Banks and credit unions offer certificates of deposit (CD) for savers who want to earn interest on money they don't plan to spend right away. CDs can offer different maturity terms designed to fit both short- and long-term financial goals. Deciding at what age it makes sense to open a CD can depend on where you are financially and what you want to achieve with your money.
Key Takeways
- A certificate of deposit is a time deposit savings account offered by banks and credit unions.
- CDs can earn interest over a set maturity term, which may be as short as 28 or 30 days, or as long as 10 years.
- CDs can be a safe investment for people who aren't seeking high returns.
- When choosing CD terms, consider how soon you'll need the money to avoid an early-withdrawal penalty.
How Certificates of Deposit Work
A certificate of deposit or CD is a type of time deposit account that allows savers to earn interest over a set time frame. Banks can offer CDs with maturity terms as short as 28 or 30 days, or as long as 10 years. As long as your money remains on the CD, you can earn interest. If you withdraw money from a CD before the end of its term, you may face an early-withdrawal penalty.
CDs can be used to fund short- and long-term savings goals. You can open them at traditional banks, online banks, or credit unions. The minimum deposit requirement for CDs can vary. Regular CDs may require $500 or $1,000 to open, or you might need $5,000 or $10,000 to open a jumbo CD.
The interest earned on a CD usually depends on the maturity term and the overall interest rate environment. Longer maturity terms typically translate to higher CD rates, while shorter-term CDs may have lower rates. Changes to the federal funds rate, which is the rate at which banks lend money to one another overnight, can also influence changes to CD rates.
CD accounts are designed just for saving, not spending. So you don't get a debit card or checks. And outside of when the CD matures, you can't transfer money from a CD to another savings account or checking account without triggering a penalty.
Deposits in a CD are protected by the Federal Deposit Insurance Corporation (FDIC) when held at an FDIC member bank. You're covered up to $250,000 per depositor, per account ownership type, and financial institution. The National Credit Union Administration (NCUA) insures credit union certificates of deposit.
Important
Not all CDs are FDIC-insured. Yankee CDs, which are issued to U.S. customers by branches of a foreign bank, don't enjoy this protection.
The Best Age to Invest in a CD
The best age to buy a CD is when you have a specific savings goal that you're working toward and you'd prefer a CD instead of a savings account or money market account. For example, you might open a CD account in your 20s to save money toward:
- Purchasing a car
- Buying a home
- Planning a vacation
- Paying for a wedding
In your 30s and 40s, you might have crossed some of these financial goals off your list. But you could still use CDs to save for other goals, such as paying for college or your retirement. Opening CDs in your 50s, 60s, and beyond could make sense if you're shifting out of riskier investments, such as stocks.
When opening a CD at any age, there are a few things to keep in mind. First, consider your goals and how suited CDs are to helping you achieve them. If you're just starting to save in your 20s, for example, then a standard CD could work for you. But if you're interested in saving for retirement in your 30s and 40s, you might prefer an IRA CD instead. IRA CDs offer the safety of CDs and the tax benefits of an IRA.
Next, think about your time frame for saving and how soon you think you'll need to access the money in your CD. This can help you choose the right maturity term for saving. Withdraw money from a CD too soon and you might end up forfeiting some or all of the interest earned. Choose a CD term that's too long and you could miss out on a chance to earn a higher interest rate on your money.
Tip
Raise-your-rate CDs, bump-up CDs, and step-up CDs allow you to increase the rate on your CD once or twice during the maturity term.
Also, consider how much of your overall portfolio you'd like to keep in CDs. Maintaining the right mix of safer investments, like CDs, and riskier investments, like stocks, is important for keeping pace with your goals.
Can a Parent Open a CD for a Child?
If you'd like to give your child a head start with saving, you could open a CD for them. You'll first need to open a custodial account. Banks and brokerages can offer custodial accounts for kids. With this type of account, you control the assets in it until your child reaches adulthood. When they're of legal age, all of the money in the custodial account belongs to them.
You can use custodial accounts to open CDs but also add stocks, mutual funds, and other securities. This could be a good way to help your kids start building wealth from an early age. When your child gets older and has earned income of their own, you could help them set up an IRA or IRA CD.
When opening CDs for a child, it's important to keep gift tax rules in mind. The gift tax applies to financial gifts made to someone else over the annual exclusion limit. For 2023, the gift tax exclusion limit is $17,000 and for 2024 the limit rises to $18,000. Married couples filing a joint return can double this to $34,000 in 2023 and $36,000 in 2024.
Note
When opening a CD account or any bank account for a child, you may need to provide a copy of their birth certificate or Social Security card as proof of their age.
At What Age Can You Open a CD?
In most states, you can open a CD in your name at the age of 18 or 19 depending on where you live. Parents can open CD accounts for minor children under the age of 18. CDs for minors can be held inside a custodial account.
Is Opening a CD a Good Investment?
CDs are a safe, secure way to grow your money. Though they won't earn the same level of returns as stocks, mutual funds, or ETFs, they don't expose you to as much risk. That could make that a good investment choice for people who want a lower level of risk.
Can a 16-Year-Old Open a CD?
A 16-year-old would not be able to open a CD in their name. A parent could, however, open a custodial account for them and add CDs to it. Depending on the age of termination, commonly 18 to 21, as dictated by the state, the child will assume ownership of the money in the custodial account. California allows the transfer to be delayed until as late as age 25 in some instances.
The Bottom Line
CD accounts can offer a predictable rate of return for your money and are far less risky compared to other investments. You could even open multiple CD accounts to build a CD ladder. The best age to open CDs will be different for everyone, and it's important to consider your goals. When you're ready to open a CD account, be sure to compare the best CD rates online to find a savings option that fits your needs.
