If You Open A CD Account, Can You Ever Lose The Money You Deposited? (2024)

A CD, or certificate of deposit, is a type of savings account that offers a guaranteed rate of return in exchange for you locking your money up for a while. When you put money into a CD account, you lend the amount you’ve deposited to a financial institution for a set period known as the CD term, which can range from a few weeks to ten years. In exchange, the financial institution pays you a fixed interest rate that’s often higher than what you’d earn with a savings account. Once your CD matures, you’ll get your original investment back plus the interest accrued.

Unlike stocks or cryptocurrencies, which present a risk of loss, CDs are generally considered safe investment vehicles that do not lose money. In some scenarios, though, you could risk losing interest or even a portion of your initial investment in a CD.

Can You Lose Money in a CD?

Because CDs offer guaranteed interest, you typically do not lose money. However, the following risks could still cause you to lose a portion of your investment or your CD to lose value.

Early Withdrawal Penalties

The most common way people lose money through a CD account is by withdrawing their funds before the term ends. When you take money out of your CD account before the maturity date, you’ll typically have to pay an early withdrawal penalty. The fee is usually equal to a portion of your interest earned, so you usually won’t lose money from your initial investment. For term lengths less than 12 months, it’s common to see early withdrawal penalties equal to 90 days’ interest on the amount you take out. For term lengths longer than 12 months, the penalty amount could be 180 days’ worth of interest or more.

Inflation

Inflation can erode your money’s purchasing power if your CD’s interest rate is lower than the inflation rate. Let’s say you invest $10,000 in a CD with a 2.00% APY, but the inflation rate is 3%. By the end of the first year, the CD will have accrued $200 in interest, bringing your total savings to $10,200. However, because the overall price of goods and services has risen by 3% due to inflation, you’ll need $10,300 to purchase the same basket of goods that $10,000 could buy in the previous year.

While you didn’t lose money in a CD, the money you invested did lose value.

Interest Rate Fluctuations

Interest rate fluctuations can’t cause you to lose money, but they can present an opportunity cost. This is a risk that occurs when you invest money in a vehicle that doesn’t offer much liquidity and a more lucrative investment opportunity comes up that you’re unable to take advantage of.

Let’s say you deposit $5,000 into a one-year CD account with 3.50% APY. Shortly after locking in your funds, the Fed raises interest rates, and the APY for the same account jumps to 4.50%. Because taking your money out early means dealing with penalty fees, you’re stuck with the lower 3.50% APY. Bump-up CDs, which allow you to raise your rate at least once during your CD term, can mitigate this risk.

Your Deposits Exceed the FDIC Insurance Limit

The FDIC, or Federal Deposit Insurance Corporation, insures up to $250,000 total per person, per account type for every individual who deposits money in an FDIC-insured bank. The NCUA offers the same insurance for credit unions. However, if you deposit more than $250,000, you may not get the portion of your deposit that exceeds this limit back in the unlikely case that your bank fails.

Can a Brokered CD Lose Money?

Yes. A brokered CD is a certificate of deposit you purchase through a brokerage firm or broker instead of a bank or credit union. While brokered CDs offer more flexibility than regular CDs—as you can sell them on the secondary market whenever you like without incurring penalties—you could lose money if they’re sold at a lower price than their face value. Also, some brokered CDs are callable CDs, which means the issuer could terminate them before maturity and cause you to lose out on potential earnings.

How To Reduce the Risk of Losing Money on a CD

While CDs don’t usually lose money, you can minimize risk by taking the following actions.

• Create a CD ladder. The CD ladder strategy involves investing in multiple CDs with different maturity dates—for example, spreading a $5,000 deposit across one-, two-, three-, four- and five-year CDs. This way, you can avoid losing out on potential earnings due to rising interest rates while still being able access to some funds once each year.
• Make sure your deposits are insured. While most banks are FDIC-insured and most credit unions are NCUA-insured, it’s always a good idea to double-check. You can do so by using the FDIC’s Bank Find tool or the NCUA’s Credit Union Locator. If you plan on depositing more than $250,000, there are some ways to insure excess deposits and avoid this potential loss.
• Leave funds in the CD account until maturity. Before temporarily locking your money away in a CD account, make sure you can afford to be without it for the entire term length. Early withdrawal penalties can be hefty, so avoid taking out the funds prematurely. If you’re unsure about committing to regular CDs, consider looking into no-penalty CDs that offer more flexibility.

All investments carry some degree of risk, but CDs are as low-risk as they come. That said, inflation, early withdrawal penalties and interest rate fluctuations can all eat into your CD’s value. Making sure you select the right CD term for your needs and seeking out the best CD rates for that term can help you maximize your investment.