What Is a Certificate of Deposit Best For?

Banks usually allow penalty-free withdrawals of CD interest.

Banks usually allow penalty-free withdrawals of CD interest.

A certificate of deposit, or CD, is a special type of savings account. Unlike typical savings accounts, a CD has an end date, called the maturity date, and you normally can't take out your initial deposit before then without paying a penalty. The penalties can be hefty, but your interest rate is typically guaranteed until maturity. Depending on your needs and purpose, a CD is often one of the best places to park your cash.

Keeping Savings Safe

CDs are among the safest investments if you choose an institution with federal deposit insurance, which protects against the institution going broke. Look for the Federal Deposit Insurance Corporation logo for banks or National Credit Union Share Insurance membership for credit unions. You'll get $250,000 in insurance in your name for each account category at any one institution. For example, all single accounts in your name, including savings and checking accounts and CDs, have $250,000 in coverage combined. Joint accounts are separately insured for an additional $250,000 in coverage for each depositor.

Saving Big or Small

CDs are a good way to invest almost any sum of money. Depending on the bank or credit union, you can open a CD with $500 or less, and some institutions have no minimum deposit at all. Other CDs require a large chunk of change -- such as $25,000, $100,000 or more. CDs requiring at least $100,000 are usually called "jumbo CDs." While such a sum might sound out of reach, a fat inheritance could put you in the jumbo club.

Putting Aside for Later

CDs are ideal to keep your wad intact until a later time. If you don't trust yourself, the early-withdrawal penalty can help keep your hand out of the till. For example, put money for a car or a down payment on a home into a CD so it's there when you need it. Most savings institutions give you a choice of maturity dates ranging from six months or less to five years, so you can choose the date that suits you best. For a series of expenses, such as tuition payments, you can open multiple CDs maturing at set intervals.

Putting More in Your Pocket

CDs usually pay a higher rate than other insured accounts, making them the best way to get guaranteed interest at the bank. However, it still pays to compare accounts, because this isn't always the case. In addition, longer-term CDs usually pay higher rates than shorter ones, but this can also vary. To score top rates, shop around, and remember that online institutions often offer the best deals. If you get a windfall, jumbo accounts usually pay more than regular CDs.

Playing the Angles

Because your principal is insured, CDs can be a great way to bet on rising interest rates without losing your shirt. For example, some institutions offer variable-rate CDs, which means you'll get an increase if interest rates go up before the maturity date. You can also divide your cash into equal portions to invest in multiple CDs. For example, put $1,000 each into CDs maturing in six months, one year and 18 months. This method, called CD laddering, gives you money to reinvest at different times so you can take advantage of interest rate increases.

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