How to open a CD

With the Federal Reserve raising interest rates rapidly over the past year, borrowing money has often become more expensive. But the flip side is that savers can now earn more by keeping their money in savings, such as a Certificate of Deposit (CD) account.

A CD pays a fixed rate of return in exchange for saving money in an account for a fixed period of time, often months to years.

A 1-year CD might have a 4% annual percentage yield (APY), so for example, if you deposit $5,000 into this account, you’ll earn $200 in interest at the end of that 12-month period. Note that the APY reflects the total interest you earn, accounting for compound interest.

however, CD Different from traditional savings accounts in the sense that more of your money is locked into these products. If you withdraw money from a CD before the deadline, you’ll often have to pay several months’ worth of interest penalties.

Although CDs are often relatively simple financial products, the terms may differ depending on where you are Open a CD. You can now easily explore your CD account options here to see how much more you can earn.

How to open a CD

Here, we will take a closer look at the process of how to open a CD account.

Compare providers

When it comes Opening a CD account, you have many options to choose from. First, you can decide between getting a CD from a variety of financial institutions. Although banks and credit unions typically issue CDs, they also sell to other finance companies, such as brokers, who sell them to customers as brokered CDs.

Make sure the CD you buy is insured through the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA). Many brokers are insuring CDs, but you’ll want to make sure.

Importantly, brokered CDs can often be sold before maturity, whereas bank and credit union CDs usually carry an early withdrawal penalty, unless you buy a no-penalty CD. Depending on interest rate changes, the resale value of a brokered CD may be less or more than your principal.

“The CD you buy from your brokerage or investment firm can be sold any day in the secondary market; if you call your advisor and need to sell it before maturity, they can give you an estimate of what the CD will be worth,” said Robin Hare, LPL-affiliated Accredited Investment Fiduciary and President of Hare Wealth Management.

That said, if you hold a CD until maturity—whether brokerage or traditional—you’ll get the full amount of interest. So, it pays to shop around for the best rate.

Compare rates and terms

Part of influencing your choice of provider is likely to be CD rate And Conditions that they offer. Find out who has the best rates for the type of CD you’re looking for.

Although some financial institutions generally have more competitive rates than others, it is possible that one will have the highest rate for a 1-year CD, while another provider has a better rate when comparing 2-year CDs. So, for an apples-to-apples comparison you need to decide on your CD period.

Keep in mind that long-term CDs don’t always pay more interest rate Greater interest rates depend on expected changes in the environment than in the short term. But if you think rates will drop soon, for example, you might prefer to lock in a relatively high rate for several years now.

Also compare the terms offered by different lenders such as penalties and fees, how interest is paid and maturity terms. Some CDs automatically renew at maturity, for example, unless you decide to take your money out during a shorter window. You may prefer that automation, or you may prefer to receive your money without automatic renewal.

“Clients should understand CD maturity dates and ask questions to understand the exact start date for interest payments. If a CD is purchased as a new issue from a brokerage inventory, the CD may not ‘settle’ or begin paying interest. Your 7-10 days from your conversation with the advisor,” says Hare.

Apply for an account

Once you decide where you want to buy a CD From and CD period, you can apply to open an account.

If you’re buying a CD from a financial institution with which you have an existing relationship, the process can be streamlined. You can answer a few questions to verify the account information, the CD term you want, and the amount.

If you’re applying for a CD account with a new financial institution, you may need to provide additional documentation, such as your ID and address verification. During this process, make sure you carefully review the account ownership terms.

“The most important step in opening a CD is to make sure the client understands the ownership options, such as sole ownership, joint ownership with a spouse or family members, or in a business name,” says Hair. “Most institutions will allow you to add a death option or beneficiary, if the owner of the CD dies before the maturity date.”

Check your CD options here to learn more.

Account Funding

The last step in opening a CD is usually to fund the account. Doing so may involve steps such as transferring money electronically from another bank account or sending you a check. The amount you decide to put into a CD can affect the interest rate. Depending on the provider, some offer higher CD interest rates above a certain amount, such as $10,000.

Note that once you fund a CD, you generally cannot add to the funds, unless you open a special account such as an add-on CD. However, you can open multiple CDs, so you have some flexibility in this regard. Many build CD ladderWhere the maturity of the CD is varied to provide a more continuous cash flow.

Bottom line

CDs can be a valuable tool in your financial toolbox, but they don’t have to be your only financial vehicle. For example, you can put some of your long-term savings into CDs to earn higher interest than a regular savings account, while also putting some money into stocks and bonds to try to earn higher returns. So, before opening a CD, consider how these accounts fit into your overall financial situation. You may want to talk to an advisor who can help you create a financial plan accordingly.

You can start researching your CD options now or in the table below.