Choosing the certificate of deposit that is right for you

Clip Art image of a bank building with a dollar sign superimposed in the top-right corner of the frame.

Banks and credit unions offer various types of certificates of deposit. Ask around. (Photo Credit: CC BY-ND/What is a Certificate of Deposit?)

A certificate of deposit (CD) resembles a savings account, in that a consumer makes a federally insured, interest-accruing bank or credit union deposit. Unlike a savings account, however, a CD does not allow early withdrawal without penalty. For those who want to explore opening a CD, here’s a guide to the best CD options available.

The traditional certificate of deposit

A traditional certificate of deposit is simple. The customer deposits a fixed amount of money for a specified term (from three months to five years) at a predetermined rate of interest. Once the CD comes to maturity, the customer can either cash out the money with interest or roll it into another CD term. Most banks and credit unions allow customers to add funds to a CD at any time. The downside is that the early withdrawal penalty can eliminate interest and cut into principal. Federal regulations delineate the minimum penalty level but not a maximum. Thus, financial institutions can — and d0 — charge more.

Flex for higher rates with a bump-up CD

For added flexibility, a bump-up certificate of deposit enables you to opt for a higher rate on return, even mid-term. It pays to know the going market rate of interest for a CD, so you can tell your bank to give you the bump-up. The trade-off when compared with a traditional CD is that a bump-up CD may begin at a lower interest rate than a traditional CD. Typically, only one bump-up is allowed per term.

Go with the flow and avoid withdrawal penalty

A liquid certificate of deposit enables you to withdraw money from your account, so long as the money invested at account inception remains untouched for at least seven days (the federal minimum; banks’ rules vary) and a minimum balance is maintained. While the liquid CD does offer penalty-free withdrawal, each financial institution will specify a maximum number of withdrawals per term. The interest rate on a liquid CD is generally lower than a traditional CD. Brokerage CDs are a form of liquid CD that has the benefit of professional management and a higher interest rate than a standard bank CD.

Zero-coupon for long-term upside

A long-term CD option is the zero-coupon CD. Typically at least 10 years in term, a zero-coupon CD does not receive direct interest payments during the term. That money is re-invested, then back-loaded at maturity. gives the example of a 12-year, $100,000 CD at 6 percent interest. As a zero-coupon CD, this might cost $50,000 to open, but the balance will reach $100,000 at the end of the term.

Keep in mind that a zero-coupon CD may cause you to be credited with phantom income at tax time, even though you won’t have access to the funds. For the most up-to-date information on the top yields for CDs, check out



Bankrate: Top CD interest rates

What is a Certificate of Deposit?

Wikipedia entry for certificate of deposit

How to calculate a CD

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