Certificate of Deposit Rules and Regulations: What You Should Know

Know the rules so you can get more from your CD investments

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Certificates of deposit (CDs) are a low-risk investment that can help you earn modest returns on your money. You make a deposit for a set term and then collect your earnings when the CD matures. 

While CDs can seem pretty simple, they’re subject to a few rules and regulations you should understand before you invest. From FDIC insurance coverage to call options, learn what’s often in the fine print so you make the most of your CDs.  

Key Takeaways

  • CDs and other deposits at federally insured banks and credit unions are covered up to $250,000 per depositor, per institution. 
  • Brokered CDs may be FDIC-insured, but you’ll need to double-check to make sure.
  • If you access funds from your CD before the maturity date, you will likely face early withdrawal penalties.  
  • Callable CDs enable issuers to terminate your CD early, which they will typically do if interest rates fall significantly below the CD's rate. 

FDIC Coverage for CDs

The Federal Deposit Insurance Corporation (FDIC) was created by Congress to provide insurance on the deposits made to American banks. In short, if you deposit money into a federally insured U.S. bank and it goes out of business, FDIC insurance will cover up to $250,000 of your funds at that bank. This amount covers deposits you make into CDs, as well as deposits into checking and savings accounts.

The $250,000 total applies to all of your deposit accounts at a single institution. If you have $250,000 in a savings account and you buy a $50,000 CD at the same bank, only $250,000 of your deposits would be insured.

CDs bought from credit unions may also be federally insured. However, instead of being covered by the FDIC, they’re covered by the National Credit Union Administration (NCUA). Again, up to $250,000 is covered for each depositor, at each credit union, for each account category.

How Brokered CDs Are Different 

When you buy brokered CDs through third parties, you can’t be sure that your deposit is FDIC insured.

For a brokered CD to be FDIC-insured, the broker must deposit your money into a CD at an FDIC-insured bank. Before investing, you can ask your broker for the name of the bank that will issue the CD and verify that it’s FDIC-insured using the FDIC’s online database

Additionally, your deposit account records need to show that the broker is a “custodian for clients” so that the insurance bypasses the broker and goes through to you. This is known as “pass-through” FDIC insurance.

Deposit brokers are not licensed or regulated. It’s essential to protect yourself by doing your due diligence and vetting a broker before buying anything. 

Early Withdrawal Penalties

Traditional CDs require you to leave your deposit in the account for a set period of time, known as a term. In return, you earn interest, which you’ll receive when your CD reaches maturity. 

If you withdraw your money before your CD matures, you’ll typically have to pay an early withdrawal penalty. Depending on your CD issuer, the penalty may be a:

  • Period of earned interest
  • Percentage of your withdrawal amount
  • Percentage of your interest earned
  • Flat fee

The longer the CD’s term, the higher the penalty usually is. Some institutions also charge higher penalties if you withdraw your money earlier in the term. For example, on PenFed Credit Union CDs with terms longer than 12 months, you’ll owe any interest you’ve earned if you pull your money out in the first year. After that, you’ll have to pay 30% of the gross dividends you would’ve earned if you had let the CD mature.

While there is no law limiting CD early withdrawal fees, federal law does set a minimum penalty. If you withdraw money within six days of buying a CD, your penalty must be at least seven days of simple interest.

You can avoid early withdrawal fees by keeping your money in CDs until they mature. If you have any doubts about whether you’ll be able to finish a CD’s term, opt for a shorter term. You can also stagger your investments using a CD ladder strategy. For example, instead of investing $10,000 into a five-year CD, you could invest $2,000 into five separate CDs with one-, two-, three-, four-, and five-year terms. As each CD matures, you can reinvest the money into a five-year CD, and eventually you’ll have a five-year CD maturing each year. 

How Do Callable CDs Work?

Callable CDs are CDs that can be terminated by the issuing bank after a certain amount of time (known as the call period). If your CD is called, you’ll get your deposit back, along with any accrued interest, instead of finishing the term. 

Banks will typically call a callable CD if interest rates fall far below the rate they’ve agreed to pay you. Unfortunately, as the account holder, you typically don’t have the same option to call the CD. 

Callable CDs may come with attractive interest rates. However, they can be less predictable than non-callable CDs because you aren’t guaranteed to earn that interest rate for the entire term.

Requirements To Open a CD

If you want to open a CD, you’ll typically have to provide basic information like your name, address, email, phone number, birthday, and Social Security number. 

You may also have to provide information about your country of citizenship, employment, and the source of your deposits. Then, you’ll need to review and approve various disclosures, such as a deposit account agreement, a privacy statement, and an interest rate and annual percentage yield disclosure. Lastly, you’ll need to provide or certify your W-9 before making your initial deposit.

Frequently Asked Questions (FAQs)

Why is a certificate of deposit considered such a safe investment?

Traditional CDs are considered safe investments because they offer a guaranteed rate of return by a specific date while being federally insured up to $250,000. However, it’s important to note that not all types of CDs offer the same guaranteed returns. 

What is the minimum balance for a certificate of deposit?

There is no federal law requiring a minimum balance for a certificate of deposit. The minimum required amount will vary from one issuer to the next. Some issuers, like Capital One, don’t have a minimum balance requirement to open a CD account, while others require anywhere from $500 to $25,000. Jumbo CDs often require deposits of $100,000 or more.

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