Are Certificates of Deposit Safe?

CDs are among the safest places to park your cash.

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Certificates of deposit are one of the safest places to tie up your cash, but they're not without their limitations. CDs are federally insured, so you don't have to worry about your bank going bankrupt. The value of your cash won't fluctuate like it would in the stock market, and you'll get higher interest rates than a general savings account. But CDs are not inflation-proof and there are penalties if you need to unexpectedly withdraw your cash, so you'll need to plan accordingly.

How does a CD work?

A CD is a type of savings account that pays a fixed interest rate for a fixed term. When you open a CD, the bank agrees to leave your money on deposit for a predetermined period of time, such as one year. From there, the bank pays a fixed interest rate and guarantees a rate of return that's generally higher than a regular savings account. But there's a catch -- you can't withdraw any of your money until the CD reaches maturity without facing a penalty. 

Are CDs safe?

Like saving accounts or money market accounts, CDs are offered at most brick-and-mortar banks, online banks, and credit unions or brokerages. CDs are just as safe as any other deposit account, as long as the bank is federally insured and takes basic steps to protect your information, such as encryption and multifactor authentication. 

The Federal Deposit Insurance Corporation and National Credit Union Administration protect CD funds at banks and credit unions, respectively. As long as you make sure to purchase your CD through an FDIC-insured bank or NCUA-insured credit union, you'll be in good hands. CDs are federally insured up to $250,000 per depositor. In the case that your bank goes bankrupt, your CD savings will be secure.

How does inflation affect a CD?

Inflation is when the dollar in your pocket loses its purchasing power, and CDs are unfortunately not set up for success in an inflationary environment. If inflation is rising, the rate of return you're earning on your CD may be outpaced. Your savings will continue to grow, but it won't be able to buy as much as your cash can today. If a CD can't keep up with inflation, you may be better off putting your funds elsewhere. I bonds, for instance, track with inflation.

How does early withdrawal work for a CD?

You can withdraw funds early from most CDs, but you'll almost always have to pay a penalty. Your exact penalty will depend on the terms and length of your CD, and it cuts into the interest you have already earned, sometimes entirely counteracting it. However, there is an exception: a no-penalty (liquid) CD. With this type of CD, you receive greater liquidity than traditional CDs, making it feel more like a savings account. But keep in mind that flexibility comes at a cost, and liquid CDs typically pay a lower interest rate to allow penalty-free access to your funds.  

The bottom line

CDs are one of the safest ways to store your cash, which should give you some peace of mind when you're deciding what's best for your finances. And as long as your CD is opened at an FDIC-insured bank or NCUA-backed credit union, your money is federally protected. If you need more liquidity, it may make more sense to open a savings account, which offers lower interest rates but won't penalize you for withdrawing your money when you need it.