Are CDs safe?

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Certificates of deposit come with a wide range of maturity dates and interest rates, but all CDs share one common component: They are one of the safest places to park your cash.

Federal insurance keeps CDs safe

How are CDs safe? They’re protected by deposit insurance. If you deposit funds in a CD at a bank, the Federal Deposit Insurance Corporation (FDIC) keeps that money safe. And if you open a CD at a credit union, the National Credit Union Administration (NCUA) offers the same type of coverage.

“That insurance is there in case a bank runs into financial trouble, which doesn’t actually happen all that often,” says David Sterman, CFP, president and CEO of New York-based Huguenot Financial Planning. “However, such insurance only covers $250,000 per account. If someone has more than $250,000 that they would like to invest, then it is wise to open accounts with several banks or open several accounts at the same bank. For example, one CD could be owned by one spouse and the other CD owned by the other spouse at the same bank. Each account would have $250,000 in insurance on them.”

To be doubly sure that your CD will be safe, you can use the FDIC’s BankFind tool to look up the institution and verify it is part of the FDIC’s network. The NCUA also offers a simple directory tool to help you get a clear picture of a credit union and verify insurance.

How safe are online CDs?

While you may be most familiar with banks that have retail locations down the street from your house, there are also plenty of banks that offer CDs that are just a click away on your screen. Instead of opening a CD with a teller at the counter, you can open one online and deposit your money digitally. If you’re curious about how safe it is to open a CD at an online-only bank, rest assured that those institutions are just as low-risk as a bank with hundreds of physical branches.

“To get the best CD yields, you may need to shop online as local bank branches may not offer the market-leading yields, though it pays to inquire at your local bank branch and compare,” Sterman says. “Those online CD vendors, such as Ally or Capital One, carry the same FDIC insurance, so there is no risk in banking with them.”

Is there anything else striking about online CDs?

Some of those online banks offer another benefit for CDs: Flexibility. Traditional CDs operate on a fairly rigid format – deposit your money for the agreed-upon term, and get it back when the term ends – but some online banks (and even traditional banks) offer the safety of a CD with some alternate features. For example, Marcus by Goldman Sachs has three different no-penalty CDs, which will not charge you any extra fees for withdrawing early. Ally Bank offers two different raise-your-rate CDs – 2-year and 4-year – that give you the chance to request an increase to your rate once during the term if the bank is offering a higher rate than you originally locked in.

Why should you think about opening a CD?

Okay, you’ve checked off the box that a CD is safe, regardless of whether you open it in person or online. Now, it’s time to think about whether opening one will be a success for your personal finance needs.

“Unfortunately, interest rates these days are so low that you won’t get a great rate for the CD you buy,” Sterman says. “And that may be the case for the next several years as the Federal Reserve aims to maintain an ultra-low interest rate policy.”

While current CD rates may be low, opening a certificate of deposit can still be a smart move for specific timelines.

“Using a CD to save for retirement is not a great idea since you may not need the money for decades,” says Chris Reddick, CFP, and owner of Texas-based Chris Reddick Financial Planning. “But if you want to buy a new car or other big purchase in a year or so it might be best to get a CD.”

“CDs are often a great place to set aside funds that won’t be needed for a year or two,” Sterman says. “They’ll garner more interest than a regular checking or savings account would, and unlike the stock market, you’re assured that the money will be there when you need it.”

Bottom line

CDs are one of the safest ways to store your money and earn some guaranteed interest. If you open a CD and keep your deposit within the threshold of FDIC or NCUA insurance limits, you’ll never lose any sleep over whether your dollars are in danger, and you’ll be able to plan your future with the money you can withdraw when the CD matures.

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