Understanding Certificates of Deposit
They can be a great way to beef up your savings, but watch out for penalties.
- (opens in new tab)
- (opens in new tab)
- (opens in new tab)
- Newsletter sign up Newsletter
CDs range from so-called time-deposit savings certificates -- available in modest denominations at banks, savings and loan associations, and credit unions -- to negotiable certificates requiring minimum deposits of $100,000 or more. They can be a great way to beef up your savings, but watch out for penalties. Here's what you should know:
With a CD, you promise to leave your money with the bank for the term specified on the certificate, which may be as short as three months or as long as five years. In return, the bank pays you a higher rate of interest than it would pay on an account with no such promise, and it probably charges a penalty if you withdraw your money before the certificate has matured. Usually, the longer the term, the higher the rate. Interest rates, penalties, and other terms vary from institution to institution. Be sure to get a clear explanation of what you'll have to pay if you redeem a CD early.
Also watch for the rollover provision. In some cases, the certificate will automatically be rolled over (that is, another certificate purchased for you) if you don't notify the institution within a specified number of days before the certificate's maturity.

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
You can reduce the risks of a long-term commitment -- and take advantage of long-term rates -- by staggering, or laddering, maturities, so that some are always coming due in the near future. Then, if you don't need the cash, you can rotate the maturing certificates back into long or short maturities, depending on rates available at the time.
For example, if you have $2,000 to put in CDs, consider putting $500 each in a three-month, six-month, one-year, and two-year certificate. When the three-month CD matures, roll it over into a six-month certificate. Do the same when the first six-month CD matures, and continue rolling over so that you'll always have a certificate within three months of maturity.
To protect against getting locked into a low rate or being caught short of ready money, arrange to have the interest from some of the certificates paid out on a quarterly or semiannual basis. You will lose part of the extra return you'd get from compounding, but if rates are volatile, that's a relatively small price to pay for retaining your liquidity.
-
-
Stock Market Today: Stock Market Struggles While Alibaba Shines
Tech and communication services stocks were two of the worst performers today as Treasury yields rose.
By Karee Venema • Published
-
Study Reveals the Most Trusted Banks
A recent study reveals the top 15 most trusted banks, with one bank ranking as the most trusted for the third consecutive year.
By Erin Bendig • Published
-
Kiplinger's Retail Outlook: Consumers Are Still Resilient
Economic Forecasts Kiplinger's Retail Outlook: Sales this year are likely to be mostly stable, even as the economy slows.
By David Payne • Last updated
-
Kiplinger Jobs Outlook: Finally, Signs of a Slowdown
Economic Forecasts The February jobs report signals a change in direction, but it may take time to arrive.
By David Payne • Last updated
-
Kiplinger’s Interest Rates Outlook: Rates Likely to Rise Again After Banking Crisis is Over
Economic Forecasts Kiplinger’s Interest Rates Outlook: Rates Likely to Rise Again After Banking Crisis is Over
By David Payne • Last updated
-
Kiplinger Housing Outlook: Housing Starts Continue to Fall
Economic Forecasts Kiplinger Housing Outlook: Weakness lies ahead for the housing market as high prices, mortgage rates ding affordability.
By Rodrigo Sermeño • Last updated
-
How to Get a Good Deal on Auto Insurance
insurance Car-insurance premiums can be a big-ticket expense. Here are some ways to lower insurance bills.
By the editors of Kiplinger's Personal Finance • Last updated
-
How to Pick a Financial Planner
credit & debt Candidates aren't hard to come by. Here's how to find the right one for you.
By the editors of Kiplinger's Personal Finance • Last updated
-
How to Size up Banks and Savings and Loans
credit & debt Six factors to consider when selecting an institution for your daily banking needs.
By the editors of Kiplinger's Personal Finance • Last updated
-
What Your Homeowners Policy Covers
insurance A breakdown of what is and isn't included with your insurance coverage.
By the editors of Kiplinger's Personal Finance • Last updated