| Certificates of Deposit |
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A Certificate of deposit is commonly referred to as a CD. A CD is a method of saving money. Unlike stocks or bonds, a CD is much more like a regular savings or money market account. A CD is wildly considered to be a safe place to stash your money and at the same time gain interest on it. Usually CD’s earn a higher interest than a savings or money market account. When you purchase a CD, the money has to remain in the CD for a certain period of time unlike that of a regular savings or checking account. The time period for a CD can be anytime from 3 months to 20 years. And during that time period you are unable to access your money without paying a early redemption penalty. This penalty is usually equivalent to the forfeiture of 3 to 6 months of interest on the account. Maturity datesAll CDs will have a maturity date; the maturity date is the date when you can access your money without paying a penalty. The longer the maturity date, the greater the interest rate you’ll receive on your CD. In other words, the lending institution generally pays you more money, the longer you let them keep your money. Why? Because the longer you keep your money in a CD, the longer the bank or lending institution can lend out your money in the form of loans to the general public and charge them a higher interest rate than they are paying you. CDs are one way banks, credit unions, brokerage and other financial institutions make money. They lend your deposits to others and charge them a higher rate. TaxesThe interest that’s earned on CDs is fully taxable. Regardless of when the CD matures, taxes are due on all interest received during the calendar year. It doesn’t matter whether you withdraw the earned interest or leave it in the CD; taxes are still due every year on interest earned on CDs. FDIC InsuredCDs are insured and guaranteed by a federal program called FDIC (Federal Deposit Insurance Corporation) therefore CDs are 100% safe. Who should buy CDs?
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