Joy Wallet is advertiser-supported: we may earn compensation from the products and offers mentioned in this article. However, any expressed opinions are our own and aren't influenced by compensation. To read our full disclosure, click here.
One of the most common investment options, a certificate of deposit (CD) is a low-risk and steady return option that allows you to keep your money safe while earning interest on it. However, nobody knows how high or low the rates will go this year, so it helps to consider all the different types of CDs and then make an investment decision. A CD is just like putting your cash in a secret vault, and it helps you choose the vault carefully. In this guide, we take you through the different types of CDs to help you make the right decision.
Related: I Bonds vs. Certificate of Deposits
In this article
What is a certificate of deposit?
A CD is a financial product banks and other financial institutions offer. It allows individuals to invest their money at a fixed interest rate for a fixed period. CDs are considered a relatively safe investment because they are typically backed by the issuing bank's or institution's guarantee of repayment, up to a certain amount, usually insured by the government up to a specified limit (such as FDIC insurance).
- FDIC insured. Keeping your money safe
- Highly competitive rates. Earn interest immediately.
- No hidden fees. Plus, no monthly maintenance fee
- $1,500 opening deposit. Simple to fund and manage
Types of CDs
Several types of CDs offer different features and benefits to investors. Here are some common types:
Traditional Fixed-Rate CD
This is the most common type of CD. It offers a fixed interest rate for a specified term, typically ranging from a few months to several years. The interest rate remains constant throughout the term, providing predictable returns. Early withdrawal usually results in a penalty. A traditional fixed-rate CD can be suitable for individuals who value stability, security, and a predictable income stream. It's especially useful for short-term savings goals or as a component of a diversified investment portfolio. However, it's important to consider your financial goals, liquidity needs, and overall investment strategy before committing to a fixed-rate CD, especially in a changing interest rate environment.
Pros and cons
Pros
- Predictable returns. Traditional fixed-rate CDs provide a predictable and guaranteed rate of return over the CD's term.
- Principal protection. Your initial investment in a traditional fixed-rate CD is generally safe and protected if the bank is FDIC-insured up to the insurance limit.
- Low risk. Fixed-rate CDs are considered low-risk investments, making them suitable for individuals seeking to preserve their capital without exposure to market fluctuations.
- Steady income. If you're looking for a consistent source of income over a specific period, a fixed-rate CD can provide regular interest payments.
- Variety of terms. Fixed-rate CDs come in various terms, from a few months to several years, allowing you to choose a CD that aligns with your investment timeline.
Cons
- Limited potential for higher returns. One of the main drawbacks of fixed-rate CDs is that their interest rates are set at the time of purchase. If market interest rates rise significantly after you've invested in a CD, you might miss out on the opportunity for higher returns.
- Opportunity cost. If you invest in a fixed-rate CD and market interest rates increase, you could miss out on better investment opportunities offering higher returns.
- Lack of flexibility. Traditional fixed-rate CDs have fixed terms, and withdrawing funds before maturity usually results in penalties. This lack of liquidity could be problematic if you need access to your funds before the CD matures.
- Early withdrawalpenalties. If you need to withdraw funds from a fixed-rate CD before its maturity date, you might incur early withdrawal penalties, impacting your overall returns.
High-Yield CD
Also known as a jumbo CD, these are similar to traditional fixed-rate CDs but typically require a larger minimum deposit. Investors might receive a slightly higher interest rate in exchange for the higher deposit. A high-yield CD can be a suitable investment choice for individuals seeking safety, stability, and higher returns compared to standard savings accounts.
Pros and cons
Pros
- Higher interest rates. The primary advantage of a high-yield CD is that it offers a significantly higher interest rate than standard CDs.
- Predictable returns. High-yield CDs offer fixed interest rates and predictable returns over the CD's term. This can be particularly appealing to individuals who prefer stable and low-risk investments.
- Diversification. Including high-yield CDs in your investment portfolio can provide diversification, especially if you're looking to balance riskier investments with more stable ones.
