Investing Basics
pennies overlapping
cds
Compare CDs with other investment options

Investing Basics » Compare CDs with other investment options

With Federal Deposit Insurance Corp. protection and a huge variety of choices, certificates of deposit are one of the most popular and safest ways to store your cash. But they're not the only investment out there for safety-conscious investors. Here's a breakdown of how other investment classes stack up against CDs to help you choose.

CDs vs. other investments
CDsMoney market account/Savings accountI bondsSeries EE bondsTreasuries/Treasury exchange traded-funds
LiquidityLimited by the CD's length of maturity. Investors who try to cash out early face penalties.Liquidity is high. Funds can usually be withdrawn within 24 hours.Limited. Buyers must wait at least one year before redeeming. Buyers who redeem the bond within five years of issuance forfeit the last three months of interest.Limited. Buyers must wait at least one year before redeeming. EE bonds can be redeemed at any time, but if redeemed before five years, buyers will forfeit the last three months of interest.High. Treasuries are highly liquid and can be sold at any time.
ReturnCD rates are better than those on liquid deposit accounts but over time they aren't likely to outpace inflation by much. Yields are predictable for financial planning.Somewhat lower, on average, than CDs because of added liquidity. Not likely to outpace inflation over time.Because part of an I bond's value rises and falls with inflation or deflation, its return is highly variable. Its return is essentially the rate of inflation plus the bond's fixed rate.Interest is fixed at the time of sale and adjusts twice per year. At minimum, the Treasury guarantees the bond will double after 20 years. Still, that rate works out to about 3.5 percent.Over time, Treasuries have featured a return comparable to CDs; though unlike CDs, their value can fluctuate.
RiskThanks to the FDIC, CDs are insured up to $250,000, making them virtually immune to credit risk. Inflation risk can be an issue.MMAs and savings accounts are backed by the full faith and credit of the U.S. government up to $250,000.I bonds are backed by the full faith and credit of the U.S. government, with no limit on the amount insured.Savings bonds are backed by the full faith and credit of the U.S. government, with no limit on the amount insured.Treasuries are backed by the full faith and credit of the U.S. government, with no limit on the amount insured.
Limits on investment?You can only insure $250,000 in CDs at one bank, but investors can easily get around this by investing in CDs at multiple banks.Savings accounts and MMAs share CDs' $250,000 protection limit, but savers can get around the limit by opening accounts at multiple banks.The Treasury sets the investment limit for I bonds at $5,000 annually.The Treasury sets the investment limit for series EE savings bonds at $5,000 annually.There is no annual purchase limit for Treasuries.
FeesFor most CDs, the only fees investors will pay are associated with early withdrawal.Most savings accounts only charge a fee for excessive withdrawals within a certain period of time or dipping below a minimum balance.The only fee for I bond investors is associated with early redemption.The only fee for series EE savings bond investors is associated with early redemption.Buying Treasuries directly from TreasuryDirect doesn't incur fees, but investors in Treasury ETFs and mutual funds will pay certain fees and brokerage commissions or sales loads.
TaxesInterest is fully taxable unless held in a tax-advantaged account.Interest is fully taxable unless held in a tax-advantaged account.Tax on gains is deferred until redemption or maturity and I bonds are exempt from state and local taxes.Tax on gains is deferred until redemption or maturity and bonds are exempt from state and local taxes.Gains are subject to federal taxes but exempt from state and local taxes.

« Back to the Investing Basics table of contents.

advertisement

Show Bankrate's community sharing policy
          Connect with us
advertisement
advertisement
CD & INVESTING NEWSLETTER

Learn the latest trends that will help grow your portfolio, plus tips on investing strategies. Delivered weekly.

Partner Center
advertisement

Connect with us