What Is a CD Account? How Does It Work?

When interest rates rise, it’s natural to explore ways to get more from your savings.

While keeping your money in a standard savings account is always an option, a smarter choice could be a Certificate of Deposit (CD).

For those wondering what CD accounts are, they are specialized savings tools that typically offer higher returns compared to traditional savings accounts. A CD account is a savings product that pays a fixed interest rate for a fixed term. It typically pays higher interest rates than a standard savings account.

The catch?

You agree to leave your money untouched for a set period, which can make it a great option for achieving your financial goals while enjoying better interest rates.

Let’s explore how CDs work, their benefits, and how they might fit into your savings strategy.

What is a Certificate of Deposit (CD)?

A Certificate of Deposit (CD) is a savings product offered by banks and credit unions. It allows you to deposit a fixed amount of money for a set period, ranging from a few months to several years.

In return, the bank pays you a guaranteed interest rate, often higher than that of a standard savings account.

It’s a low-risk savings strategy where your money earns consistent returns without being exposed to market volatility.

At the end of the term, called "maturity," you receive your original deposit plus the accrued interest.

For those seeking clarity on what a certificate of deposit is, it's essentially a commitment: you commit your funds, and the bank commits to providing a fixed interest rate for a fixed term.

If you're wondering whether CDs are safe investments, the answer is yes—CDs are low-risk because the rates are fixed for the term of the account. If a bank or credit union is insured by the FDIC or NCUA, its CDs are insured up to applicable limits.

SBIC, with its reputation for safety and personalized services, offers a range of CDs tailored to meet your financial needs.

How Certificates of Deposit Work

When you open a CD, you agree to:

• Deposit a Lump Sum: CDs require an upfront deposit. The amount can vary, but higher deposits may qualify you for better rates.

• Lock-In Period: This is the term during which your money is inaccessible without penalty.

• Earn Fixed Interest: The interest rate is determined at the time of purchase and remains fixed throughout the term.

• Receive Maturity Proceeds: At the end of the term, you can withdraw the deposit along with the earned interest or roll it over into a new CD.

If you're asking, can I withdraw money from a CD early? - You can, but you’ll likely pay an early withdrawal penalty unless you choose a no-penalty CD.

If liquidity is a concern, SBIC also provides other options like savings and checking accounts, and a safety deposit box for storing valuables securely.

Types of Certificates of Deposit

Understanding the types of CDs can help you decide the best fit for your needs:

• Traditional CD

  Fixed term and fixed interest rate. Ideal for those with funds they can set aside for a specific period.

• Jumbo CD

  Requires a significant minimum deposit, often $100,000 or more. May offer higher interest rates than traditional CDs.

• No-Penalty CD

  Allows early withdrawal without penalties. Offers flexibility, though often with slightly lower interest rates.

• Bump-Up CD

  Lets you increase your interest rate once during the term if market rates rise.

• Step-Up CD

  Automatically raises the interest rate at specified intervals.

SBIC makes it easy to open a bank account and explore our CD offerings to match your financial goals. If you're curious about how to open a CD with SBIC, simply start by opening a bank account and reviewing the available options.

Benefits of Certificates of Deposit

CDs come with several advantages, making them an appealing option for savers:

• Higher Interest Rates: Compared to a savings account, CDs typically offer better returns.

• Low Risk: CDs offered by FDIC or NCUA-insured institutions are insured up to applicable limits.

• Predictable Returns: Fixed rates mean you know exactly how much you’ll earn.

• No Market Volatility: CDs are not susceptible to market fluctuations, unlike stocks or mutual funds.

Drawbacks of Certificates of Deposit

Despite their benefits, CDs have limitations to consider:

• Liquidity Constraints: Your funds are locked for the term unless you pay a penalty.

• Inflation Risk: Fixed returns may lose value during periods of high inflation.

• Opportunity Cost: Money in a CD cannot be used for other investments with potentially higher returns.

If you’re still exploring what bank CDs are, understanding these trade-offs is essential. At SBIC, we can help you assess if a CD aligns with your financial goals.

Strategies for Maximizing CD Returns

• CD Laddering: Divide your investment across multiple CDs with staggered maturities. This ensures regular access to funds while benefiting from higher long-term rates.

• Shop for Rates: Compare rates across banks to maximize your earnings. Online banks often provide competitive options.

• Reinvest Interest: Instead of withdrawing interest earnings periodically, allow them to accrue for greater returns.

• Align Terms with Goals: Match your CD’s term length with your financial objectives. A 1-year CD might be suitable for short-term goals, while a 5-year CD works well for long-term savings.

Tax Implications of Certificates of Deposit

Interest earned on CDs is taxable as income. Here’s what you should know:

• Federal and State Taxes: You’ll owe taxes on the interest earned, even if you don’t withdraw it during the year.

• Tax-Deferred Accounts: CDs held in IRAs or other retirement accounts may grow tax-deferred until withdrawal.

SBIC is not a tax advisor. Consult your tax advisor before making tax-related investment decisions.

Why Consider SBI California for CDs?

SBIC, as a trusted financial partner, offers tailored CD solutions formulated for diverse requirements.

Whether you're planning for short-term goals or long-term financial security, we’re here to guide you every step of the way.

If you're ready to start, open a bank account today and explore the benefits of our competitive CD options.

Wrapping Up

Certificates of Deposit (CDs) are a secure, predictable way to grow your savings.

They offer higher interest rates compared to regular savings accounts, making them ideal for those with specific savings goals and a low tolerance for risk.

However, understanding their terms and potential drawbacks is crucial.

We hope this post was helpful. Ready to get started? Explore SBIC’s CD options and start earning more from your savings today.