A CD account, or certificate of deposit account, is a time deposit account that allows you to save by earning interest on deposited funds for a set period of time.
Let’s look at how CD accounts work, how you can benefit from them and what types are typically available.
How does a CD account work?
Certificate of deposit accounts work similarly to regular savings accounts in several ways. You deposit funds into the account and let those funds accumulate interest over time.
However, unlike a normal savings account, CD accounts only let you deposit your funds over a specified period, known as a term. This period typically ranges from a few months to a few years. Once the CD’s term has ended, the CD has reached maturity, and you can either collect your funds plus interest or roll over those same funds and interest into another CD term.
How much interest you earn depends on the initial deposit amount, the length of the term, and account’s APY. Depending on the type of CD, like step up CDs, the APY for a certificate of deposit account may vary over the length of the CD account’s term. Typically, you’ll have an idea of either the increase to APY or the range in which your APY can vary ahead of time. Fixed rate CD APYs will not change during the term.
For most CD accounts, once you’ve deposited your funds, you cannot withdraw those funds again until the CD account has reached maturity. If you do, you’ll receive an early withdrawal penalty.
What are the benefits of a CD account?
CD accounts can be a great way to earn a specific interest on your deposits Some certificate of deposit accounts offer higher APYs than a conventional savings account, which means you could earn more interest on your deposit funds over time.
And CD accounts, like other types of bank accounts, are federally insured if the bank or credit union is a member of a federal deposit insurance agency. This helps make CDs a less risky way to save money, because in the rare event the bank or credit union fails, you’re guaranteed to get your money back, up to the $250,000 federal limit.
Different types of CD accounts
There are a few different types of certificate of deposit accounts available. Each of these accounts offers different benefits that may suit your financial needs.
No penalty CD
While most CD accounts will penalize you for withdrawing your funds before the term has ended, a no penalty CD typically allows you to withdraw funds after a specific period of time without paying the usual early withdrawal penalty, provided you meet certain conditions for early withdrawal.
Different banks may require different conditions to be met in order to avoid an early withdrawal penalty, so make sure you understand the terms behind a no penalty CD before you deposit your funds.
Setup up CD?
A step up CD offers the benefits of a typical CD account, but in addition, its APY will increase to a specific rate at fixed intervals throughout the CD’s term. This can be helpful if you want the benefits of predicatable rate increases during the CD term.
Fixed rate CD
A fixed rate CD's APY will not change over the duration of the term. This can be helpful if you want specific interest earnings until the CD account reaches maturity.
When to use a CD account
If you want to earn interest with funds you don’t need immediate access to, a CD account may be a good idea. Keep in mind that unless you decide to use a no penalty CD, you will be penalized for withdrawing funds from a CD account before the account reaches maturity. It’s best practice to only deposit funds in a CD if you don’t need them during the account’s term.
Disclaimer: This article is for general educational purposes. It is not intended to provide financial advice. It also is not intended to describe any Citi product or service. You should refer to the terms and conditions financial institutions provide for various products.
