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Certificates of deposit (CDs) are accounts that typically pay a guaranteed rate of return for a set period of time. CDs come with a wide range of terms 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
Like savings and checking accounts, most CDs are protected by deposit insurance, meaning your funds are insured by the Federal Deposit Insurance Corp. (FDIC) at a bank and the National Credit Union Administration (NCUA) at a credit union.
“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 sure that your CD’s funds will be insured, you can use the FDIC’s BankFind tool to look up the institution and verify it is part of the FDIC’s network. Likewise, the NCUA offers a Research a Credit Union tool that provides credit union details and verifies insurance.
How safe are online CDs?
In addition to brick-and-mortar banks, CDs are commonly offered at online-only banks. Instead of opening a CD in person, these banks require you to open the CD online and deposit your money electronically.
Using an online bank for CDs and other deposit accounts can be just as safe as going with a brick-and-mortar bank, as long as the online bank is federally insured and takes basic steps to protect your information, such as:
- Encryption: Encryption technology can protect your username, password and other information. You’ll know it’s in place when there’s a lock symbol next to the bank’s web address in your browser.
- Multi-factor authentication: This two-step process can add a layer of security by sending you a text with a code that you’ll use to log in.
A bonus of CDs from online banks is they often earn a higher annual percentage yield (APY) than those offered by brick-and-mortar banks.
“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 noteworthy about online CDs?
Opening a CD with an online bank may also provide greater 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 offers three terms of no-penalty CDs that charge no fees for early withdrawals. Ally Bank offers two terms of bump-up CDs that allow you to request a rate increase a set number of times during the term should the bank start offering a higher rate than the one originally locked in.
Why should you think about opening a CD?
In addition to ensuring a CD is safe, it’s important to determine whether it’s a good place to stash your money, based on your financial goals.
The Federal Reserve has raised interest rates five times so far in 2022, and it may raise rates yet again before the year ends. The rates on many CDs have been increasing incrementally following Fed rate hikes.
“For savers looking at CDs, the outlook is improving,” says Greg McBride, CFA, Bankrate chief financial analyst. “The Federal Reserve has repeatedly raised interest rates to tame inflation, which will help narrow the large gap that currently exists between what you earn on a CD and the loss of purchasing power due to inflation.”
In the current rising-rate environment, opening a CD can be a smart move depending on your financial goals and timeline.
“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.”
Huguenot Financial Planning’s Sterman says CDs are often a great place to set aside funds that won’t be needed for a year or two. “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.”
Consider inflation when opening a CD
Inflation continues to soar near the highest level since the early 1980s. Locking your money in a CD when the prices of goods and services are rising could mean you’re losing purchasing power, since over time your money won’t be able to buy as much as it can today. If a CD can’t keep up with inflation, it might be better to put your funds elsewhere.
Consumers looking to open a CD during inflationary times would do best to select one that pays a significantly higher yield than the national average, which often means opening a CD with an online-only bank. Without the expense of maintaining branches, online banks may pass along the savings to customers in the form of higher rates. But even with a high yield, you’re not likely to beat inflation by investing in a CD.
Relatively safe alternatives to CDs include money market accounts and low-risk mutual funds — as well as Treasury Inflation-Protected Securities, which have an effective interest rate that moves up or down along with inflation.
CDs are one of the safest ways to store money and earn a set rate of interest, which can help you better plan your finances. CDs opened at FDIC-insured banks or credit unions backed by the NCUA are guaranteed by the federal government. Should the bank or credit union fail, your savings won’t be lost, as long as you’re within deposit limits.
–Freelance writer David McMillan contributed to a previous version of this article.