5 Things to Know Before Opening a CD

Updated July 08, 2021

Although they’re not as popular as they once were, a Certificate of Deposit (CD) is still an investment that offers stable growth to balance out any portfolio. But do you know how to open a CD? More importantly, do you know how to find a CD with the right terms and return for your investment? 

Before opening a CD, it’s critical to do your homework and understand how these investment products can help build your wealth. Before opening a CD account, here are the five things you first need to know.

What Is a Certificate of Deposit (CD)?

A certificate of deposit is a relatively low-risk investment instrument offered by commercial banks, credit unions, and other financial institutions. The investor agrees to deposit money with the financial institution for a set amount of time, and in return, receives a specified interest rate. 

You can invest in either:

What to Know About Opening a CD

While a CD can help build your wealth, there are a lot of things that make it stand out from competing choices:

1. CDs Are FDIC Insured

In most cases, CD accounts are insured by the Federal Deposit Insurance Corporation (FDIC) to at least $250,000. Unlike stocks (which can lose value over time), CDs and other time deposits are guaranteed, even if the bank fails. FDIC insurance covers both the principal and interest, meaning you’ll get your money no matter what happens.

2. CDs Offer Flexible Deposit Options

In today’s banking economy, opening a CD comes with a lot of flexibility. Many banks do not require a minimum deposit to open a CD account, which means you can invest any amount that fits your budget. 

In addition, certain CD accounts offer the opportunity to add to your account, or not pay any early withdrawal penalties. Add-on CDs allow you to continually add money to your account, while no-penalty CDs allow you to withdraw your cash after a minimum deposit time has been met (this can range from six days to three months).

3. Choosing the Right CD Term is Essential

Before opening a CD, it’s important to find the right term that works for your money. With traditional CDs, once you deposit your money, you won’t be able to access it without paying an early withdrawal penalty. 

CD terms can run as short as three months to as long as five years. While longer terms usually result in higher returns, it also means your money won’t be available for that time. When considering a CD, be sure to look at your budget to determine how long you can afford to invest into a CD.

4. Early Withdrawal Penalties Are Harsh

When opening a CD, it’s expected that you will keep your money in the bank for the entire term of the certificate. With a traditional CD, there will be early withdrawal penalties if you decide to take your money out of the bank early. 

Early withdrawal penalties vary based on your CD terms, so it’s important to read the fine print. For five-year CDs, your fine for taking out the money before the term is up can be as much as the last five months of interest, negating your entire earnings over that time period.

5. After the CD Term Ends, You Have Options

Once your CD reaches maturity, you’ll have plenty of options to help that money grow. Your deposit can be rolled over into a new CD account, or it can be transferred to one of many different account types (e.g. money market account, high-yield savings account). As your CD draws to maturity, be sure to have a plan for where it should go.

How to Open a CD

Opening a CD is a relatively easy and straightforward process, as they are widely offered through retail financial institutions. To start, you’ll need the minimum deposit and an idea of what kind of return you’re looking for.

Shop Around for a CD

All different kinds of banks and lenders – both in your community and online – offer different types of CD accounts which feature various terms and interest rates. The key is to balance a term that works for your strategy, as well as an interest rate that rewards you for the timed deposit.

Understand the Minimum Deposit

While some institutions don’t have any minimum deposits, others may demand $1,000 or more to open a CD account.

Get the Best Term and Rate For Your CD

As you decide on which CD account to open, it's important to find the right combination of rate and term to maximize your return on investment. While longer terms result in a higher annual percentage yield, shorter terms let you access your money faster without penalties. 

As you shop around, determine how long you can afford to have your money to grow, and understand the results that come with it.

How to Find the Best CD Rates for You

Opening the right CD account is a matter of balance. Finding equilibrium between your account minimum, the term deposit and the interest rate can help you optimize your return from your CD account. Below are some of our favorite CD options. 


Should I Open a CD?

While opening a CD provides lower risk and stable returns, it isn’t necessarily the right option for everyone. It’s important to understand the advantages and disadvantages of a CD account, and what kind of investor benefits exist.

The key advantage of opening a CD account is that it provides stable returns over its life. Unlike stocks and other investments which are not guaranteed and could lose value, CDs can have a fixed interest rate or variable interest rate. Regardless of market conditions, a CD will continually earn money throughout its term.  

There are, however, some downsides to opening a CD. Most CD accounts are locked in for a period of time (from six months to five years). During this time, you won’t be able to access the money without paying an early withdrawal penalty. Depending on the CD account, the penalty for taking money out early can negate all earnings you may have accrued. 

Those who are averse to risk, want a guaranteed rate of return for their money, and can afford to keep it in the bank for an extended period of time will benefit most from opening a CD account. With a positive interest rate assured for the account term, a CD account can provide long-term appreciation of your assets and grow your liquid wealth. However, those who anticipate they will need access to their money (or want to continually add and subtract from their account) may not be the best candidate for opening a CD, but may want to consider a high-yield savings account instead.

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All of our content is verified for accuracy by Rachel Siegel, CFA and our team of certified financial experts. We pride ourselves on quality, research, and transparency, and we value your feedback. Below you'll find answers to some of the most common reader questions about 5 Things to Know Before Opening a CD.

Should I Open a CD at a Bank or Online?

Both traditional banks and online banks offer CD accounts at different terms and interest rates. While both are solid options, it’s important to shop around to find the right institution that offers the term, rate, and account minimum that fit your lifestyle. While that combination might exist at your current bank, you may be able to do better at an online institution.

How Many CD Accounts Can You Open?

There’s no limit to the number of CD accounts you can open, and some investors use that to their advantage. Using a CD ladder strategy, many investors take advantage of rising interest rates to grow their wealth (while accessing their money at regular intervals). Though a CD ladder strategy isn’t for everyone, those seeking protection from inflation and more long-term liquidity could stand to gain from this move.

Rachel Siegel, CFA
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Rachel Siegel, CFA is one of the nation's leading experts at ensuring the accuracy of financial and economic text.  Her prestigious background includes over 10 years creating professional financial certification exams and another 20 years of college-level teaching.

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