What You Need to Know About CDs

With bank certificates of deposit, you're sure to get your money back with interest -- if you take a few precautions.

By Joan Goldwasser, Senior Reporter

From Kiplinger's Personal Finance magazine, June 2009

1. Interest rates are low -- but so is inflation. CD rates dropped when the federal funds rate nearly hit zero in mid December. But with annual inflation at 0.2%, your CD's buying power is greater than it was a year ago. (See the highest-yielding CDs.)

Recently, the best five-year CD, from Intervest National Bank, was yielding more than a full percentage point above the average of 2.26%. Also check with community banks and credit unions. Navy Federal Credit Union recently offered a six-month certificate yielding 2.40% and a one-year CD at 3.75%.

2. Climb the CD ladder. Protect your cash by staggering the maturities of your CDs from six months up to five years. As each CD matures, you can replace it with another of a suitable maturity. That way, if rates fall, you've locked in a high yield for years. If, however, they begin to rise, you can take advantage of higher rates when your next certificate matures.

3. "Too good to be true" always applies. Robert Allen Stanford's $8-billion CD scam is a reminder to be wary of unreasonably high guaranteed returns. Stanford invested depositors' funds in notes issued by his Antigua-based bank. "They were promissory notes from the bank, not CDs," explains Fred Joseph, president of the North American Securities Administrators Association. "CDs are issued by a U.S. bank and insured by the federal government." Go to www.fdic.gov to verify that the bank issuing your CD is insured by the FDIC.

4. Let your broker do the heavy lifting. If you have a large chunk of money to deposit, your broker can spread it among a number of FDIC-insured banks and you'll receive a single statement. Plus, if you need your money before your CD matures, your broker sells your CD in the secondary market and you avoid the bank's early-withdrawal penalty. But because the value of a CD fluctuates with changes in interest rates, you could lose principal if you cash it in before maturity. CDs held in a brokerage account are protected by the FDIC.

There's also a service, the Certificate of Deposit Account Registry program, that will let you place as much as $50 million, all FDIC-insured (for more information, go to www.cdars.com). Caveat: Be sure that your total deposits in any one bank do not exceed the FDIC's insurance limit, as explained below.

5. Market-linked CDs are not a sure thing. CDs with an interest rate tied to a stock-market index promise bigger rewards, but they carry added risk. You are guaranteed to get back your principal when the CD matures, but your return may be as low as 0%, depending on the movement of the index during the term of the CD. Certificates of deposit are meant to be a safe haven for your cash. Invest in an index fund if you want to bet on the stock market.

6. The ceiling could fall. The current FDIC limit of $250,000 per depositor per bank reverts to $100,000 on January 1, 2010, and Congress may or may not act to extend it. To calculate whether you are over your insured limit at any one bank, use EDIE, the FDIC's deposit-insurance estimator.

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