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If you’re not sure about CDs because they lock your investment at a specific interest rate, don’t lose hope. There are CDs that offer flexible options like raising your rate mid-term.
Our Pick: Ally Bank 2-Year Raise Your Rate CD
With the Ally Bank 2-Year Raise Your Rate CD, you’ll earn a strong APY with a one-time option to increase your rate if interest rates start to rise. It doesn’t have a minimum deposit amount and the early withdrawal penalty is only 60 days worth of interest.
Best Feature:One-time opportunity to increase your CD rate
How did we decide what makes a great certificate of deposit (CD) account? We researched roughly 155 CDs from the top banks for this guide.
The Best CD Account picks are based on the consistency of high-interest rates, fees, minimum balance requirements, and account features. The overall rank for each institution within a specific category is dependant on how many days in the quarter that institution’s score was among the top 10.
On the surface, CDs seem simple, but there are a number of things you need to pay attention to when picking the right CD account.
A lot of investors traditionally purchased their CDs through banking institutions.
However, CDs are now also being offered by brokerage firms and independent sales personnel.
These individuals or business entities are sometimes known as “deposit brokers” because they can negotiate a higher rate of interest by promising a specific amount of deposits to the banking institution.
In this regard, it is important to look at strategies that can maximize the yield of your CD.
The interest rate is one of the most important aspects of a CD. It can be the difference between losing to inflation and keeping pace with it. It can also accelerate your progress towards long-term savings goals.
Early Withdrawal Fees
It really pays to do the research on penalties and fees, not just the interest rates, so that if you do take a loss with an early withdrawal, it doesn’t have to equal a bad financial decision.
In the case of some banks with long-term CD accounts that have a fixed penalty, the high-interest rate could outweigh the withdrawal penalty, even if you do end up taking your money out early.
Comparing CD Early Withdrawal Penalty Fees Across Major Banks
$25 + either 1/2 of the interest you would have earned if the funds were withdrawn after maturity OR 1% of the withdrawal amount, whichever is greater
$25 + either 1/2 of the interest you would have earned if the funds were withdrawn after maturity OR 3% of the withdrawal amount, whichever is greater
A Certificate of Deposit (CD) is a type of fixed-income investment product that is offered in banks and credit unions. It is a short to medium-term investment that is fully insured by the FDIC up to $250,000.
When investing in a CD, clients decide to put their money in the bank for a specific period of time, and in return, the bank pays them an agreed interest rate which is typically higher than the regular savings account. Banks usually impose a certain penalty for CD withdrawals made before the maturity or the end of the term.
Types of CD Accounts We Track
Most of us are familiar with the traditional Certificate of Deposit. It is a deposit product that earns a fixed interest rate higher than the savings account for a fixed period of time.
CD's are usually availed of by clients who have no immediate plans for their cash and want to enjoy a higher yield for their money in a safe and FDIC-backed investment vehicle.
Other than the traditional CD, however, do you know that there are also other types of CDs?
These non-traditional CDs offer flexible options for depositors who may be looking to explore other CD alternatives.
Here are some of the most commonly offered and used non-traditional CDs:
A Callable CD is a CD that a bank can "call" away after a designated call-protection period.
What happens is that the bank gives you a premium rate while the call-protection period is still in effect, but in exchange, as soon as this period ends, the bank can then take back the premium rate and replace it with a much lower one based on the prevailing market rates at that time.
As opposed to the Callable CD, a Bump-Up CD gives the depositor the chance to "bump up" or opt for a higher interest rate should there be an increase in CD rates within the lifetime of the CD. This can be done only once for the duration of the CD term.
Liquid CDs are CDs that allow the depositor to withdraw from his CD without being charged a penalty.
Pay close attention as there are several caveats to this type of CD:
The minimum amount that you need to open and maintain this CD is much higher than the usual balance required
The interest rate for liquid CDs are lower than traditional CD rates
There is usually a limit to the number of times you can withdraw within the term of the CD
Step Up or Step Down
This type of CD is also known as a Flex CD. Not to be confused with the Bump Up, the Step Up or Step Down CD usually enjoys a fixed rate for a period of time, say one year, after which the rate is automatically increased or lowered to a predetermined rate.
