A Certificate of Deposit is a savings certificate with a specific fixed term and entitles the receiver to accrue interest.
Banks offer certificates of deposit as promissory notes where, unlike a regular savings account, the investor agrees to leave his/her money in the account until the maturity date. Investors are usually unable to withdraw their investment before the maturity date without paying a penalty fee.
The investor can opt for a higher interest rate by choosing a longer-length term. The interest rates for a CD investment are fixed, meaning it will remain the same amount until the maturity date. When the CD matures, the entire principal investment, as well as the interest will be available to the investor for withdrawal. CDs offer higher interest rates than accounts that allow you to withdraw at any time.
CDs are low risk because, like savings accounts, CDs are insured in the bank and your principal is backed by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. This is what makes Certificates of Deposits one of the safest investments available.
Almost all financial institutions offer some type of CD, but they each get to set their own rates and terms. It’s important to shop your options to find the best one.
Fixed rate CDs
Variable rate CD
Liquid or no penalty CD
The most common type of CD and are what’s outlined above.
Offers a changeable rate as opposed to a fixed rate. Investors may benefit from periodic increased rates. Variable CDs typically require higher initial balances.
Gives you the most flexibility in terms of withdrawal, but also comes with some restrictions that vary based on the financial institution. With these, you trade a higher interest rate for the ability to withdrawal before the maturity date.
Allows the investor to earn a higher interest rate, but gives the bank the ability to end the term at any time.
Require a minimum deposit of $100,000 and typically pay higher interest rates.
Once you have determined that a Certificate of Deposit is suitable for you, it can be purchased with your Self-Directed IRA or other retirement account at Mainstar Trust. Click below to find out how to use a Mainstar Trust account to invest in a CD.