Are you in search of a low-risk way to build your savings? If so, consider a Certificate of Deposit (CD). A CD is a savings account with a fixed interest rate and date of withdrawal. It comes with a guaranteed return and earns higher interest rates than most checking, savings, and money market accounts. But is a CD account right for you? Here's everything you need to know.

Who should consider a CD account?

Senior citizens who need a portion of their investment portfolio in simple, safe, and predictable investments are the ideal candidates for CD accounts. But senior citizens aren't the only people who can benefit from a CD account. You should consider a CD if you want a safe place to put your money without the low annual percentage rate (APY) of a traditional savings account. Unlike a traditional savings account, however, you can't dip into your CD whenever you want. You're restricted from taking withdrawals for a specific period. This feature can make CDs a good option for those who struggle to save money, but it isn't a wise place to keep your emergency fund.

CD early withdrawal penalties

If you withdraw money before your CD term is up, you'll likely have to pay a steep penalty. The severity depends on the terms of your CD—a longer term usually results in a higher penalty. The policy on early withdrawals varies from bank to bank, including penalty amounts as well as how the penalty is calculated. Some banks charge an early withdrawal fee based on the amount withdrawn, while others charge based on the total balance of the account. Either way, these penalties can eliminate interest you've earned on your CD and possibly even eat away at your principal. That's because many banks will dip into your principal if you haven't yet earned enough interest to cover early withdrawal fees. You'll lose out on money you would have gained while also losing some of the money you initially deposited. So you'll want to avoid putting money in a CD if you think you'll need it soon. Otherwise, you may end up walking away with less money rather than more. In addition to early withdrawal penalties, some CDs come with other fees as well. For instance, with a brokered CD, you may have to pay a flat fee or a percentage of the amount you are investing. If that's the case, you'll want to ensure the interest rate makes it worthwhile before locking in your money. Don't open a CD account until you fully understand the potential fees associated with it.

CD accounts pros and cons

Understanding CD interest rates

A CD is an agreement between you and your bank or financial institution. You agree not to make any withdrawals for a certain time period. In return, the bank or financial institution pays you a specific interest rate for that period, which is typically fixed. Your APY will depend on the term length and how much you invest. So, you'll usually receive a higher APY when you invest more money and opt for a CD with a longer term. You can maximize your earnings even more by implementing strategies like CD laddering, bump-up CDs, variable-rate CDs, and promotional rates. To find the best CD rates, perform an online research and reach out to several banks and financial institutions. You'll likely discover that online banks offer better interest rates than brick-and-mortar banks because they have lower overhead costs. So, they're often able to offer their customers a higher interest rate.

What is CD laddering?

CD laddering involves setting up multiple CDs at one time with staggered maturity dates. Rather than cashing out a CD when it reaches maturity, you can roll it over into a new one and continue to earn interest. For instance, if you have $10,000 to invest, you could arrange a CD ladder by spreading out your money in the following way:

• $2,000 in a one-year CD
• $2,000 in a two-year CD
• $2,000 in a three-year CD
• $2,000 in a four-year CD
• $2,000 in a five-year CD

Once your one-year CD matures, you can reinvest that money into a new five-year CD. You can continue this pattern when the second-year CD ends. Eventually, you'll get to the point where your ladder is comprised of long-term CDs that allow you to maximize your interest. With this strategy, you can benefit from the higher interest rates that come with longer-term investments and enjoy access to your money at short-term intervals.

17 CD products

With a traditional CD, you'll have a fixed interest rate and withdrawal date. But there are other types of CDs that come with adjustable rates and allow you to access your money before it matures. Here’s a brief overview of the various types of CD products available.

CD Type	Features	What to Consider
Traditional CD	Pays a certain interest rate for a certain time period	Early withdrawal penalty. Less flexibility
Variable-Rate CD	Pays an interest based on the varying rate of a particular index fund	Since rate will vary, you may earn more or less than you expected
IRA CD	Earns interest -Money is only taxed when it's withdrawn	Early withdrawal penalty
Fixed-Rate CD	Pays a set interest rate for the term's lifetime	Liquid CDs, callable CDs, and traditional CDs are all examples
Jumbo CD	Intended for investments of $100,000 or greater	Pays higher interest rates. The Federal Deposit Insurance Corporation only insures up to $250,000
Brokerage CD	Available through a stock broker or online brokerage	May charge a flat fee or a percentage of investment amount -Some brokered CDs may not be FDIC-insured
Bump-Up CD	Gives you the chance to "bump up" to the higher market interest rate in the event rates go up during the CD's term	Only one rate increase is usually permitted
Zero-Coupon CD	Available at a significant discount and pays no interest	No interest is paid out until the CD has matured
Uninsured CD	Not insured by any institution including the FDIC	Typically pays a higher interest rate than traditional CDs-If the CD issuer goes bankrupt, you run the risk of losing your investment
Thrift CD	Available through thrift institutions like credit unions and savings-and-loan institutions	You may need to join this institution or hold another account with them
Callable CD	Can be "called back" or closed by the bank at any time -Offers higher interest rates	Bank can close the CD before its term is up if interest rates go down. You cannot cancel the CD if interest rates go up and invest in a higher rate
No Penalty CD	No early withdrawal fee	Pays a lower interest rate than a traditional CD
Liquid CD	Permits withdrawals at all times	Pays a lower interest rate than a non-liquid of the same term
Add On CD	Allows you to add money to your CD before its maturity -Additional amount earns the same interest rate as the amount used to purchase the CD initially	The majority of add-on CDs only allow additional deposits of a specified minimum amount
Index Linked CD	Associated with a specified index, -Return might be 100% of the index performance or another percentage like 90%	If the linked index declines, there may be no profit. You will collect your principal back
Bear CD	Pays an interest rate inverse to the agreed-upon market index -If the linked index declines, the CD collects interest	Typically used as a hedge against declining stock prices
Bull CD	Pays interest at a rate associated to a rising index	In the event the market goes into a bear phase and declines, you'll receive a minimum rate that must be paid

Find the best CD for you

Before you open up a CD, make sure it is insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration or NCUA. By doing so, you can protect your CD in the event a bank or another financial institution fails. Aside from that, you'll want to make sure you do your research to find a CD that best fits your needs. SuperMoney's CD comparison tools make it easy to filter CDs based on your needs and preferences. Then compare the CD accounts available side by side and see what other users have to say about each financial institution.