A certificate of deposit (CD) can help you grow your savings faster, but you must keep your money in the account for a set period of time — which can feel risky. Online banks often offer the highest rates, but should you trust an online bank with your money? What happens if the bank fails before your CD reaches maturity? Or what if your income changes and you need to access some of your savings?
Most CDs are FDIC insured, which makes them safe, and there are even strategies you can use to maintain access to your money. But it’s still wise to get all your questions answered before opening a CD.
Are CDs safe?
CDs are a secure way to grow your money by earning interest. As long as you wait to withdraw your funds until your CD matures, you won’t risk losing money (and the money you would lose in that interest would be interest accrued during the term).
But risk comes in other forms too: Some people think it’s a risk to lock your money into one interest rate if interest elsewhere begins to rise. Other people worry about what will happen if they need their money for something before the end of the CD term.
If you want to maximize your earnings while accessing some of your cash in the short term, a CD ladder may fit the bill. It involves dividing your money among 1-year CDs with rolling maturity dates, so you can take advantage of the highest CD rates while reaping the liquidity benefits of a short-term CD.
Are CDs FDIC insured?
You might also be worried about your bank becoming insolvent. If that happens, the bank may be incapable of providing your expected returns. But any money you have in the account will be protected, thanks to FDIC insurance.
The Federal Deposit Insurance Corporation automatically insures deposit accounts at member banks, up to its limits. There’s no need to pay for the insurance. Each depositor gets standard coverage of up to $250,000 per bank for each account ownership category, per depositor. Note that all single deposit accounts, including checking accounts, savings accounts, CDs, and money market deposit accounts are considered under the same ownership category.
That means if you open a CD at an FDIC-insured bank where you don’t already have other deposit accounts, your CD will be federally insured up to $250,000.
If you open a CD at an FDIC-insured bank where you already have checking and savings accounts worth $150,000, you’ll get $100,000 in insurance for your CD. However, if you have a spouse, their accounts will also be insured up to $250,000, which would bring your total to $500,000. To check if a bank is FDIC insured, you can search through the FDIC’s BankFind Suite.
Credit union deposit accounts are insured by a different federal agency. The National Credit Union Administration (NCUA) provides each credit union member with $250,000 of coverage for each account ownership category, per insured credit union. You can use the NCUA’s Credit Union Locator to check if your credit union is federally insured.
Types of CDs that aren’t FDIC-insured
While traditional CDs are insured, there are a few categories of CDs that aren’t.
- Index-linked CDs: An index or equity-linked CD generates returns based on a market index, like the S&P 500. One drawback of these CDs is that only the principal (your deposit amount) is FDIC-insured. The issuing bank is responsible for paying any interest generated.
- Brokered CDs: If you purchase a CD through a brokerage firm, it may or may not be FDIC-insured, depending on whether the brokerage works with federally-insured banks. If you work with a firm that offers FDIC-insured, brokered CDs, like Vanguard or Fidelity, you may be able to expand your FDIC insurance coverage and get even higher returns.
What does FDIC insurance cover?
FDIC insurance only covers deposit accounts and doesn’t protect your investment accounts. Deposit accounts include CDs, checking accounts, savings accounts, money market deposit accounts, and prepaid cards that meet FDIC requirements. The bank that holds your deposit account must be FDIC-insured for the account to qualify for the coverage.
Note that when it comes to the $250,000 limit, different branches still count as the same bank. But if you have one deposit account at Chase and another at Wells Fargo, they’ll each be insured up to $250,000. If you have multiple deposit accounts at one bank, they’ll be collectively insured up to $250,000.
What if you need more insurance?
There are a few ways you can insure more than $250,000 in deposits.
- Open accounts at multiple banks: If you open accounts at multiple insured banks, you’ll get $250,000 in coverage at each bank. If you get 2 CDs at two different banks, that would mean you could insure up to $500,000.
- Open a credit union account with excess funds: You can also become a member of a credit union and open an account insured by the NCUA for up to $250,000.
- Open accounts in different ownership categories: The FDIC recognizes several different ownership categories and offers depositors $250,000 in insurance for each category at each bank. For example, if you opened a joint account with your spouse at the same bank where you have your single CD, the joint account would be additionally insured up to $250,000. Or if you set up a trust with two named beneficiaries, each beneficiary would get $250,000 in insurance.
- Explore brokerage accounts: If you open a brokerage account, you can deposit a lump sum that will be divided across several banks. For example, you can get a $500,000 brokered CD, as long as you make sure the money is spread across separately chartered banks.
- Open a cash management account: You can also deposit money into a cash management account with a brokerage firm that partners with several banks. For example, the Cash Reserve account at Betterment is FDIC-insured up to $2 million and offers a variable 4.75% APY and no transaction limits or fees.
- Rely on bank networks: Another way to spread out funds to maximize your coverage is to use IntraFi Network Deposits to get millions in FDIC insurance. The service allows you to deposit a large sum across multiple financial institutions with just one relationship.
What happens if my bank fails?
Bank failures are rare, but in the event that it happens, the FDIC will respond in two ways:
- Paying depositors for their insured funds: Most commonly, the FDIC arranges for a healthy bank to take on the insured deposits of the failed bank. If that happens, you’ll have immediate access to your insured account at the healthy bank. If another bank doesn’t assume the insured deposits, the FDIC sends checks directly to depositors for their insured accounts balances, typically starting just a few days after the bank closes.
- Recovering uninsured funds: The FDIC is responsible for selling the failed bank’s assets to settle its debts. As the assets are sold, the FDIC sends payments to depositors who had uninsured funds, but this process can take years and depositors may never receive the full uninsured balance. That’s why it’s important to ensure that all your deposit accounts are fully insured.
Are CDs worth it?
If a CD helps you meet your financial goals, it’s worth it. CDs are a safe and predictable way to grow your savings faster than with a savings account. Even one-year CD rates are as high as 5.35% as of September 7, 2023. Jumbo CDs, which have a higher minimum deposit requirement, can earn even higher returns. Browse options at the best banks and best online banks for the most appealing terms.
That said, CDs come with drawbacks. If you need to withdraw the money early, you’ll incur a penalty that could wipe out your earnings. And keeping all your money locked in a long-term CD could mean missing out on other potentially higher-earning investments. A CD ladder strategy can help minimize the cons of opening a CD, however.
Locking your money into a CD may feel like a risk, but if you choose a federally insured institution, you can rest easy. You’ll have access to the funds you deposit and the interest you earn up to FDIC limits, even if the bank fails. Just make sure you understand FDIC limits, and evaluate your finances before you lock up your money long term.
Editorial Disclosure: All articles are prepared by editorial staff and contributors. Opinions expressed therein are solely those of the editorial team and have not been reviewed or approved by any advertiser. The information, including rates and fees, presented in this article is accurate as of the date of the publish. Check the lender’s website for the most current information.
This article was originally published on SFGate.com and reviewed by Lauren Williamson, who serves as the Home and Financial Services Editor for the Hearst E-Commerce team. Email her at [email protected].