Brokerage CDs are those bought by the investor through a brokerage rather than from banks.
The advantage of buying brokered CDs is that these usually carry higher interest rates than those directly sold at banks because brokerages can pool investments before buying a certain bank's CD.
On the downside, brokered CDs are traded on the secondary market, and while you can have access to your cash without penalty, you could also stand to lose part of the principal for the same reason.
Also, some brokerages are not FDIC insured so do your homework before buying CDs through one.
Zero-coupon CDs work in much the same way as Zero-coupon bonds. The CDs are purchased at a deep discount to par value, or the amount of the CD by the time it matures.
The term zero-coupon means zero-interest payments.
So while this type of CD typically has higher yields, there will be no payments made for the duration of the CD term which is usually for longer periods, as the interest will be reinvested together with the principal.
Even if you can afford to tie your investment for longer terms, you also need to cover the taxes that will be billed to you every year before even receiving the actual interest.
A jumbo CD is a CD in a very large denomination, usually at a minimum of $100,000 thousand.
Jumbo CDs are commonly bought by large institutional investors, such as banks and pension funds, who are interested in low-risk and stable investment options.
Jumbo CDs are also known as negotiable certificates of deposits and come in bearer form. It works like a conventional certificate of deposit that locks in the principal amount for a set time frame and is payable upon maturity.
To get more detailed information on each of these CDs and to find out which are available at this time, visit your local bank or your online bank's website. To get the latest interest rates in the market today, check out our CD rates page.
How CDs Work
When a CD earns interest, it can be paid via check, transferred to a savings account, or capitalized. With interest payments via check or transfer, it is up to you how you reinvest or spend the interest.
On the other hand, when you choose to capitalize on your interest payments, this simply means that the CD yields will be reinvested into the account, making it part of the principal amount. The investment will grow more quickly in this manner.
The end of the term is what is known as the CD maturity. Upon maturity, you can take either of two courses of action: renew the CD or take out the money.
Keeping track of your maturity date is especially important because when banks do not receive any instructions from the customer regarding the matured CD, they will automatically renew this for the same term after a prescribed period of time, usually 10-15 days.
Should You Invest in CDs?
Before deciding to invest in certificate of deposits, you should first determine what type of investor you are.
There are basically three types of investors including conservative, moderate, and aggressive.
Conservative investors usually invest in cash. They put their money on interest-bearing instruments such as savings accounts, mutual funds, Treasury Bills, and money market accounts. This type of investor prefers low-risk investments that grow over a lengthy timeframe.
Moderate investors usually invest in cash and in bonds.
They may also dabble in riskier investments like the stock market. This type of investor has a moderate risk tolerance. Many of them also invest in real estate properties provided that this investment poses low to moderate risks.
Last is the aggressive investor; they invest a significant amount of their money on the stock market. The aggressive investor also invests in high-risk business ventures.
If you are a conservative or moderate investor, the certificate of deposit is a good instrument for you.
It provides a stable return on your money and your market exposure to risk is minimal. On the downside, the interest yield you can expect from CDs is also minimal compared to higher-risk investments.
Meanwhile, if you are an aggressive investor, it may be better for you to invest your money in other types of investment instruments. That way, you won’t feel that your money is “tied up” when you want to invest in a seemingly good opportunity in the stock market.
However, beyond knowing your tolerance level for risk, it is more important for you to learn and understand the different types of investment instruments.
In the end, your decision to invest in CD should depend on whether or not you are comfortable with the yield it gives and the level of risk it presents.
Tips for Purchasing CDs
Determine when the CD matures
This is the first step you need to go through. Though it may seem obvious, there is a surprising number of investors who fail to confirm the maturity date of their investment.
They are shocked to find out that they tied their money for five or even ten years when they try to withdraw it from the bank.
Know the penalty for early withdrawal
Before investing in CDs, it is important to determine how many penalties will be charged in case of early withdrawal.
