While CDs can seem pretty simple, they’re subject to a few rules and regulations you should understand before you invest. From FDIC insurance coverage to call options, learn what’s often in the fine print so you make the most of your CDs.
FDIC Coverage for CDs
The Federal Deposit Insurance Corporation (FDIC) was created by Congress to provide insurance on the deposits made to American banks. In short, if you deposit money into a federally insured U.S. bank and it goes out of business, FDIC insurance will cover up to $250,000 of your funds at that bank. This amount covers deposits you make into CDs, as well as deposits into checking and savings accounts. CDs bought from credit unions may also be federally insured. However, instead of being covered by the FDIC, they’re covered by the National Credit Union Administration (NCUA). Again, up to $250,000 is covered for each depositor, at each credit union, for each account category.
How Brokered CDs Are Different
When you buy brokered CDs through third parties, you can’t be sure that your deposit is FDIC insured. For a brokered CD to be FDIC-insured, the broker must deposit your money into a CD at an FDIC-insured bank. Before investing, you can ask your broker for the name of the bank that will issue the CD and verify that it’s FDIC-insured using the FDIC’s online database. Additionally, your deposit account records need to show that the broker is a “custodian for clients” so that the insurance bypasses the broker and goes through to you. This is known as “pass-through” FDIC insurance.
Early Withdrawal Penalties
Traditional CDs require you to leave your deposit in the account for a set period of time, known as a term. In return, you earn interest, which you’ll receive when your CD reaches maturity. If you withdraw your money before your CD matures, you’ll typically have to pay an early withdrawal penalty. Depending on your CD issuer, the penalty may be a:
Period of earned interestPercentage of your withdrawal amountPercentage of your interest earnedFlat fee
The longer the CD’s term, the higher the penalty usually is. Some institutions also charge higher penalties if you withdraw your money earlier in the term. For example, on PenFed Credit Union CDs with terms longer than 12 months, you’ll owe any interest you’ve earned if you pull your money out in the first year. After that, you’ll have to pay 30% of the gross dividends you would’ve earned if you had let the CD mature. You can avoid early withdrawal fees by keeping your money in CDs until they mature. If you have any doubts about whether you’ll be able to finish a CD’s term, opt for a shorter term. You can also stagger your investments using a CD ladder strategy. For example, instead of investing $10,000 into a five-year CD, you could invest $2,000 into five separate CDs with one-, two-, three-, four-, and five-year terms. As each CD matures, you can reinvest the money into a five-year CD, and eventually you’ll have a five-year CD maturing each year.
How Do Callable CDs Work?
Callable CDs are CDs that can be terminated by the issuing bank after a certain amount of time (known as the call period). If your CD is called, you’ll get your deposit back, along with any accrued interest, instead of finishing the term. Banks will typically call a callable CD if interest rates fall far below the rate they’ve agreed to pay you. Unfortunately, as the account holder, you typically don’t have the same option to call the CD. Callable CDs may come with attractive interest rates. However, they can be less predictable than non-callable CDs because you aren’t guaranteed to earn that interest rate for the entire term.
Requirements To Open a CD
If you want to open a CD, you’ll typically have to provide basic information like your name, address, email, phone number, birthday, and Social Security number. You may also have to provide information about your country of citizenship, employment, and the source of your deposits. Then, you’ll need to review and approve various disclosures, such as a deposit account agreement, a privacy statement, and an interest rate and annual percentage yield disclosure. Lastly, you’ll need to provide or certify your W-9 before making your initial deposit. Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning!
