Savings accounts help you ensure you have money available in the event of an emergency. Savings accounts, however, earn very little interest each month. You may opt for a Certificate of Deposit instead. CDs have competitive interest rates on accounts. Some banks allow you to make contributions to your CD to increase its balance and your overall return on investment.
Certificate of Deposit
A CD works by allowing you to make a lump sum deposit into a bank and gain interest on your deposit. You must leave your deposit with the bank for a specific amount of time in order to qualify for interest rates. This can mean no withdrawals for multiple years. If you choose to withdraw prematurely, you risk penalty fees from your bank. If you are planning to set aside money untouched for an extended period of time, a CD can prove beneficial to you.
Savings accounts often earn little to no interest. Savers may turn to CDs for the opportunity to earn a return on their savings dollars. Transitioning from a savings to CD can be a smooth transition for some and an inconvenience to others. If you want the option of making a small initial deposit and contributing over time, savings accounts are usually the best option. However, there are some CDs that allow you to contribute over time. These accounts are commonly called systematic saver CDs.
You can set up automatic deposits to a systematic saver CD. These deposits occur at the frequency you set up when you open your CD account. Your deposits are repeated until the end of your CD term and can be altered throughout by visiting your bank branch. Rarely does systematic saver CDs allow you to stop making deposits to your CD account altogether. Review your bank’s CD terms and conditions to learn minimum deposit and automatic deposit requirements.
A Certificate of Deposit is a type of investment and account holders should plan to be taxed on their investment. “Any interest that you receive or that is credited to your account and can be withdrawn is considered taxable income,” explains George Saenz of Bankrate.com. Interest payments are not taxed until they are actually withdrawn from your CD account. If you prefer to enjoy tax deferment as long as possible, consider a long term CD as extend over multiple years.