In some cases, investors risk losing a portion of their principal if they cash out early especially if they bought a brokered CDs.
Confirm the yield of the CD
The investor needs to receive a disclosed document that states how much the amount of interest rate on the CD will be.
It should also contain how and how often the bank will pay the yield.
For example, some banks pay the interest monthly while some disburse it semi-annually. The payment can be made through electronic transfer by issuing a check.
Find out if the CD has call features
As was discussed above, the call feature allows the bank to terminate the CD after a specific period of time but the investors do not have the same right.
If interest rates fall, the banks may “call” it and you will be paid the principal plus any accrued interest.
However, if the interest rates rise, you can be stuck with a long-term CD that pays below-market rates. In addition, the investor wants to cash out before the maturity date, they will lose some of their principal.
Federally Insured One-Year-Non-Callable
Understand what “Federally Insured One-Year-Non-Callable” means – the term doesn’t imply that the CD will mature in one year.
It simply states that the bank cannot terminate the CD during the first year but the institution has the right to terminate it after one year has passed. Ask a representative of the bank if it isn’t clear when the CD will mature.
Determine if the brokered CD is insured
The Federal Deposit Insurance limits its coverage to $100,000 per depositor in each institution.
If an investor bought a brokered CD, it is important for them to find out which institution is the issuer of the investment instrument.
The broker may be putting the money in a bank where the investor already has CDs and other deposits. In that case, they risk not being fully insured if their total deposit in the bank exceeds $100,000.
Ask whether the interest rate can change
Some forms of CDs have variable interest rates. These types of investment instruments have “multi-step” structures wherein the rate can increase or decrease based on a pre-set schedule. The varying rate can also be dependent on the performance of a specified index such as the Dow Jones Industrial Average.
Consider a CD Laddering
Many people like CDs because of their security and higher interest rates. Some don't like them because they tie up their money for an extended period of time. If you are one of these people, the solution may be CD laddering.
CD laddering balances the benefits of higher interest you receive from a larger and longer-term CD, with more access to your money.
CD laddering balances the benefits of higher interest, long-term CDs, with the greater liquidity of short-term, lower interest rate CDs. Building a CD ladder gives you the best of both worlds by buying multiple longer-term CDs with different maturity dates. Having staggered CD maturity dates enables you to have more regular access to your funds.
CD ladder strategies
A popular way to organize your CDs is by creating a flexible CD ladder that spreads your money across multiple CDs with the goal of having both a regular source of income, while earning the highest interest rate. For example, if you have $10,000 you wish to invest in CDs and you want to have a regular source of annual income, you would need to buy five $2,000 CDs.
Each of the five CDs would have a term of 1, 2, 3, 4, or 5 years. When the first CD matures at the end of the first year, you withdraw the interest and roll over the principal into a new five year CD.
By following this process each year at the end of five years, you will have five CDs each earning the maximum interest rate for a 5-year CD. The same technique can be applied to any amount and any CD term.
What to Expect When Your CD Term is Coming to an End
Several weeks before your CD matures, your bank will notify you (usually by U.S. mail) that your CD is about to mature. The notice will include a description of your options and instructions about what to do once you select one.
When your CD reaches maturity, you have a number of choices:
Withdraw your principal and interest and renew the CD.
Withdraw your interest and renew the CD.
Rollover your principal and interest in a new CD.
Add funds and purchase a new CD.
Withdraw the interest and a portion of the principle and buy a smaller CD.
If you choose to cash out some or all of your CD when it matures, you will have the choice of receiving a check in the mail or transferring it to another account.
Whichever option you choose you will have to notify the bank in writing or in-person, as required by your bank. If you don't follow your bank's rules for notifying them of the changes, they will be ignored.
What happens if you do nothing?
If you forget to respond to the notice or simply choose to do nothing, the bank will hold your money for a grace period of 7-10 days, and then it will automatically renew for the same terms as the original CD.
This will result in you being subject to early withdrawal penalties, even if you remember one day after the CD auto renews.
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