How to open a certificate of deposit (CD)

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If you have a sum of money that you want to save securely, a certificate of deposit, usually called a CD, is a good option. However, unlike a traditional savings account, once you open and fund a CD, your money has to remain tucked away for a fixed period of time.

Read on to understand if a CD is the right kind of savings vehicle for you, and how to open one if it is.

How a CD works

A CD stores and grows your money for a fixed period, known as its term, usually ranging anywhere from a month to five years, though longer-term CDs are available. A CD can be ideal if you want to save for a long-term goal, such as purchasing a home.

What sets a CD apart from other deposit accounts, like a high-yield savings account, is that CDs have a fixed rate. This means that your APY isn’t sensitive to interest rate changes by the Federal Reserve after you’ve already opened your account.

However, if you think you may need access to your money for unexpected costs, a CD probably isn’t the best choice. If you withdraw money from a CD before its term ends, also known as its maturity date, you’ll likely pay an early withdrawal penalty, reducing — or even eliminating — any interest you may have earned. In some cases, you could even lose some of your initial deposit.

Also, if you’re the kind of saver who wants to make additional deposits and continue to build on your balance, you might consider a different type of savings product like a traditional savings or money market account. Most CDs don’t allow you to continue making deposits after your first deposit.

Once your CD has reached the end of the term, you can withdraw your principal balance, plus any earned interest. In some cases, you might opt to rollover your CD into a new account and continue to grow your savings that way.

Decide what kind of CD to open

There are several different types of CDs, and it’s important to choose the one most suited to your savings goal.

Here are the most common types:

• Traditional CD: The most common type of CD; your initial deposit must remain untouched for a fixed term. If you withdraw your money early, you’ll pay a penalty.

• Jumbo CD: A traditional CD but with a higher minimum opening deposit, usually at least $100,000. It will pay a higher annual percentage yield, or APY.

• No-penalty CD: A CD without an early withdrawal penalty but with a lower APY.

• Add-on CD: You can add more money to this CD even after opening the account.

• Bump-up CD: You can choose to increase the APY a limited number of times during the CD term to keep up with rising interest rates.

Not every financial institution will offer all CD types. When you’re shopping for a CD, read the fine print on the deposit agreement to ensure you know what you’re signing up for.

Choose a term length and shop for the best CD rate

CDs with longer terms usually offer higher annual percentage yields — up to a point. CD rates tend to reflect market expectations for interest rates. So if rates are expected to rise in the short term but fall in a couple of years, CDs with terms up to two years may offer higher rates than those with a three-year term.

Be sure to compare APYs and terms carefully so you get the best rate for the term that suits your financial goals. For example, if you want to buy a house in a year and are keeping your down payment in a CD, choose one with a 12-month term or less.

A CD’s APY is a calculation of the total return you’ll earn, including compound interest. Compound interest is the interest you earn on previously accrued interest. Like savings accounts, CD APYs will differ depending from bank to bank. Online banks often offer better APYs than traditional banks. And don’t overlook credit unions, which call CDs share certificates, and sometimes offer higher APYs.

Go deeper: What is APY?

Where to open a CD account

Once you choose a bank, credit union or neobank, you can complete an application online or in person. If you’re opening a new CD online, you'll have to create an account with the bank or credit union if you don't have one already.

To open a CD, you'll usually have to provide the following information:

• Full legal name

• Social Security number or taxpayer identification number

• Birth date

• Current address

You must be 18 or older to open a CD. If you are younger than 18, a parent or legal guardian can open a custodial CD for you.

Fund your CD

Once you select the CD and term, you’ll transfer funds to the financial institution or write a check to fund the account.

FAQs

How much can I deposit in a CD?

Many online banks and credit unions do not have minimum deposit requirements, but some major banks have a minimum opening deposit requirement starting at $1,000. If you don’t have that much money, look for a bank with a low or no minimum deposit. The maximum you can deposit also varies depending on the bank or credit union.

If your financial institution is a member of the FDIC or the NCUA, your CDs are insured for up to $250,000. If you have more than that to put aside, you may want to speak to a professional financial adviser about how to proceed.

Does it cost money to open a CD?

Opening a CD does not come with a separate fee.

Can I undo opening a CD?

Before you fund your CD, check your bank or credit union’s policies to see if it offers a grace period at the time of opening. These are not common, so it’s best to be sure before you open your account.

How many CDs can I open?

There is no limit to how many CDs you can open in general, but some banks may have a maximum number of CDs you can open with them. If you plan to use a CD ladder as part of your savings strategy, you should ask your financial institution what that limit is.