Written By : Terry Turner
Edited By : Lee Williams
This page features 7 Cited Research Articles
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APA Turner, T. (2021, November 15). Types of CDs. Annuity.org. Retrieved December 8, 2021, from https://www.annuity.org/financial-literacy/certificate-of-deposit/types/

MLA Turner, Terry. "Types of CDs." Annuity.org, 15 Nov 2021, https://www.annuity.org/financial-literacy/certificate-of-deposit/types/.

Chicago Turner, Terry. "Types of CDs." Annuity.org. Last modified November 15, 2021. https://www.annuity.org/financial-literacy/certificate-of-deposit/types/.

Certificates of deposit – or CDs – lets you save a fixed amount of money over a fixed period of time. When you cash in your CD at the end of the term, you receive the money you invested plus interest. A CD can be insured for up to $250,000, making it one of the safest savings options available.

Certificates of deposit (CDs) are a type of savings account available through banks and credit unions.

You invest a fixed amount of money into a CD over a fixed period of time – typically six months, one year or five years. The issuing bank or credit union is required to pay interest periodically during this time frame.

If you buy your CD through a federally insured bank, the FDIC will insure it for up to $250,000. But the $250,000 insurance covers all accounts in your name at the same bank. It does not cover each CD you have at the bank for that amount.

What To Know About Certificates of Deposit (CDs)

Like all investments, you should be aware of both the risks and benefits of CDs. The biggest risk with CDs is that inflation will increase faster than the interest on your investment.

The chief benefit is that CDs feature some of the highest returns of bank savings options and can be federally insured.

Check the Fine Print When Buying a CD

When buying a CD, you should receive a disclosure statement from the issuing bank. This statement should tell you whether the interest rate you will receive is fixed or variable. Fixed means it will stay at the same rate for the term of the CD, variable means it can fluctuate.

The statement will also let you know how often interest will be paid on the CD – monthly or semi-annually, for example. Also check to see if the interest will be paid by check or through an electronic fund transfer.

Be sure you understand the CD maturity date. You may have to pay penalties if you withdraw your money from the CD before this date.

What Are the Different Types of CDs Available?

There are several types of CDs but all essentially work the same way: You invest money for a period of time and receive interest. But the difference is how the terms, deposits, interest rates and other features work.

Understanding the differences between the various types of CDs can help you choose the right one for you – not to mention it can add volumes to your financial literacy.

13 Types of CDs
Add-on
Add-on CDs work more like a savings account, letting you deposit more money into the CD over its term. Most other CDs require that you make an initial deposit up front and don’t let you add any more money. The number of additional deposits to an add-on CD may be limited and can vary depending on the issuing bank.
Brokered
While most CDs are purchased from banks, you can buy them from brokerage firms or independent sellers. These deposit brokers may offer higher interest rates for brokered CDs.
Bump-up
A bump-up CD lets you tell the issuing bank to “bump-up” the interest rate on the CD for the remainder of its term if the bank raises interest payment rate after you buy a CD.
Callable
A callable CD gives you a chance to earn higher interest, but you also have a risk. Callable CDs tend to offer higher yields when you first buy them. But if interest rates fall, the bank can call back your CD before it matures and reissue it with a lower interest rate.
Equity-linked
Equity-linked CDs are FDIC-insured CDs that tie their rate of return to a stock index such as the S&P 500. Terms are typically five years but may vary. There is no guarantee that you will receive more than the guaranteed payment when it matures.
Foreign currency
Foreign currency CDs are purchased with U.S. dollars, but issued in foreign currencies – British pounds, euros or other currencies. Once they mature, they are converted back into dollars. They can be risky due to changing exchange rates – a strong dollar can wipe out any gains – and complicated even for people who understand currency markets.
High-yield
A high-yield CD is typically a traditional CD that offers higher returns. High-yield CDs often require you to commit to a longer term or may require a larger deposit than traditional CDs.
IRA
If you have an individual retirement account (IRA), you may want to include an IRA CD as part of your retirement plan. IRA CDs are offered by retirement planning companies and are better suited for people nearing retirement than for young investors.
Jumbo
Jumbo CDs require a larger deposit than traditional CDs – $100,000 or more in most cases, but you may find some for lower amounts. They tend to pay only slightly higher returns than a traditional CD, but the higher deposit, over a typical five-year term, can result in a significantly higher payoff.
Liquid
Also known as no-penalty CDs, liquid CDs let you withdraw your money from the CD before the term ends without having to pay a penalty. Both the rate and the yield are typically lower than those of a traditional CD.
Step-up
A step-up CD is similar to a bump-up CD, but with a step-up you don’t have to tell the bank to raise the interest rate – the bank does it automatically at certain times over the term of your CD.
Traditional
With a traditional CD, you deposit a fixed amount of money for a specific period of time and are paid a fixed interest rate. You may face a penalty for early withdrawal, but you can cash out the CD at the end of it’s term or roll it over for another term.
Zero-coupon
A zero-coupon CD is similar to a savings bond. You don’t receive annual or periodic interest on your CD. Instead, you buy a zero-coupon CD at a price below its face value. You keep it for several years at which time you cash it in for the full value.

What Is the Best Type of CD for You?

The best type of CD is whichever type fits your budget, your goals and how comfortable you are with different levels of risk.

There are several questions you should ask yourself and qualities to consider when choosing a CD.

What to Consider Before Buying a CD
Minimum deposit
How much are you willing to invest? Minimum deposits start at $500 for a traditional CD, but high-yield CDs can be in the six-figure range. You’ll need to consider how much you can afford.
The CD term
This is how long you will have to leave your money in the CD. You’ll need to consider how long you can leave your money in the CD and plan accordingly. Find the right length of time for you – a few months or several years.
Early withdrawal penalty
Are you going to need the money before your term is up? If you take the money out before the CD matures, you may have to pay early withdrawal penalties. Make sure you know what these will cost you before you buy.
Interest rate
Shop for the highest interest rates. This is your best hedge against inflation. The highest rates may be through brokers or online banks instead of through traditional banks. The higher the interest rate, the better the return on your investment.
FDIC insurance
Not all CDs are insured. Before buying a CD, make sure it’s FDIC-insured. If the seller suddenly collapses – though this is rare – you’ll get your money back. This federal insurance covers up to $250,000 – but if you and your spouse open a joint CD, it doubles.

Ranking these considerations in order of importance to you can let you compare the qualities of each different type of CDs to find the one that fits best for you.

Please seek the advice of a qualified professional before making financial decisions.
Last Modified: November 15, 2021

7 Cited Research Articles

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