Are CDs a good way to save? Your top questions, answered
May 15, 2023
7 min read
What we'll cover
What a CD is and how it works
When you should consider a CD
The different kinds of CDs
With all the talk of interest rates, economic forecasts and more, you might feel a little stuck when it comes to your money.
But no matter the market, one thing you can count on is that saving is always a good idea. And while they may not grab headlines, certificates of deposit (CDs) remain one of the most reliable tools for building your balance.
What are CDs?
A traditional bank CD is an interest-bearing deposit account in which you agree to keep your initial deposit for a specified time. A CD has a fixed term length and a maturity date, at which time your funds can be withdrawn penalty-free. Like other deposit accounts, such as checking and savings accounts, CDs are federally insured up to the maximum amount allowed by law when issued by an FDIC-insured institution, such as Ally Bank.
How does a CD work?
CDs are simple. You deposit money into the account for a certain number of months or years (this is referred to as the “term” of the CD). The money earns interest at a predetermined rate until the CD matures at the end of the term. That’s when you can withdraw your money (plus interest) without penalty, renew or “roll over” the CD into the same term or a new term.
What happens if you withdraw funds from a CD early?
Usually, if you withdraw your money earlier than the CD terms dictate, you’ll pay an early withdrawal penalty (barring exceptions, like Ally Bank’s No Penalty CD).
An early withdrawal penalty isn’t necessarily a bad thing — the idea of paying a fee might incentivize you to leave your savings alone.
When should you consider a CD?
The best time to open a CD depends on your financial goals, timeline, and how often you expect to need access to your money. If you think you’ll want to withdraw funds from time to time, a CD probably isn’t the best option. If you’re looking for a safe, reliable place to save over a period of time while earning a competitive rate, a CD could be a good fit.
Just remember, because most CDs have early withdrawal penalties, you’ll want to make sure you can afford to be without access to your cash until the CD matures.
What are the different types of CDs?
You can find a variety of certificates of deposit with different term lengths and features to fit your specific goals. Several popular types of CDs, all of which are offered by Ally, include:
No-penalty CDs: Also called “liquid CDs,” these allow you to withdraw money before the maturity date without penalty. Ally Bank's No Penalty CD allows you to withdraw your full balance and interest any time after the first six days following the date you funded the account penalty-free.
High yield CDs: Usually have higher than average fixed interest rates. In exchange, high yield CDs may have longer terms and could require a larger deposit. With an Ally Bank High Yield CD, you can open and fund with any amount.
“Bump up” CDs: Allow you to take advantage of rising interest rates without worrying about the potential downward adjustments of a variable rate. Ally Bank’s Raise Your Rate CDs give you the option of a one-time rate increase if our 2-Year CD rate goes up and the option to increase your rate twice if our if our rate for your term and balance tier goes up.
IRA CDs: Let you take advantage of the tax benefits of an Individual Retirement Account (IRA) with the security of a deposit account. Ally Bank offers both High-Yield and Raise Your Rate CDs for an IRA. For IRAs, an additional IRS tax may also apply; please consult your tax professional.
You may also come across other types of CDs that are not offered at Ally Bank. Some of these include:
Jumbo CDs: Which usually require a deposit of $100,000 or more.
Callable CDs: Can offer a higher annual percentage yield (APY) at the risk of the financial institution “calling” back the CD before maturity and reissuing it at a lower rate.
Add-on CDs: Allow you to make additional deposits to your CD account during the term.
Zero-coupon CDs: Do not pay interest throughout the term, but are sold at a discount and redeemed at maturity for the full value, resulting in a profit for the owner.
Step-up CDs: Automatically raise their rate at periodic intervals during the CD term.
Foreign currency CDs: Are issued in foreign currencies, but are bought with and converted back to US dollars at maturity.
Brokered CDs: Are issued by banks but bought and sold through a brokerage, similarly to bonds on the secondary market. They’re more liquid than deposit account CDs.
Choosing the right CD requires some thinking about your savings goals. The more you nail down the specifics, the easier it will be to choose the best CD for you.
How does a CD compare to a savings or money market accounts?
CDs, savings accounts and money market accounts all have benefits and drawbacks. It’s a good idea to compare them before making any deposits.
Money market accounts, which act like savings accounts with certain checking account features, offer the most accessibility. Savings accounts offer fewer withdrawal options but may provide higher interest rates. CDs usually have a higher APY than other deposit accounts, but are the most rigid in terms of accessing your money.
When deciding between deposit accounts, chasing high interest rates can send you running in circles. CDs allow you to lock in a fixed interest rate for a specified time period, while most savings and money market interest rates are variable. So, instead of constantly trying to snag the best rate, you can put your money in a CD that offers a competitive APY and leave it be. It’s important to know that CDs are subject to market conditions, so CD rates may be higher when interest rates are up and lower when interest rates are down, which is a factor to take into consideration when deciding where to stash your savings.
How do you open a CD?
Like most deposit accounts, opening a CD is easy, especially with an online bank like Ally Bank. Determine your goals and how long you want to keep your money deposited. Then, find a CD that best fits your needs. Beware of additional fees or promotional rates that plummet after a few months. Your best bet is to look for an FDIC-insured bank that offers consistently competitive rates. And don’t forget: When you open a CD at Ally Bank, you get our 10-Day-Best-Rate Guarantee and a Loyalty Reward when your CD renews. Plus, there’s no minimum balance to open.
From there, follow your bank’s instructions to set up your account, make a deposit and watch your funds grow.
How do you save and grow your money with CDs?
CDs can be a great way to give stagnant savings a boost. They’re typically a good option for mid- to short-term goals (think a few months up to five or so years) since you’ll likely earn more interest compared to other deposit accounts, but you don’t have to worry about losing money in the market, a risk you take when investing. All you have to do is find a CD with terms that align with your savings timeline and let the interest to its job.
If you aren’t interested in tying up your money for years at a time, consider CD laddering.
With a CD ladder, you open several CDs with staggered maturity dates, so some of your cash is available to use or rollover at regular intervals. You can take advantage of better rates usually offered by long-term CDs without having all your money tied up for three, five or more years.
What are the benefits and risks of CDs?
Weighing the positives and drawbacks of CDs along with your personal savings goals can help you determine whether CDs are right for you.
CDs typically have higher interest rates compared to other deposit accounts.
CDs often offer fixed rates for fixed terms.
FDIC-insured CDs offer security for your savings.
You can open CDs at most banks and credit unions.
CDs typically won’t offer returns as high as those from investment securities (which offer higher potential earnings but are not FDIC-insured).
Fixed rates mean you may be stuck with lower interest rates if rates rise.
If you need the money before CD maturity, you may pay early withdrawal fees.
You typically won’t have flexible access to funds held in a CD.
How are CDs taxed?
The Internal Revenue Service (IRS) treats interest earned on a CD like income, whether you withdraw your money or roll it into a new CD.
If your CD is part of an IRA (Individual Retirement Account), the interest you earn may be tax deductible until you start taking distributions during retirement.
Earn, but don't touch
Certificates of deposit can be a smart way to safely maximize your savings. At Ally Bank, our competitive rates and various options mean smart savers with all kinds of money goals can find a CD that’s a financial fit. Whether you’re in it for the APY or the peace of mind that comes with a safe choice to grow your deposit, consider saving with a CD today.