Certificates of deposit, or CDs, are offering record-high annual percentage yields (APYs) averaging between 4% and 5% right now. And since CDs are typically insured by the Federal Deposit Insurance Corp. or the National Credit Union Administration, you can be sure your money’s safe.
CDs are secure, low-risk investments, whether you open an account online or at a local branch bank. However, like a savings or investment account, there are a few risks to keep in mind.
Here’s what you need to know about how CDs are insured and how to decide if a CD is the best option for you.
Read more: Should You Break a CD Early for a Better Rate?
Are CDs safe investments?
A CD offers peace of mind if you’re more averse to risk, said Billy Cho, Citi’s financial expert and Manhattan market leader. As long as you open a CD with a financial institution that’s insured by the FDIC or the NCUA, your CD is protected up to $250,000 per person, per account category in case of a bank failure. That means you won’t lose your deposit or interest earned (up to the insured amount) if the bank unexpectedly closes. Instead, your funds may be moved to another bank or refunded. (Brokered CDs, however, aren’t always insured.)
“That’s a great safety net for a lot of people,” said Bobbi Rebell, author of Launching Financial Grownups and host of the Money Tips for Financial Grownups podcast. “It’s a very secure way to have your money grow and can be a great part of your investment portfolio.”
If your goal is to diversify your portfolio, CDs also work well in conjunction with other investments that give you a bigger return in exchange for more volatility.
Are CDs from online banks safe?
Yes, CDs are safe as long as they’re FDIC- or NCUA-insured, said Jamilah McCluney, a fiduciary and financial advisor at Black Wealth Financial. In fact, your pockets may even benefit from the higher rates. “Online banks tend to pay higher interest rates and pass the savings otherwise spent on staff and locations to consumers,” said McCluney.
But before choosing a CD from an online-only bank, it’s important to understand any limitations and requirements, she added. For instance, a minimum deposit, transfer limits and fees may be required. And be cautious with banks outside the US, which may have fewer regulations and may not protect your funds for up to $250,000.
What are the risks of a CD?
Though CDs are safe, there are still some drawbacks that can impact your end balance. Here are a few common CD risks.
Early withdrawal penalty: If you take money out of your CD before the term ends, you’ll pay an early withdrawal penalty that’s usually a few weeks or months of interest, depending on the bank and term. The penalty can also eat away at your deposit if you take money out shortly after you open the account.
Lock in a lower rate: If you lock in a rate in a rising-rate environment, you may not earn as big a return as you could have. For instance, if you opened a CD last year, rates are higher this year, so you’re earning a lower return compared with people opening a CD this year.
One-time deposit: While high-yield savings and money market accounts let you deposit and withdraw money regularly, CDs allow only a one-time deposit. That means you’ll earn interest only on the money you deposit when you open the account.
How inflation impacts CD earnings
Though inflation doesn’t make a CD any less secure, it can indirectly eat into your savings. When inflation is high, your dollars lose purchasing power. CDs usually see higher interest rates when inflation is up. That’s because the Federal Reserve’s main course of action to fight inflation is to raise the federal funds rate. When the Fed raises rates, online-only banks tend to push savings and CD rates higher.
“CDs are an excellent option in an inflationary environment,” said Cho. “The high-interest rate environment has been a boon to CD rates over the past couple of years, with some rates quadrupling and then some.”
High savings rates are good news for savers, but these rates usually don’t keep up with the pace of inflation (though some are right now). And even if you invest in a bank with a higher APY than the current inflation rate, rising prices are still taking a bite out of your finances, since you can’t buy as much with the same amount of money. If you have savings set aside, however, you can earn a worthwhile return. If you do have money set aside, investing in a CD can be a safe and rewarding way to grow your money. “We recommend locking in a high fixed rate for a long term to earn a high APY so that you’re set even if the federal interest rate dips at some point during the term,” said Cho. Alternatively, you can build a CD ladder so you’ll have more flexibility if rates go up. Regardless, as long as your CD is FDIC- or NCUA-insured, your deposit and interest earned are protected.
Is now a good time to open a CD?
CD rates sit between about 4% and 5%, depending on the term, which is higher than they’ve been in recent years, making it a good time to open a CD to earn a return toward your short-term goals. As of July 24, 2023, the average APY for a one-year term is 5.09%. If you deposit $1,000 and interest compounds daily, you’ll have a balance of $1,050.90 by the end of the term. Comparatively, during the pandemic, rates fell to record lows between 1% and 2%.
Depending on what the Fed does next, though, rates may fall for certain terms. And if it’s the end of rate hikes, now’s the time to lock in a long-term CD before rates fall.
Is it safe to open multiple CDs?
You can open multiple CDs without risk of losing your money, as long as you don’t exceed the $250,000 insured limit and don’t withdraw your funds early. In fact, many experts recommend building a CD ladder to spread your money across several CDs with different terms to have money available periodically — instead of locking your entire deposit in one CD.
No matter how many CDs you open, remember to only invest money you know you won’t need for the duration of the CD term. Otherwise, you’ll pay an early withdrawal penalty to get the money out sooner. And most importantly, make sure each CD is insured by the FDIC or the NCUA.
Editors’ note: An earlier version of this article was assisted by an AI engine. This version has been substantially updated by a staff writer.
This article includes some material that was previously published on NextAdvisor, a CNET Money sister site that was also owned by Red Ventures and which has merged with CNET Money. It has been edited and updated by CNET Money editors.