Information on Certificates of Deposit
If you have money to invest but you are not comfortable putting that money at risk, consider buying a certificate of deposit (CD). While certificates of deposits carry some restrictions, they are fixed-rate investments that are popular with risk-averse savers. Read these guidelines to see if a certificate of deposit is a good investment choice for you.
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Identification
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A certificate of deposit is a savings product that you may purchase directly from your bank. You do not need the services of an investment broker or financial planner to choose a CD. To make the most of your certificate of deposit, you must hold it for the specific length of time without making withdrawals. You will forfeit some of your earned interest if you take money out early.
Function
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CD terms range from between three months and more than five years. The more you invest, the higher your interest rate will be. Similarly, CDs that carry a longer term will pay a higher rate of interest than those that you hold for a short time. CD rates are often higher than those on regular savings accounts. If you're sure you won't need you investment funds for a particular period of time, a certificate of deposit can be profitable.
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Features
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You may use certificates of deposits to fund various accounts. For example, you might decide to place a CD inside your IRA account to defer paying taxes on the earnings until you retire. You could also fund a Coverdell Education Savings Account (ESA) with a CD and use the proceeds for qualified educational expenses. If your certificate of deposit earns interest which is not tax-deferred, you must report the interest as income on your tax return.
Benefits
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The FDIC (Federal Deposit Insurance Corp.) insures certificates of deposit purchased at your bank. This insures that if your bank files for bankruptcy or cannot otherwise meet its obligations to depositors, you cannot lose your money. If you have a large amount of money to invest in CDs, it may be wise to open accounts at more than one bank. Ask your banker how much money you can have in that particular bank and still be fully covered by FDIC.
Time Frame
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When your CD matures, you may withdraw your money or ask your banker to roll the funds into a new CD. Compare rates at other institutions before you automatically renew a CD at your bank. If you find better rates elsewhere, switch your money there. If you are comfortable with online banking, compare CD rates on the web. Internet banks are highly competitive.
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