Is there a risk putting money in CDs?
Standard CDs are insured by the Federal Deposit Insurance Corp. (FDIC) for up to $250,000, so they cannot lose money. However, some CDs that are not FDIC-insured may carry greater risk, and there may be risks that come from rising inflation or interest rates.
Your money is safe
If you open a CD or share certificate at a bank or credit union that's insured by the Federal Deposit Insurance Corp. (FDIC) or National Credit Union Administration (NCUA), respectively, you're insured up to $250,000 per depositor, per financial institution in the unlikely event of a bank failure.
Like other bank accounts, CDs are federally insured at financial institutions that are members of a federal deposit insurance agency. If a member bank or credit union fails, you're guaranteed to receive your money back, up to $250,000, by the full faith and credit of the U.S. government.
While no one knows precisely what a default would entail, consumers can rest assured that their Treasuries and certificates of deposit are reasonably safe.
The biggest disadvantage of investing in CDs is that, unlike a traditional savings account, CDs aren't flexible. Once you decide on the term of the CD, whether it's six months or 18 months, it can't be changed after the account is funded.
You could lose money in a CD if you withdraw before you've earned enough interest to cover the penalty. Brokered CDs don't allow early withdrawals, but you could lose money if you sell them on a secondary market at a bad time.
You generally can't lose money with a CD from a financial institution insured by the FDIC or NCUA. Unlike stock investments, CDs don't fluctuate in value. That being said, you can lose some or all of the interest you've earned if you withdraw money before the CD's maturity date.
Are CDs safe if the market crashes? Putting your money in a CD doesn't involve putting your money in the stock market. Instead, it's in a financial institution, like a bank or credit union. So, in the event of a market crash, your CD account will not be impacted or lose value.
The FDIC Covers CDs in the Event of Bank Failure
But the recent regional banking turmoil may have you concerned about your investment in case of a bank failure. CDs are treated by the FDIC like other bank accounts and will be insured up to $250,000 if the bank is a member of the agency.
Yes, most CD accounts are insured by the Federal Deposit Insurance Corporation (FDIC), an independent agency that provides deposit insurance and maintains the safety of the U.S. banking system. Deposits at FDIC-insured banks are covered up to $250,000 per person per account ownership type.
Where to put money if the US defaults?
“If the debt ceiling is not raised and the government defaults on its debt obligations, investors may turn to gold and other precious metals to protect their wealth.” The largest precious metals ETF is SPDR Gold Shares (GLD), with $60.7 billion in net assets. Its annual expense ratio is 0.40%.
If you have money in U.S. government money market funds, U.S. Treasury money market funds, or treasury bills maturing in June or July SELL those securities and hold cash deposits or perhaps even prime money market funds until the debt ceiling crisis is over.
CDs and Treasurys are both safe, relatively riskless investments. Since CDs are considered deposit accounts, they're covered by Federal Deposit Insurance Corp. (FDIC) insurance, up to $250,000 per depositor, per bank. You can check if a bank is FDIC-insured on the BankFind Suite website.
CD drawbacks
There are a few key points to keep in mind before opening one. Lower returns: If you're looking for a way to build wealth, CDs may offer only limited benefits. You could get better returns for your money by putting it into the market and buying stocks, mutual funds, or other investments instead.
- Accessibility. With a savings account or money market account, you're allowed to make a certain number of withdrawals of cash or transfer funds to a linked checking account. ...
- Early Withdrawal Penalties. ...
- Interest Rate Risk. ...
- Inflation Risk. ...
- Lower Returns.
- No Liquidity. CDs require you to deposit your money for a certain amount of time, with the expectation you don't withdraw any of it until the maturity date. ...
- Early Withdrawal Penalty. ...
- Lower Earning Ability.
If you deposit $500 in a high-yield savings account with a 5.00% APY, you could earn as much as $142 over five years — assuming you don't make anymore deposits and that the APY stays the same. Interest rates on savings accounts are variable, however, so they can go down as easily as they go up.
Sometimes if a withdrawal is early enough, a penalty can include part of the principal, or the initial sum of money you deposited, meaning you can lose money on a CD.
CD interest is subject to ordinary income tax, like other money that you earn. The IRS requires investors to pay taxes on CD interest income. The bank or financial institution that holds the CD is required to send you a Form 1099-INT by January 31.
Don't put cash into a CD that you'll need for emergencies. Many CDs have a minimum deposit amount, usually around $500. Don't put more in a CD than you feel comfortable parting with.
How long should you keep money in a CD?
Traditionally, in your typical ladder, five-year CDs have a higher yield than one-year CDs. But these days, you're likely to see a CD with a term of around six months to 18 months will likely have the highest yield in your ladder.
CD Investing Pros and Cons in 2024
CDs can be a smart financial move at times, but not so great at others. In the past, other investments earned higher rates than even the best CDs could earn. But, in today's high-interest-rate environment, CDs might be a great option.
Use Multiple CDs to Manage Interest Rates
Multiple CDs can help you capitalize on interest rate changes if you believe CD rates will change over time. You might put some cash into a higher-rate 6-month CD and the remainder into a 24-month bump-up CD that allows you to take advantage of CD rate increases over time.
When deciding between a long-term CD or putting money in the stock market, always take into account your goals and how long you'll need to achieve them. For long-term plans like retirement, the market offers better returns than locking up your cash in a CD.
Still, the FDIC itself doesn't have unlimited money. If enough banks flounder at once, it could deplete the fund that backstops deposits. However, experts say even in that event, bank patrons shouldn't worry about losing their FDIC-insured money.