Cons
- Lock-in period. One major drawback of CDs, including high-yield ones, is that your money is tied up for a specific term, ranging from a few months to several years. This lack of liquidity can be a disadvantage if you need access to your funds before the CD matures.
- Penalties for early withdrawal. If you need to withdraw your funds before the CD's maturity date, you will likely face penalties, which could affect your returns. These penalties can vary based on the financial institution and the specific terms of the CD.
- Limited flexibility. Unlike other investment options, CDs don't allow flexibility in adjusting your investment strategy during the term. Once you've committed to the CD, you're locked into the agreed-upon interest rate and term.
- Minimum deposit requirements. Some high-yield CDs might require a significant minimum deposit to take advantage of the higher interest rates, which could be a barrier for some investors.
Bump-up CD
With a bump-up CD, investors can request an increase in their interest rate to match the bank's current rates during the CD's term. This can be advantageous if interest rates rise after you've invested in the CD. It can be a suitable option if you want to balance fixed interest rates and potential rate increases. It provides flexibility in taking advantage of rising interest rates without opening a new CD.
Pros and cons
Pros
- Interest rate flexibility. The primary advantage of a bump-up CD is the option to increase your interest rate if market rates rise during the CD's term. This can be beneficial if you expect interest rates to increase in the future, as it allows you to take advantage of higher yields without committing to a new CD.
- Safety. Like other traditional CDs, bump-up CDs are generally considered safe investments. Reputable financial institutions often offer them and are typically FDIC-insured in the United States, protecting your principal from loss.
- Predictable returns. Bump-up CDs still offer fixed interest rates and predictable returns, similar to traditional CDs. The added flexibility of a rate increase option provides the potential for even better returns.
Cons
- Limited rate increases. While the ability to bump up your interest rate can be advantageous, it's important to note that there are limits to how many times and by how much you can increase the rate.
- Lower initial rate. Bump-up CDs often have an initial interest rate lower than what you might find with a fixed-rate CD of the same term. This lower starting rate is the trade-off for the option to increase the rate later. If interest rates remain relatively stable or decrease, you might end up with a lower overall return compared to a traditional CD with a higher initial rate.
- Complexity. The terms and conditions of bump-up CDs can be more complex than those of traditional CDs. Understanding the specifics of the bump-up option, including when and how it can be exercised, is crucial to making informed decisions.
Step-up CD
A Step-up CD is a type of CD that offers increasing interest rates at predefined intervals during the CD's term. Unlike traditional fixed-rate CDs, where the interest rate remains constant for the entire duration of the CD, a step-up CD provides an opportunity for investors to benefit from rising interest rates over time. A step-up CD can be appealing if you're looking for a CD option that offers higher initial rates and protection against rising interest rates. However, it's essential to carefully consider the predetermined rate schedule, potential limitations, and your own financial goals before committing to a step-up CD.
Pros and cons
Pros
- Increasing interest rates. The primary advantage of a step-up CD is that it offers the potential for increasing interest rates over time. This can be beneficial if you anticipate that interest rates will rise during the CD's term, as your returns will adjust accordingly.
- Higher initial rates. Compared to traditional fixed-rate CDs, step-up CDs often come with higher initial interest rates. This can provide you with better returns from the start compared to standard fixed-rate CDs.
- Limited interest rate risk. Since the CD's interest rates are predetermined and increase over time, you have a level of protection against sudden interest rate spikes that could negatively impact your returns.
Cons
- Limited rate increases. The interest rate increases in a step-up CD are pre-set and might be capped. This means you won't fully benefit from any significant interest rate hikes in the market beyond the predetermined schedule.
- Complexity. The terms of step-up CDs can be more complex than those of traditional CDs. Understanding the specific schedule of interest rate increases and any limitations or conditions is important to make informed decisions.
- Lower flexibility. While you might have the advantage of increasing interest rates, you're still locked into a fixed term. This lack of liquidity could be a drawback if you need access to your funds before the CD matures.
