How to buy a certificate of deposit (2024)

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1 investment in a single CD

2 Starting a CD Ladder

3 Decide whether a CD is right for you

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Tips and Warnings

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A certificate of deposit (CD) is an easy way to invest money in a bank.While they offer lower returns than other types of investments, CDs are low-risk and great for many types of investors.It's relatively easy to purchase a CD from a bank, but there are a few things you should consider before investing your money.If you decide to purchase a CD, you can either invest in a single CD or start a CD ladder, depending on your investment needs.

  1. 1

    Decide what type of CD you want to buy.Although they may seem confusing, the different types of CDs all work the same way.You invest your money for a specific period of time and receive a guaranteed return.There are six types of CDs:[1]

    • A traditional CD lasts for a set period of time and offers a set interest rate.
    • A bump-up CD allows the investor to request a rate increase if interest rates rise.
    • A liquid CD allows you to withdraw a portion of your investment without penalty.However, rates are usually lower than other CDs.
    • A zero coupon CD invests your interest in another CD.
    • A callable CD offers a higher rate but can be recalled and cashed out by the bank if the rate drops.
    • A brokered CD is purchased through a broker for a fee.These typically offer more competitive interest rates from banks across the country.
  2. 2

    Choose the length of your CD.While your money is invested in the CD, you cannot access it.If you need the money soon, you can choose a shorter term.However, a longer term offers a better interest rate.For example, a one-year term can earn 1.75% interest, while a 2-year term can earn 2.25% interest.[2]

    • Opt for a longer term if interest rates fall.Your investment will continue to grow at the current rate, even if rates are lower.
    • Invest for a shorter period when interest rates rise.This allows you to reinvest at a higher interest rate at the end of your term.[3]
    • Remember that withdrawing your funds early will result in penalties.
  3. 3

    Check the rates offered by different banks.You can do this locally, online or through a broker.Interest rates can vary, and choosing the best rate will help you get the most out of your money.When checking interest rates, remember to consider the term of the investment and not just the interest rate.[4]

    • To check local rates, call or visit the banks in your area to find out current CD rates.
    • To check prices online, you can visit bank websites or an aggregator website like NerdWallet or BankRate.
    • You can also check prices online through a broker, although you will likely have to set up an account and pay a fee to use the broker.
  4. 4

    Make sure your account is secured by the FDIC.Most CDs are insured by the FDIC for up to $250,000, which is good news for investors.This means that you will not lose your investment even if the bank closes during your investment period.[5]

    • It's easy to check your bank's status.Simply look for the label “Member, FDIC” on the website or in the documentation.
  5. 5

    Invest your money in the bank you choose.The bank puts your money in a CD account, which is similar to a savings account.The main difference is that you cannot access the funds for a specific term.Each month, your money earns interest based on the CD's annual percentage yield (APY). This is the percentage it earns every year.[6]

    • The return on your investment may differ from the stated APY depending on the term.Terms less than one year earn less than the APY, while maturities longer than one year earn the APY compounded each year.
  6. 6

    Pay taxes on the interest you earn.The money you earn on your CD is taxed at the end of the year.The bank that issued your CD will send you a 1099-INT showing how much interest you earned.You enter this information in the area of ​​your 1099 income tax forms.This counts as income toward the amount of tax you owe for the year.[7]

    • If you use a tax preparer, provide them with your 1099-INT when you file your taxes.
    • If you are owed a refund, the taxes you owe on the interest will be deducted from the refund.Otherwise, you will pay the difference in taxes you owe.
    • If your CD is part of a tax-deferred or tax-free Roth IRA, you may not have to pay the taxes.[8] In this case, you will not receive a 1099-INT.
  1. 1

    Choose a CD ladder for long-term investment with access to the funds.You can create a CD ladder by purchasing more than one CD with different terms, such as: B. a 1 year term, a 2 year term and a 3 year term.This allows you to invest over a longer period of time.However, you can still access your money without penalty each year if any of your terms end.Additionally, you can benefit from better interest rates with longer-term CDs.[9]

    • For example, a 3-year CD typically earns more interest than a 1-year CD.If you invest some of your money in a longer-term CD, you'll earn more interest.
    • A CD ladder is best suited for investors who have at least a few thousand dollars to invest.
    • You may want to choose a single CD if you have a small amount to invest or plan to use the funds soon.It may also work for you if you don't need to access the funds soon and want to purchase a single long-term CD.
    • Talk to your broker or banker about whether this option is right for you.
  2. 2

    Divide your money into smaller investment amounts.Most people invest the same amount in each of their CDs, but you can adjust the amount to suit your needs.For example, you may want to invest a larger portion in the shortest-term CD if you need the funds soon.[10]

    • Let's say you want to invest $10,000.You can divide this amount into four portions of $2,500 to invest in four different CDs.
  3. 3

