On a scale of least to most risky places to save or invest your money, stocks would fall on one end of the spectrum, while savings accounts would fall on the opposite end. Somewhere in the middle, nestled close to bonds, are certificates of deposit (CDs), a savings product that has FDIC insurance but carries some risks.
Excluding no-penalty CDs, most CDs have an early withdrawal penalty. The penalty is designed to discourage you from withdrawing money before your term is up. Often, you'll forfeit some interest if you do.
But in some scenarios, you could even lose some of your initial deposit. Here's how.
Early withdrawal penalties are equal to several months of interest
The most common way you can lose money is by breaking a CD contract before you earn enough interest to pay the penalty.
Most short-term CDs, like those with six to 12 month terms, impose an early withdrawal penalty that's equal to several months of earned interest, while long-term CDs may have a penalty equal to 12 months or more. If you have a 12-month CD that charges a penalty worth three months of interest, breaking your contract before the three month mark would result in a loss.
Don't miss that. It doesn't matter if you've earned that interest; your CD provider will expect you to pay the penalty. That means it could take some money from your principal if you don't have enough to cover the fee. Depending on how long you've had the CD before breaking the contract, this could be a sizable amount.
Brokered CDs come with their own risks
Brokered CDs are offered through brokerage accounts, like Fidelity. They often boast high APYs with a variety of terms. To buy one, you must have a brokerage account with the broker, and you typically buy them in set amounts (like $1,000). But the higher APYs are appealing and could help you earn the most interest on your savings.
These CDs don't have early withdrawal penalties. In fact, the only way you can break your term is by selling the brokered CD on a secondary market. This would involve finding a buyer who wants to take the CD off your hands.
Sometimes, this works in your favor. For instance, if you have a CD with a 6% APR at a time when the ongoing CD rate is 3%, you won't have trouble finding a buyer. But if the opposite was true, and you had a 3% CD while CD rates were as high as 6%, you might have to take a loss to attract buyers at all.
You won't lose money if you don't break your terms
Finally, rest assured that your money is safe if you stay within your CD contract. As long as your CD provider has FDIC insurance, your CD deposit will be safe up to $250,000.
If you have savings you won't need in the near term, an early withdrawal penalty shouldn't scare you. Today's CD rates are high in comparison to years past. Stashing cash in a CD could help you keep pace with inflation (assuming CD rates are above the inflationary rate), not to mention prevent you from spending money in a checking account.
Of course, don't be tempted by CD rates if you don't have much savings in your bank account. Earning high interest means nothing if you have to forfeit it or your principal to access your money. A high-yield savings account or money market account would be better for your money.
In sum, yes, you can lose money on a CD. But as long as you don't withdraw too early, you'll be left with at least your principal. Keep your money in for the entire term, and you won't lose anything at all -- you'll have your principal, plus money earned on today's high APYs.
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FAQs
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.
Can you lose your money in a CD? ›
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.
What is the biggest negative of putting your money in a CD? ›
The biggest risk to CD accounts is usually an interest-rate risk, as federal rate cuts could lead banks to pay out less to savers. 7 Bank failure is also a risk, though this is a rarity.
Is my money safe in a CD account? ›
Along with savings accounts and money market accounts, CDs are some of the safest places to keep your money. That's because money held in a CD is insured. So long as you purchase your CD account through an FDIC-insured bank, you're covered in case the bank shuts down or goes out of business.
Are CDs safe if the market crashes? ›
Market Crashes and CDs
Even if the market crashes, your CD is still safe. Your interest rate won't change, and your money is still insured. But, keep an eye on interest rates. After your CD term ends, you might find that new CDs have lower rates if the economy is still struggling.
Why is CD not a good financial investment? ›
One major drawback of a CD is that account holders can't easily access their money if an unanticipated need arises. They typically have to pay a penalty for early withdrawals, which can eat up interest and can even result in the loss of principal.
Are CDs safe if the government defaults? ›
While no one knows precisely what a default would entail, consumers can rest assured that their Treasuries and certificates of deposit are reasonably safe.
How much does a $10,000 CD make in a year? ›
The national average APY for a one-year CD is 1.74 percent, based on Bankrate research, which shows this average has increased or remained the same since March 2022. If you deposited $10,000 into a one-year CD that pays this national average rate of 1.74 percent, in one year it would be worth a total of around $10,174.
Is it worth putting money in a CD right now? ›
If you don't need access to your money right away, a CD might be a good savings tool for you in 2024 while average interest rates remain high. CD interest rates are high in 2024 — higher nationally, on average, than they've been in more than a decade, according to Forbes Advisor.
What is the catch with putting your money in a CD? ›
When you sign up for a CD, you agree not to touch the money for a set period of time but there are always unexpected expenses. If you access your money before the CD's term is up, you'll be charged an early withdrawal penalty, often worth a few months of interest.
Like all fixed income securities, brokered CD prices are particularly susceptible to fluctuations in interest rates. If interest rates rise, the market price of outstanding brokered CDs will generally decline, creating a potential loss should you decide to sell them in the secondary market.
Do you pay taxes on CD interest? ›
Key takeaways. Interest earned on CDs is considered taxable income by the IRS, regardless of whether the money is received in cash or reinvested. Interest earned on CDs with terms longer than one year must be reported and taxed every year, even if the CD cannot be cashed in until maturity.
How much money should I put in a CD? ›
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.
Should I put $100,000 in CD? ›
The more money you've saved, the more options you generally have for earning a higher interest rate. Those with $100,000 or more may want to consider depositing their money into a jumbo CD that's insured through a bank insured by the Federal Deposit Insurance Corp.
Can I lose money on a CD? ›
While it's unlikely, a certificate of deposit (CD) could lose money if you withdraw funds before you've earned enough interest to cover the penalty charged. Typically, CDs are safe time deposits that guarantee an interest rate for the term that you agree to keep money at a financial institution.
Is a CD safe in a recession? ›
CDs are primarily a safe investment. They are guaranteed by the bank to return the principal and interest earned at maturity. CDs can provide modest income during turbulent economic times like recessions when other types of investments often lose value.
Can money be taken out of a CD? ›
Federal law sets a minimum penalty on early withdrawals from CDs, but there is no maximum penalty. If you withdraw money within the first six days after deposit, the penalty is at least seven days' simple interest. Review your account agreement for policies specific to your bank and your account.
Is your money guaranteed in a CD? ›
Practically speaking, it is almost impossible to lose money on a CD for two reasons. First, they are guaranteed by the bank or credit union that offers them, meaning that they are legally required to pay you exactly the amount of interest and principal agreed upon.
What happens to my CD if the bank fails? ›
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.
How much will a $500 CD make in 5 years? ›
This CD will earn $120.39 on $500 over five years, which means your deposit will grow by 24.6%.