- Potential for rate decreases. While step-up CDs offer increasing interest rates, it's important to note that they don't protect against decreasing rates. If market interest rates decline, your CD's interest rate will still follow the predetermined schedule.
Callable CD
The issuing bank can redeem callable CDs before maturity, usually at a higher interest rate than prevailing market rates. This benefits the bank but introduces an element of uncertainty for investors. A callable CD is a unique type that can be "called" or redeemed by the issuing bank before its maturity date. Callable CDs often offer higher interest rates than traditional CDs as compensation for this feature. Callable CDs can be an option for investors seeking higher yields while understanding the potential risks of the callable feature.
Pros and cons
Pros
- Higher interest rates. Callable CDs typically offer higher interest rates than traditional CDs with similar terms. The higher rates can make them appealing to investors seeking potentially better returns.
- Variety of terms. Callable CDs come in various terms, allowing investors to choose the term that aligns with their investment goals and time horizon.
- Potential for early withdrawal. While not always guaranteed, some callable CDs include an embedded option that allows you to redeem the CD early without penalties if the bank decides to call the CD.
Cons
- Callable feature. The primary disadvantage of a callable CD is the issuer's ability to call or redeem it before its maturity date. If the bank decides to exercise this option, you might not receive the full interest you anticipated if market rates have decreased since you purchased the CD.
- Lack of control. The bank's ability to call the CD means you have limited control over when you'll receive your principal back. This could impact your financial planning if the CD is called when you hadn't intended to access those funds.
- Complexity. Callable CDs can be more complex than traditional CDs due to the additional features and options. Understanding the terms and conditions, including the call schedule, is crucial to making informed decisions.
- Early withdrawal penalties. If the bank doesn't exercise its call option and you decide to withdraw funds from the CD before its maturity date, you might face early withdrawal penalties.
- 3.50% APY
- $1,000 minimum to open
- No account opening or maintenance fees
No-penalty CD
This type of CD allows you to withdraw your funds before the maturity date without the typical early withdrawal penalty. However, the interest rate might be lower than that of traditional CDs. No-penalty CDs can be a suitable choice for individuals seeking a balance between traditional CDs' higher rates and regular savings accounts' flexibility.
Related: No-Penalty Certificates of Deposit
Pros and cons
Pros
- Liquidity. The primary advantage of a no-penalty CD is the ability to withdraw your funds without facing early withdrawal penalties. This makes it a more liquid option than traditional CDs, which can be useful if you anticipate needing access to your money before the CD matures.
- Flexibility. No-penalty CDs offer flexibility in managing your funds. If you find better investment opportunities, experience unexpected financial needs, or want to take advantage of changes in the interest rate environment, you can do so without worrying about penalties.
Cons
- Lower rates. While no-penalty CDs might offer better rates than traditional savings accounts, they often come with lower rates than traditional fixed-rate CDs. This is the trade-off for the added liquidity and flexibility.
- Limited upside potential. If interest rates rise significantly after you've invested in a no-penalty CD, you might miss out on taking advantage of those higher rates.
- Potential for rate changes. The interest rate on a no-penalty CD might not be fixed, and the bank could adjust it during its term. This means your returns might change over time.
- Minimum deposit requirements. Some no-penalty CDs might require a minimum deposit to open the account. This could be a barrier for individuals with limited funds to invest.
IRA CD
An Individual Retirement Account (IRA) CD is a financial product that combines the features of a traditional CD with the tax advantages of an IRA. IRAs are specialized accounts designed to help individuals save for retirement, and they come with various tax benefits depending on the type of IRA you choose (Traditional IRA, Roth IRA, etc.). An IRA CD is a type of CD held within an IRA, allowing you to save for retirement while benefiting from the security of a CD.
Pros and Cons
Pros
- Tax Advantages. One of the primary benefits of an IRA CD is that it offers potential tax advantages, depending on the type of IRA you have. Traditional IRA contributions are often tax-deductible, and earnings within the IRA are tax-deferred until withdrawal. Roth IRA contributions are made with after-tax money, but qualified withdrawals, including earnings, are tax-free.
