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A CD, or certificate of deposit, is a type of savings account that offers a guaranteed rate of return in exchange for you locking your money up for a while. When you put money into a CD account, you lend the amount you’ve deposited to a financial institution for a set period known as the CD term, which can range from a few weeks to ten years. In exchange, the financial institution pays you a fixed interest rate that’s often higher than what you’d earn with a savings account. Once your CD matures, you’ll get your original investment back plus the interest accrued.
Unlike stocks or cryptocurrencies, which present a risk of loss, CDs are generally considered safe investment vehicles that do not lose money. In some scenarios, though, you could risk losing interest or even a portion of your initial investment in a CD.
Can You Lose Money in a CD?
Because CDs offer guaranteed interest, you typically do not lose money. However, the following risks could still cause you to lose a portion of your investment or your CD to lose value.
Early Withdrawal Penalties
The most common way people lose money through a CD account is by withdrawing their funds before the term ends. When you take money out of your CD account before the maturity date, you’ll typically have to pay an early withdrawal penalty. The fee is usually equal to a portion of your interest earned, so you usually won’t lose money from your initial investment. For term lengths less than 12 months, it’s common to see early withdrawal penalties equal to 90 days’ interest on the amount you take out. For term lengths longer than 12 months, the penalty amount could be 180 days’ worth of interest or more.
Inflation
Inflation can erode your money’s purchasing power if your CD’s interest rate is lower than the inflation rate. Let’s say you invest $10,000 in a CD with a 2.00% APY, but the inflation rate is 3%. By the end of the first year, the CD will have accrued $200 in interest, bringing your total savings to $10,200. However, because the overall price of goods and services has risen by 3% due to inflation, you’ll need $10,300 to purchase the same basket of goods that $10,000 could buy in the previous year.
While you didn’t lose money in a CD, the money you invested did lose value.
Interest Rate Fluctuations
Interest rate fluctuations can’t cause you to lose money, but they can present an opportunity cost. This is a risk that occurs when you invest money in a vehicle that doesn’t offer much liquidity and a more lucrative investment opportunity comes up that you’re unable to take advantage of.
Let’s say you deposit $5,000 into a one-year CD account with 3.50% APY. Shortly after locking in your funds, the Fed raises interest rates, and the APY for the same account jumps to 4.50%. Because taking your money out early means dealing with penalty fees, you’re stuck with the lower 3.50% APY. Bump-up CDs, which allow you to raise your rate at least once during your CD term, can mitigate this risk.
Your Deposits Exceed the FDIC Insurance Limit
The FDIC, or Federal Deposit Insurance Corporation, insures up to $250,000 total per person, per account type for every individual who deposits money in an FDIC-insured bank. The NCUA offers the same insurance for credit unions. However, if you deposit more than $250,000, you may not get the portion of your deposit that exceeds this limit back in the unlikely case that your bank fails.
Can a Brokered CD Lose Money?
Yes. A brokered CD is a certificate of deposit you purchase through a brokerage firm or broker instead of a bank or credit union. While brokered CDs offer more flexibility than regular CDs—as you can sell them on the secondary market whenever you like without incurring penalties—you could lose money if they’re sold at a lower price than their face value. Also, some brokered CDs are callable CDs, which means the issuer could terminate them before maturity and cause you to lose out on potential earnings.
How To Reduce the Risk of Losing Money on a CD
While CDs don’t usually lose money, you can minimize risk by taking the following actions.
- Create a CD ladder. The CD ladder strategy involves investing in multiple CDs with different maturity dates—for example, spreading a $5,000 deposit across one-, two-, three-, four- and five-year CDs. This way, you can avoid losing out on potential earnings due to rising interest rates while still being able access to some funds once each year.
- Make sure your deposits are insured. While most banks are FDIC-insured and most credit unions are NCUA-insured, it’s always a good idea to double-check. You can do so by using the FDIC’s Bank Find tool or the NCUA’s Credit Union Locator. If you plan on depositing more than $250,000, there are some ways to insure excess deposits and avoid this potential loss.
- Leave funds in the CD account until maturity. Before temporarily locking your money away in a CD account, make sure you can afford to be without it for the entire term length. Early withdrawal penalties can be hefty, so avoid taking out the funds prematurely. If you’re unsure about committing to regular CDs, consider looking into no-penalty CDs that offer more flexibility.
All investments carry some degree of risk, but CDs are as low-risk as they come. That said, inflation, early withdrawal penalties and interest rate fluctuations can all eat into your CD’s value. Making sure you select the right CD term for your needs and seeking out the best CD rates for that term can help you maximize your investment.
Find The Best CD Rates Of 2024
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 ever lose money on a CD? ›
A Certificate of Deposit (CD) could lose money if funds are withdrawn early, incurring penalties that may exceed earned interest. CDs are generally low-risk and guarantee a fixed interest rate for the term. Early withdrawal penalties can sometimes reduce the principal, not just the interest.
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.
What is a disadvantage to putting your money into a CD? ›
Penalties: One of the main drawbacks of CDs is that in most cases you're locked into the maturity term. If you take money from the CD before it matures, you will get hit with a penalty fee equal to at least seven days of the interest earned or even more.
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 is the catch with putting your money in a CD? ›
If interest rates fall before the CD expires, the bank is out of luck and must give you the rate it quoted. If rates climb, you're stuck with the lower rate you agreed to when you opened the account. And if you take your money out before a CD matures, you'll pay a penalty -- typically three months of interest.
What happens to CDs 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.
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.
Is there any risk in opening a CD account? ›
FDIC insurance
Always make sure any bank you open a CD with is FDIC-insured. This federal deposit insurance protects funds up to $250,000 per account per bank, so even if the bank fails, your money will be safe. You enjoy the same protections if you open a CD with an NCUA-insured credit union.
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.
Yes, CDs are generally still safe even if a stock market crash occurs. CDs are a type of bank account. Many accounts offer a set rate of return for a specific timeframe that won't fluctuate.
Do you pay taxes on CDs? ›
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.
Can you always add money to a CD? ›
With a traditional CD, you typically make a one-time opening deposit and leave it in the account until the end of the term. You can't continually add money to this type of CD. However, you can opt to open an add-on CD, which allows you to make additional deposits throughout the CD's lifetime.
Why am I losing money in a CD? ›
The most common way people lose money through a CD account is by withdrawing their funds before the term ends. When you take money out of your CD account before the maturity date, you'll typically have to pay an early withdrawal penalty.
How much does a $1000 CD make in a year? ›
That all said, here's how much a $1,000 CD will make in a year, based on four possible interest rate scenarios: At 6.00%: $60 (for a total of $1,060 total after one year) At 5.75%: $57.50 (for a total of $1,057.50 total after one year)
Why is CD not a good financial investment? ›
CD rates tend to lag behind rising inflation and drop more quickly than inflation on the way down. Because of that likelihood, investing in CDs carries the danger that your money will lose its purchasing power over time as your interest gains are overtaken by inflation.
Can you lose money on a CD if you hold it to maturity? ›
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.
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 long should you keep money in a CD? ›
Traditionally, in your typical ladder, five-year CDs have a higher yield than one-year CDs. But these days, you're likely to see a CD with a term of around six months to 18 months will likely have the highest yield in your ladder.
Can money be taken out of a CD? ›
It depends on the terms of your account. 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.
