In some ways, putting money into certificates of deposit (CDs) lets you have your cake and eat it, too. You get a guaranteed interest rate for a stated time period called the maturity. That interest rate is usually better than those paid by money market accounts. In addition, your money is insured up to $250,000 by the Federal Deposit Insurance Corporation just like a checking or regular savings account. You have to agree to leave your money on deposit until the CD matures or pay a substantial interest penalty for early withdrawal.
Shop around for the best CD interest rates. Banks and credit unions compete for CD investors’ money, so don’t assume that your bank automatically is the best choice. For example, smaller banks often offer premium rates to draw customers from the big institutions. You may also find banks offering special deals such as extended maturities on CDs with good interest rates.
Learn what the rules are. The bank will provide you with a statement of the terms and conditions for CDs. Make certain you read and understand them. What you don’t know can hurt you. For example, some CDs have variable, rather than fixed, rates. This can be a good deal. However, you want to know what the minimum rate is, since that’s all you are actually guaranteed with variable-rate CDs.
Take the right documents with you when you go to the bank to invest in certificates of deposit. You need photo identification such as your driver’s license and your Social Security number. If you do not already have an account where you are buying CDs, bring a recent utility bill, lease or other proof of residency. If you want to deposit the money via electronic funds transfer, bring the information for the account you will transfer funds from.
- Like most types of interest, the interest earned on CDs is taxable as ordinary income. However, many people find CDs are a good income investment to include in an IRA. This is especially true of Roth IRAs. The interest earned from a CD won’t be taxed while it stays in the IRA. With a Roth, the interest will also be tax-exempt when withdrawn after retirement (assuming you follow the IRS rules).
- If you have children, you may want to introduce them to the basics of investing by helping them buy CDs. Many banks encourage this with special deals. Most states allow minors to have CDs and savings accounts in their own names. However, you may have to sign as co-owner. Both of you must provide Social Security numbers and identification.