- Stable Returns. IRA CDs provide fixed interest rates and predictable returns over the CD's term. This stability can be reassuring for retirement savers who prioritize security.
- Low Risk. IRA CDs are considered low-risk investments, making them suitable for individuals who are more risk-averse and looking to preserve their capital.
- Diversification. Including an IRA CD in your retirement portfolio can provide diversification, especially if you have a mix of other investments such as stocks and bonds.
- No Early Withdrawal Penalties at Age 59½. While early withdrawals from traditional CDs can incur penalties, if you withdraw from an IRA CD after reaching age 59½, you won't face early withdrawal penalties. However, withdrawals from a traditional IRA might still be subject to regular income tax.
Cons
- Limited Returns. The interest rates offered by IRA CDs are often lower than potential returns from riskier investments like stocks. While this provides stability, it also limits your potential for significant growth over time.
- Interest Rate Risk. If you lock into an IRA CD with a longer term and interest rates rise significantly, you could miss out on the opportunity to invest in higher-yielding options.
- Tax Implications. Withdrawals from traditional IRA CDs are taxed as ordinary income, potentially increasing your tax liability in retirement. In the case of Roth IRA CDs, qualified withdrawals are tax-free, but you've already paid taxes on the contributions.
- Minimum Distribution Requirements. Traditional IRAs have required minimum distributions (RMDs) starting at age 72 (as of my last update in September 2021). RMDs can affect your financial planning, and failing to take them can result in penalties.
Brokered CD
These CDs are purchased through brokerage firms, offering access to various CDs from various banks and institutions. They can provide more options and flexibility than CDs offered directly by a single bank. Brokered CDs can be useful for diversifying your investment portfolio and potentially accessing higher interest rates. However, they also introduce complexities, risks, and potential costs that must be carefully considered.
Pros and cons
Pros
- Access to a variety of issuers. Brokered CDs provide access to many banks and credit unions, often beyond what you might find locally. This can help you diversify your CD investments among different financial institutions.
- Potential for higher rates. Brokered CDs often offer higher interest rates than traditional CDs from local banks. This can lead to better returns on your investment.
- Secondary market trading. Brokered CDs can be bought or sold on the secondary market, providing liquidity and the ability to exit your investment before maturity. This flexibility can be valuable if you need to access your funds before the CD matures.
- Professional management. Brokers can assist you in managing your CD portfolio, helping you find the best rates and terms to match your financial goals.
Cons
- Interest rate risk. Brokered CDs can carry interest rate risk, as their value may fluctuate in response to changes in interest rates. If rates rise, the market value of your CD may fall.
- Potential for early redemption. While brokered CDs offer secondary market trading, they can also be subject to early redemption by the issuer. This could result in your CD being called before maturity, affecting your expected returns.
- Fees and commissions. Brokered CDs may come with fees or commissions, impacting your overall returns. Make sure you understand the costs associated with buying and selling brokered CDs.
- Potential for illiquidity. While brokered CDs offer liquidity compared to traditional CDs, the secondary market might not always be active, leading to potential difficulties in selling your CD when desired.
- Limited FDIC coverage. Depending on how the brokered CDs are structured, you might not receive the same FDIC coverage as you would with directly purchased CDs from individual banks.
Liquid or flexible CD
These CDs allow a certain number of penalty-free withdrawals before maturity, providing a degree of liquidity that traditional CDs lack. However, the interest rate might be lower than that of standard CDs. A flexible CD, also known as an adjustable-rate or variable-rate CD, offers some degree of flexibility in its terms, such as adjusting the interest rate or making additional deposits during the CD's term.
Pros and cons
Pros
- Potential for rate increases. Some flexible CDs allow for rate adjustments, which means you could benefit from increasing interest rates during the CD's term. This can lead to higher returns than traditional fixed-rate CDs, especially if interest rates rise significantly.
- Initial rate advantages. Flexible CDs often start with higher initial interest rates than traditional fixed-rate CDs. This can provide better returns from the beginning.