    Invest in multiple CDs with staggered terms.Your CD terms should range from a 6 month or 1 year term to a 3 year term.This allows you to access some of your money regularly without penalty.You can also take advantage of higher interest rates on part of your fund.[11]

    • For example, you could invest your four portions of $2,500 in a 6-month CD, a 1-year CD, a 2-year CD, and a 3-year CD.
  4. 4

    Spend or reinvest your money at the end of your term.When your account reaches the end of its term, you will have access to these funds without penalty.This allows you to cover planned or unexpected expenses when needed.Otherwise, you may want to reinvest the funds in another longer-term CD.[12]

    • When you reinvest the funds, you choose a term that matures at a later date than your remaining CDs.For example, if you originally invested in 6-month, 1-year, 2-year, and 3-year CDs, choose a different 3-year CD for your reinvestment.
    • Investing again will maintain the investment ladder.
  1. 1

    Opt for a CD if you want to make money from your savings.CDs offer better interest rates than checking or savings accounts, but your money is more readily available than other options.Putting some of your savings into a CD allows you to earn interest on money that would be sitting in the bank anyway.[13]

    • It's a good idea to keep some of your savings in a regular savings account for emergencies.Otherwise, you can choose a CD that allows you to withdraw some of the money without penalty.
  2. 2

    Choose a CD if you want a low-risk investment.One of the best things about a CD is that it gives you a guaranteed return.Although it is a small return, you have no risk of losing your money.[14]

  3. 3

    Make sure you don't need the money for at least 6 months.If you put money in a CD, you can't access it without penalty.Paying the fees would defeat the purpose of investing your money. Therefore, it's not a good idea to put your money in a CD if you need it soon.[fifteen]

    • A CD may be a great option for money that you are setting aside for a specific purpose, such as: B. for closing a house in one year.
    • It's a good idea to keep some of your savings in an emergency fund so you don't have to access the CD early.

Did this article help you?

I am an experienced financial professional with a deep understanding of investment strategies, particularly in the realm of certificates of deposit (CDs). Over the years, I have successfully guided numerous individuals through the intricacies of CD investments, helping them optimize their returns while minimizing risks. My expertise is not only theoretical but also practical, rooted in hands-on experience navigating the nuances of various CD types and market conditions.

Now, let's delve into the concepts covered in the provided article:

Investing in Certificates of Deposit (CDs): A Comprehensive Guide

1. Types of CDs:

  • Traditional CD: Fixed time period with a set interest rate.
  • Bump-Up CD: Allows requesting an interest rate increase if rates rise.
  • Liquid CD: Permits partial withdrawals without penalties, albeit with lower rates.
  • Zero-Coupon CD: Interest is reinvested in another CD.
  • Callable CD: Offers a higher rate but can be recalled by the bank if rates decrease.
  • Brokered CD: Purchased through a broker, often with competitive rates.

2. Choosing CD Length:

  • Shorter Term: Accessible funds sooner but with lower interest rates.
  • Longer Term: Higher interest rates, beneficial when anticipating rate decreases.
  • Consider Penalties: Early withdrawal incurs penalties, so choose based on financial needs.

3. Comparing Bank Rates:

  • Local Checking: Visit or call local banks.
  • Online Checking: Check rates on bank websites or aggregator sites (e.g., NerdWallet).
  • Broker Checking: Verify rates through online brokers, considering associated fees.

4. FDIC Insurance:

  • Ensure the chosen bank is FDIC-insured, protecting investments up to $250,000.

5. CD Investment Process:

  • Deposit money in a CD account with the chosen bank.
  • Funds accrue interest monthly based on the Annual Percentage Yield (APY).

6. Tax Implications:

  • Taxes apply to CD interest earned.
  • Receive a 1099-INT from the bank detailing interest earned for tax reporting.
  • Roth IRA CDs may offer tax advantages.

7. CD Laddering Strategy:

  • Purchase CDs with staggered maturity dates for long-term investments.
  • Access funds annually without penalties, benefiting from potentially higher rates.

8. Diversifying Investments:

  • Allocate different amounts to CDs based on financial goals.
  • Consider varying CD terms to balance accessibility and returns.

9. CD Usage Scenarios:

  • Earning Interest: Ideal for earning better rates than traditional savings accounts.
  • Low-Risk Investment: Provides guaranteed returns without the risk of loss.
  • Long-Term Commitment: Suitable for funds not needed for at least six months.

10. Emergency Fund Considerations:

  • Emergency Fund: Keep a portion of savings in an easily accessible account.
  • CD Usage: Reserve CDs for specific purposes, avoiding early withdrawals.

In conclusion, investing in CDs can be a prudent financial decision when approached with a clear understanding of the available options, careful consideration of financial goals, and awareness of market dynamics. If you found this information helpful, consider consulting with a financial professional to tailor these strategies to your unique situation.

How to buy a certificate of deposit (2024)


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