Are CDs Safe? Unlocking the Truth About Your Savings Security (2024)

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• CDs are a generally safe savings product because they are federally insured.
• You can open a CD at banks, credit unions, and brokerage firms.
• CDs have some disadvantages to be mindful of, including early withdrawal penalties.

Certificates of deposit might be on your radar if you plan to set aside some money for a short-term goal, especially since CD rates have risen over the last two years. But if you're unfamiliar with these accounts and don't want to take much risk, you might worry about whether your money is secure.

To help you understand whether CDs are safe, we'll go over how federal insurance protects these accounts, as well as potential disadvantages you'll want to consider.

How safe are CDs? The basics

What makes CDs a safe investment?

CDs are a type of savings account that offer a fixed interest rate over a set period of time. This type of predictable growth can't be found in investments or even regular savings accounts, which makes CDs a useful tool for funding short- and mid-term goals.

Some retirees may even use CDs as a cash equivalent in their overall retirement strategy for a guaranteed return.

The role of FDIC insurance in CD coverage

CDs are as safe as any other bank account because they have federal insurance coverage.

When you see a logo that says "Member FDIC" or "federally insured by the NCUA" on a financial institution's website, that means its deposit accounts are insured. The FDIC (Federal Deposit Insurance Corporation) provides federal insurance for banks, and the NCUA (National Credit Union Administration) insures credit unions.

"If a bank were to go under, knowing that it's FDIC-insured should give you some solace and some comfort because anything that's FDIC-insured is backed by the full faith and FDIC insurance program," explains Scott Stanley, a CFP professional and founder of Pharos Wealth.

The FDIC and NCUA protect up to $250,000 per account owner, per ownership category at each financial institution. Examples of ownership categories include individual bank accounts and joint bank accounts.

FDIC insurance example

Let's say you plan to open a CD with a $100,000 deposit at your current financial institution. You already have a savings account with $150,000 and a checking account with $25,000 at the same bank.

If these are all individual bank accounts, they fall under the same ownership category. A maximum of $250,000 can be federally insured at your bank. Since your accounts would add up to $275,000, there would be $25,000 left uninsured.

Choosing the safest CDs

Researching the bank or credit union

There are many federally-insured brick-and-mortar banks, online banks, and credit unions to choose from.

Online banks are as safe as brick-and-mortar financial institutions, as long as they have FDIC or NCUA insurance. Online bank accounts are insured for the same amount as those at brick-and-mortar banks.

Understanding the fine print of CD documents

A traditional CD is the most common type of account you'll find (credit unions call them share certificates). It offers a fixed interest rate — a so-called dividend rate at a credit union — which allows you to earn a steady return until the CD matures.

When comparing CDs from various credit unions and banks, be sure to compare the annual percentage yield, or APY, which includes the effects of compounding interest.

Also understand the early withdrawal penalties associated with any CD you are considering. Most often, penalties are equal to a certain number of days of earned interest. For example, a penalty on a 1-year CD may be 90 days (or three months) of interest. If you redeem the CD at any time before the one-year mark, you'll trigger the penalty.

Some financial institutions may also offer CDs with distinct features that suit your goals or preferences. For example, if you would like to open a CD and make additional deposits during the term, you could explore an add-on CD. Or if you're looking for an option that doesn't have withdrawal penalties, consider a no-penalty CD.

Maximizing FDIC/NCUA insurance

There are ways to keep your money insured if you want to deposit more than the federal insurance amount into a CD.

"If it's just in your name, then any one given bank can only insure up to $250,000 for you. You could go to Bank One and put in $250,000, and then open up another account in Bank Two and put $250,000 in a CD," suggests Sefa Mawuli, a CFP professional and managing partner at financial planning firm Jade & Cowry.

Another option to obtain more federal insurance is to open accounts in different ownership categories. You could open a joint bank account, which would insure up to $250,000 per account owner. Considering the example listed above, if you opened a joint CD instead of an individual one, all of your money would be federally insured.

That said, be sure to consider the benefits and drawbacks of a joint bank account versus an individual account before diving in.

Are CDs at brokerage firms safe?

Brokered CDs are CDs you buy from a brokerage firm or investment company, and they are generally also safe.

Brokerage firms typically buy a high number of CDs from a variety of federally insured financial institutions. Each institution still offers the standard federal insurance amount per depositor, per ownership category. Some examples of firms that offer brokered CDs include Edward Jones and Charles Schwab.

Brokered CDs have a few distinct features that you should be aware of, though. For example, brokered CDs do not compound interest. Traditional CDs often compound interest daily, monthly, or quarterly.

Some brokered CDs also have a callable feature, which means the bank could call back the account before the term ends. This means you may not earn as much money on the account as you anticipated.

"The reason a bank might call a CD early is because interest rates are going down, and they don't want to pay those high interest rates that they promised you. They're going to call your CD, and that way, they stop paying those high interest payments to you," Scott says.

Another thing to keep in mind is that brokered CDs often do not have early withdrawal penalties like traditional CDs. Instead, you can sell your CD on the secondary market, though you'll usually have to pay a trading fee. You also could potentially lose money on a brokered CD if you sell it on the secondary market before the term ends and market conditions aren't favorable.

Most CDs — with the exception of select accounts like no-penalty CDs and brokered CDs — have early withdrawal penalties. An early withdrawal penalty is a charge from a bank when you take out money before the end of a CD term.

In addition to early withdrawal penalties, you should be mindful of inflation risk when opening a CD.

"If you want to put something in a CD for six months or up to two years — a relatively short period of time — knowing that you're going to get some interest, that can be great. But the longer you hold cash in a CD, the longer you run the risk that inflation might outpace the amount that you earn from holding it," Mawuli says.

Overall, it's important to factor in the timeframe and purpose of your account when deciding where to put your money. You might consider investing rather than saving if you want higher returns for a long-term goal and are comfortable taking more risk. If you have a short-term goal or would like to grow your money in a low-risk place, CDs or another type of savings account may fit your situation.

Additional savings options to explore

CD alternative: high-yield savings accounts

Savings accounts and CDs have the same federal insurance protection. The primary difference between the two is flexibility.

You can access your money at virtually any time in a savings account. CDs lock up your money for a period of time and penalize you for accessing it early, but sometimes offer a higher interest rate in exchange for keeping your money tied up.

CD alternative: treasury bills

Treasury bills are a type of bond backed by the U.S government. They typically offer slightly lower interest rates than traditional CDs but have a broader variety of terms to choose from. There are also tax benefits to consider: T-bills are exempt from state income taxes.

In general, T-bills are considered more liquid than CDs because they can be sold easily on the secondary market. However, you are not guaranteed to recover your initial deposit with either a T-bill or a brokered CD if you sell it early.

CD alternative: money market accounts

Money market accounts are very similar to savings accounts, but may give you even greater access to your cash through check-writing capabilities and a debit card. They offer competitive interest rates to savings accounts and CDs, but rates can fluctuate with market conditions.

CD Security FAQs