- Opportunity for additional deposits. Certain flexible CDs allow you to make additional deposits beyond the initial investment during the CD's term. This can help you take advantage of market opportunities or increase your returns.
Cons
- Lack of full flexibility. While some flexible CDs allow for rate adjustments, not all offer significant flexibility. The terms, frequency of adjustments, and additional deposit options can vary widely.
- Limited liquidity. Flexible CDs still have fixed terms, and withdrawing funds before maturity might result in penalties. This lack of liquidity could be a drawback if you need access to your funds before the CD matures.
- Minimum deposit requirements. Some flexible CDs might require a minimum deposit to take advantage of the higher interest rates or flexible features.
- Potential for rate decreases. While flexible CDs offer the potential for rate increases, they might not protect against decreasing rates. If market interest rates decline, your CD's rate might also decrease.
Market-linked CD
Also known as an indexed CD or equity-linked CD, this type of CD's returns are tied to the performance of a specific market index, such as the S&P 500. While they offer the potential for higher returns, there is often a cap on how much the investor can earn. A market-linked CD, also known as an indexed or structured CD, is a type whose returns are tied to the performance of an underlying financial index, such as a stock market index. While market-linked CDs offer the potential for higher returns than traditional CDs, they also come with unique advantages and disadvantages.
Pros and cons
Pros
- Potential for higher returns. Market-linked CDs offer potentially higher returns than traditional fixed-rate CDs, especially if the underlying index performs well.
- Stability. While market-linked CDs offer the potential for higher returns, they are generally less volatile than direct investments in the stock market. This can appeal to investors seeking a balance between risk and reward.
Cons
- Limited returns. Market-linked CDs often have caps or participation rates limiting potential returns, even if the underlying index performs exceptionally well. This can result in lower returns than direct investment in the index.
- Lack of liquidity. Market-linked CDs typically have fixed terms, and accessing your funds before maturity might result in penalties. This lack of liquidity could be a drawback if you need access to your money before the CD matures.
- Early redemption restrictions. Some market-linked CDs have restrictions on early redemptions or withdrawals, which could limit your ability to access your funds in certain situations.
- Tracking errors. The performance of the market-linked CD might not perfectly match the performance of the underlying index due to factors such as fees, calculation methods, and caps.
- 3.50% APY
- $1,000 minimum opening deposit.
- No penalty to access funds if needed before maturity
- No opening or maintenance fees
- Daily compounding interest to maximize your earning potential
- FDIC insured
The bottom line
There's a CD for every type of investor and your investment goals. While most CDs have similar features, the returns and liquidity vary. Hence, it's important to carefully consider your financial goals, risk tolerance, and liquidity needs when choosing a CD type. Each type has advantages and disadvantages, so read the terms and conditions before investing.
Joy Wallet is an independent publisher and comparison service, not an investment advisor, financial advisor, loan broker, insurance producer, or insurance broker. Its articles, interactive tools and other content are provided to you for free, as self-help tools and for informational purposes only. They are not intended to provide investment advice. Joy Wallet does not and cannot guarantee the accuracy or applicability of any information in regard to your individual circumstances. We encourage you to seek personalized advice from qualified professionals regarding specific investment issues. Featured estimates are based on past market performance, and past performance is not a guarantee of future performance.
Our site doesn’t feature every company or financial product available on the market. We are compensated by our partners, which may influence which products we review and write about (and where those products appear on our site), but it in no way affects our recommendations or advice. Our editorials are grounded on independent research. Our partners cannot pay us to guarantee favorable reviews of their products or services.
We value your privacy. We work with trusted partners to provide relevant advertising based on information about your use of Joy Wallet’s and third-party websites and applications. This includes, but is not limited to, sharing information about your web browsing activities with Meta (Facebook) and Google. All of the web browsing information that is shared is anonymized. To learn more, click on our Privacy Policy link.
Images appearing across JoyWallet are courtesy of shutterstock.com.
Share this article
