Certificates of Deposits (CDs) are recognized and valued as low-risk savings vehicles. But, as you consider and manage your CD accounts, there are several factors that you should keep in mind.
Early withdrawal penalties–When you open a certificate of deposit (CD), you agree that you will not withdraw the funds until the maturity date, which varies from a few months to several years after you open the account, depending on the term you choose. If you close a CD before the term ends, you typically will pay an early withdrawal penalty for doing so. Those penalties can eat into your return and even your principal.
If you need more flexibility than a traditional CD allows, take a look at Ally Bank's No Penalty CD. With this CD, you can withdraw all your money, including interest earned, without any penalty, any time after the first six days following the date you fund your account.
Tax liabilities–Interest on a CD is likely taxable at your normal tax rate. Consult a tax professional familiar with your individual situation.
Reinvestment–If interest rates go down and your existing CD account with relatively high interest matures, you may have to roll over the CD at the lower rate.
Inflation–Over the long run, inflation may outpace your CD account's interest earnings. To some extent, inflation risk may be addressed by “laddering” CD accounts. This means setting up several CDs with staggered maturity dates, so that you can open new CDs regularly and potentially take advantage of the highest rates.
Limits of FDIC insurance–The Federal Deposit Insurance Corporation (FDIC) insures deposits up to the maximum allowed by law, for each account ownership category. While it may be unlikely that you would ever need that insurance, it's good to be aware of federal limits.
The rewards of CD accounts often outweigh the risks mentioned above. CD accounts usually have higher interest rates than regular savings accounts. And they provide predictability that lets you plan ahead with peace of mind. Learn more about the full line of Ally Bank CDs at AllyBank.com or call live, 24/7 customer care at 877-247-ALLY (2559) today.
Ally Bank, member FDIC
Other articles in the Understanding CDs series: Understanding CDs: An Introduction (Part 1 of 3), Understanding Certificates of Deposit: The Growing Variety (Part 2 of 3)