Can you lose money in a CD? (2024)

FAQs

Can you lose money in a CD? ›

CDs insured by the Federal Deposit Insurance Corp. (FDIC) for up to $250,000 cannot lose money even if the bank fails. However, some CDs that are not FDIC-insured may carry greater risk, and risks may come from rising inflation or interest rates.

But unlike many savings accounts, a CD isn't designed to offer easy access to your cash. When you open a CD, you promise to lock that money up for a fixed period. If you break that promise, your bank may charge an early withdrawal penalty—which could cost you some or, in extreme cases, all of your accrued interest.

Your money is safe

If you open a CD or share certificate at a bank or credit union that's insured by the Federal Deposit Insurance Corp. (FDIC) or National Credit Union Administration (NCUA), respectively, you're insured up to $250,000 per depositor, per financial institution in the unlikely event of a bank failure.

Investing $1,000 in a CD offers a secure and predictable way to grow your savings, with the potential to earn up to $46.18 at current rates. Bob Haegele is a personal finance writer focusing on topics such as investing, credit cards, and banking.

Losing money in a CD is highly unlikely. However, it's not impossible. If you're thinking about opening one, read the fine print about early withdrawal penalties, and be sure to compare more flexible options that don't have a maturity date. And even if you decide to open a CD, don't set it and forget it.

One major drawback of a CD is that account holders can't easily access their money if an unanticipated need arises. They typically have to pay a penalty for early withdrawals, which can eat up interest and can even result in the loss of principal.

CDs opened at FDIC-insured banks, or credit unions backed by the NCUA, are guaranteed by the federal government. Should the bank or credit union fail, your savings won't be lost, as long as you're within deposit limits.

Are CDs safe if the market crashes? Putting your money in a CD doesn't involve putting your money in the stock market. Instead, it's in a financial institution, like a bank or credit union. So, in the event of a market crash, your CD account will not be impacted or lose value.

While no one knows precisely what a default would entail, consumers can rest assured that their Treasuries and certificates of deposit are reasonably safe.

How much will a $500 CD make in 5 years? ›

This CD will earn $117.15 on $500 over five years, which means your deposit will grow by 23.4%.

There's nothing wrong with putting cash into a CD, but it can be the wrong decision if you're left without any money in your savings account. Most financial experts recommend having enough cash to cover three to six months of expenses in your emergency fund. If that's too much to manage, start with $1,000.

With a rate that high, a $10,000 investment in a 5-year CD could potentially grow to over $12,000 by the end of the term — and that's without any additional contributions. That means the returns on your CD will significantly outpace the returns typically offered by traditional savings accounts, averaging about 0.45%.

The taxes on CDs are similar to those on other types of interest income, such as interest earned on bonds. Both are considered taxable income and subject to federal income tax, which is based on your marginal tax bracket. However, there are some investments, such as stocks and mutual funds, which are taxed differently.

Both money market funds and CDs are considered relatively safe investments, potentially providing returns in the form of interest or dividends. Money market funds are generally more liquid than bank or brokered CDs.

Long-term CDs (4-5 years)

Pledging to leave your money inaccessible for that long can be worth the commitment, especially if you can lock into a high APY before a falling-rate environment. The national average rate for a five-year term is 1.42% APY and you can find higher rates at some banks and credit unions.

You might only have seven to 10 days to withdraw penalty-free from a CD after it matures, depending on your bank's policy. If you don't withdraw, your bank might automatically renew your CD for the same or similar term but at the bank's current rate.

CDs with longer terms tend to have higher early withdrawal penalties. For example: You might be charged the equivalent of three months' interest for an early withdrawal from a CD that matures in six months or less. If you have a five-year CD, the penalty might be 12 months' worth of interest.

Whether you withdraw early or at the end of the term, your credit won't be impacted since it's your money. Because CDs aren't a loan or credit account, your actions, including withdrawing money or closing out the account, aren't reported to the credit bureaus or factored into your credit score.

CDs earn a guaranteed return over a set period of months or years. They're considered safer than the stock market and can offer a better return than other bank deposit accounts. CDs charge an early withdrawal penalty if you cancel before the end of the agreed term.