If you’re new to investing, the range of options can feel a little overwhelming (or at least confusing). Stocks, bonds, mutual funds, certificates of deposit — what makes the most sense for your lifestyle, your plans, budget and comfort level when it comes to risk?
Let’s take a deeper look into one of the most popular investment options for beginners: certificates of deposit, or CDs.
CDs are popular with beginners for a few reasons, but the big one: They’re a great investment option for people who want a low-risk, secure, easy-to-understand way to grow their savings.
What are certificates of deposit?
Issued by banks and credit unions, CDs function kind of like a time-bound savings account. You deposit a fixed amount of money for a set period of time, usually ranging from three months to five years.
They’re ideal if you want or need predictable returns and have a low tolerance for financial risk. They’re not ideal if you think you’ll need to access the money you’ve invested — if you need to withdraw money from a CD before it matures, you’ll generally have to pay a penalty and you’ll lose out on returns.
Who are CDs for?
CDs have benefits for just about any investor, but they’re particularly suited for people who:
- Aren’t terribly comfortable with risk
- Need a secure investment with a guaranteed return
- Want to save for a specific goal, like buying a house, paying tuition, or retirement.
The benefits of CDs
Like any investment, certificates of deposit are particularly suited to certain needs, preferences and circumstances. Here are a few of the pluses:
1. You know what to expect.
CDs offer a fixed rate of return, determined when you make the initial deposit, so you’ll know how much money you’ll earn at the end of your CD term. It’s a predictable, low-risk investment option.
They also have a fixed term — you know exactly when the CD matures, and how much money you’ll have available to you — so you can make budget plans with certainty.
2. They offer higher rates than typical savings.
CDs typically offer higher interest rates than savings accounts or money market accounts, so they can be a great choice if you’re looking to grow your savings and can commit to a time frame without accessing the funds.
The Difference between IRA CDs and Regular CDs
Not all certificates of deposit are the same. There are IRA CDs and Regular CDs, and while they’re similar, there are some key differences you’ll want to be aware of if you’re considering investing in a CD.
- IRA CDs are considered retirement accounts, so they have different tax implications than regular CDs. Interest earned on IRA CDs is tax-deferred. Interest from regular CDs is taxed as ordinary income.
- Both IRA CDs and regular CDs generally have fees or penalties for early withdrawal, but typically, the penalty for an IRA CD is more severe.
More questions? Our team can help.
Feeling like a certificate of deposit might be a good savings option for you? We’re here if you have more questions or need to talk through details, terms and returns.