The amount of money you should put in a certificate of deposit (CD) depends on numerous factors, ranging from how much you have to invest to how much the bank requires. You must typically make a minimum opening deposit, usually between $500 and $2,500, although some accounts don’t have this requirement.
Your financial circ*mstances and a few other key considerations can help you determine how much to keep in CDs and take advantage of today’s high interest rates.
How much money should I keep in a CD?
The answer to how much money you should put in a CD is personal. Consider these issues to figure out what is best for you:
Emergency savings: If you don’t have an emergency fund, focus on building one before you put money in a CD. Your savings should be easily accessible instead of in a CD, which can tie up your cash.
Access to funds: Traditional CDs are not liquid investments, which means you’ll incur penalties if you cash out early. Keep that in mind when deciding how much money to invest.
Financial goals: If you are saving toward a particular goal with a timeline, such as a wedding, that can help you determine how much to put in the CD and for how long.
For younger people, it might make more sense to put more of their portfolio in stocks or other riskier investments with higher upside for a long-term return, said Cetin Duransoy, CEO at Raisin US, an online savings platform.
“The older you get, the wiser it is to have a larger percentage of your portfolio in stable, low-risk investments like high-yield CDs, depending on your fixed income requirements,” he said.
Balance requirements: Banks may set minimum opening deposit requirements and account limits. These vary by account and bank so be sure to check before you open a CD.
Minimum and maximum amounts for CD investments
You can expect a minimum CD opening deposit of at least $500 at most banks, though that could rise to $2,500 or more for certain accounts. For example, CIT’s Jumbo CDs require a minimum balance of $100,000. CDs with higher minimums often pay higher APYs. In contrast, regular savings accounts typically have minimal or even no opening deposit requirements.
You might also face higher minimums for special accounts, such as a step-up CD that lets you adjust the interest rate at scheduled times before the maturity date.
In terms of maximum deposits, every bank lays out its own rules. Banks might impose maximum limits per CD account or per account type, such as jumbo or step-up CDs. Capital One’s 360 CD has no minimum deposit but may not exceed $1 million, for instance.
Risks and benefits of investing in CDs
CDs are considered very safe investments because your principal is guaranteed and you get a guaranteed annual percentage yield (APY) for the term of the CD. The only exception is if you invest in a callable CD that allows the bank to “call back” the CD before its maturity date, limiting your earnings. In this case, the issuing bank can cancel the CD at the callable date, which means you get the principal and interest accrued to that point, but lose out on future interest.
Here are some of the pros and cons of investing in CDs:
Pros
- Guaranteed income at a fixed rate
- Higher APYs than regular savings accounts
- Multiple term options that can range from three months to 10 years or more
- Offers low risk, with deposits backed at federally insured institutions
Cons
- Lacks flexibility, including the ability to make withdrawals and transfers as needed
- Often comes with early withdrawal penalties
- Carries interest rate risk — meaning returns may not keep up with inflation
- Produces lower returns than higher-risk investments
How interest rates affect CD investments
Obviously, you want the highest possible rate when you open a CD because the higher the rate, the higher the return. In terms of what affects interest rates, some of the main factors are:
- The overall market rate: This is determined by the Federal Reserve. When the Fed lowers its rates, CD rates usually go down. When it raises rates, CD rates usually go up
- The type of bank: Many online banks offer higher interest rates than traditional brick-and-mortar banks because they have lower operating costs
- The type of CD: Depending on the bank, you might get higher interest rates with longer-term CDs, but that’s not always the case. You may find higher rates on short-term CDs — especially if the overall market rate is high. You can also get higher rates on special CDs
Now is a good time to invest in CDs because of a series of Fed interest rate hikes over the past couple of years.
“With interest rates as high as they are today and likely to come down in the near future, it may make sense for savers from any generation to lock into rates now and devote a higher percentage of their portfolios to CDs to generate guaranteed, predictable returns to help augment their entire portfolio,” Duransoy said.
Penalties of early CD withdrawal
One of the main downsides of a CD is that you usually have to pay an early withdrawal penalty if you access the money before the term ends.
The amount of the penalty depends on the bank and the CD terms. Federal law sets a minimum penalty on early CD withdrawals but there is no maximum penalty.
If you withdraw money within the first six days after deposit, the penalty is at least seven days of simple interest. In other cases, your penalty may be a portion of accrued interest. Review your CD terms to find how much you might be penalized.
Renewing vs. cashing out CDs
Once a CD hits its maturity date, you usually have the option to renew it, deposit the money into another bank account or cash out. Your decision depends on your financial needs and goals.
For example, if you used the CD to save for a specific goal, then you will probably want to cash out and put the money toward that goal. But if you used the account to build your savings, then your decision about whether to renew or cash out depends on the APY.
If the CD doesn’t offer a competitive APY, then you may want to cash out and invest the money where you can get a better return. You may want to renew the CD, however, if the APY is higher than average.
If you’re not sure what to do, most CDs have a 10-day grace period after the CD matures, which gives you some time to think it over. If you do nothing, then the bank might renew the CD automatically at the same term.
Frequently asked questions (FAQs)
Withdrawing money before the maturity date can lead to an early withdrawal penalty. The penalty varies by bank and CD term.
Some banks impose a limit on how much you can invest in a CD. Limits depend on the bank and account type.
No, different banks offer different interest rates for CDs. Even within the same bank, you will likely find different interest rates for different CD terms.
Interest income is taxed at the same rate as your ordinary income, so that means if your income puts you in the 12% tax bracket, then 12% of your CD interest income will go toward federal income taxes. Your bank or credit union should issue a 1099-INT statement showing how much interest you earned on the account for the year.
In nearly all cases, you can’t add more money to the CD before its term has ended. The exceptions are add-on CDs offered by some banks, but these are rare.
