As far as investment vehicles go, bank certificates of deposit (CDs) are a great option for many people. They are about as safe as possible and can be purchased for durations lasting several months to several years. You know in advance what the guaranteed interest will be for the entire duration of the CD and they can be purchased in almost any amount once a minimum threshold is met.
CDs are insured by the Federal Deposit Insurance Corporation (FDIC) backed by the United States government. As of August, 2010, CDs are insured up to $250,000 total per depositor per institution until the end of 2013. If you have more than that amount invested at any one bank, it makes sense to spread your investment out so you don’t have any monies not insured. Joint accounts are treated a bit differently. The EDIE estimator worksheet at FDIC.gov can help you figure out if any of your deposit totals are uninsured.
Penalty for Early Withdrawals
If for any reason the principal or part of the principal must be withdrawn before the maturity date of the CD, the investor will be assessed a penalty. These vary, but are usually based on the interest accrued, and could be anywhere from a few months of interest up to a year, depending on the bank. When you purchase your CD the penalty structure will be part of the agreement.
Pay Out Interest or Reinvest It
When you purchase your CD, you have the option of having the interest sent to you as a check or by being deposited into your account or you can reinvest it by adding it to the CD’s principal balance. Note that the annual percentage rate yield the bank gave you when you first opened the CD is based on reinvesting the interest, not paying it out in increments.
Most bank CDs renew automatically for the same term at whatever the prevailing interest rate is at the CD’s maturity. Usually, you have a time period such as a 10-business day window to withdraw all the funds, principal and interest, penalty free. This clause will also be part of your initial agreement with the bank.