While it’s unlikely, a certificate of deposit (CD) could lose money if you withdraw funds before you’ve earned enough interest to cover the penalty charged. Typically, CDs are safe time deposits that guarantee an interest rate for the term that you agree to keep money at a financial institution. In fact, CDs are considered one of the lowest-risk savings vehicles available. But, if you pull your money out before the maturity date, you might take a loss.
Here’s a closer look at this topic, so you can decide if a CD is the right way to grow your money.
Key Points
• A Certificate of Deposit (CD) could lose money if funds are withdrawn early, incurring penalties that may exceed earned interest.
• CDs are generally low-risk and guarantee a fixed interest rate for the term.
• Early withdrawal penalties can sometimes reduce the principal, not just the interest.
• CDs offer higher interest rates compared to regular savings accounts, especially for longer terms.
• CDs are insured up to $250,000 by FDIC or NCUA, providing additional security against bank failures.
What Is a Certificate of Deposit (CD)?
A certificate of deposit is a savings account offered by banks or credit unions that holds a certain amount of money for a fixed period of time. Some specifics:
• This time frame can typically range from six months to five years, but you might find even shorter- or longer-term products.
• There may be a minimum deposit amount, too, of possibly $1,000 or a similar sum.
• The bank pays you interest over the term of the CD. At the end of your CD’s term (you may hear this referred to as when your CD matures), you receive the money you originally put in along with the interest earned from having your money locked away.
• CDs can be a more attractive savings vehicle than an ordinary savings account because they may offer higher annual percentage yields (APYs).
• Typically, the longer your money is in the CD, the higher the rates offered.
• If you get a CD from a bank that is insured by the FDIC (Federal Deposit Insurance Corporation) or NCUA (National Credit Union Administration), you are typically covered up to $250,000 per account holder, per account ownership category, per insured institution in the very rare event of a bank failure.
💡 Quick Tip: Typically, checking accounts don’t earn interest. However, some accounts do, and online banks are more likely than brick-and-mortar banks to offer you the best rates.
How Standard Certificate of Deposits Work
A CD is similar to a standard bank account, but the difference is CDs have a “lock-in” period where you cannot access the money during that time (the CD’s term). In exchange, you earn interest on the account.
When you open a certificate of deposit, you have to determine how long you are able to keep your money stowed away. This term length generally ranges from six months to several years.
If you need to access the money before the term ends, you will usually pay a penalty for withdrawing the money before the account’s maturity. There are CDs that allow early withdrawal without penalties; these are typically called no-penalty CDs, and the trade-off for this flexibility may offer a lower APY.
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Can You Lose Money on a CD?
The risk of having a CD is very low. Unlike how the stock market or a Roth IRA can lose money, you typically cannot lose money in a CD.
There is actually no risk the account owner incurs unless you withdraw money before the account reaches maturity. In this case, the early-withdrawal penalty kicks in and typically may eat up some or all of the interest earned. (Read your account’s terms or check a bank’s website for the specifics.)
But to answer “Can CDs lose money?”: In rare cases, an early withdrawal fee might take a bite out of your principal, too. If, say, you deposit $1,000 in an IRA and earn $15 in interest and then decide to withdraw the funds, hypothetically you could be assessed a $25 fee. In this case, you would wind up with $990 vs. the $1,000 you deposited.
Pros of Investing in a CD
Investing in CDs can be a convenient way to grow your money. High-yield checking and savings accounts can be as well, though. Or perhaps you’re tempted by other investments and wonder how CDs vs. bonds perform. Here, consider some of the benefits specific to certificates of deposit, so you can decide what will work best for you.
• Security. You can count on a CD for its safety. Make sure to open a CD from a federally insured bank or credit union so your money is secure up to the limits of the insurance ($250,000).
• Dependability. Instead of having your money sit in a bank and not be sure what returns you will receive as interest rates fluctuate, you can expect to get fixed returns from your CD deposit over a specific period of time.
• Flexible terms. When opening a CD, account holders get to select from a wide range of term lengths. If you prefer a CD with a shorter maturity date, you can choose a term of a couple of months. Looking for a longer duration? Some CDs may be offered with a 10-year term.
Recommended: CDs vs. Bonds: What’s Smart for Your Money?
Cons of Investing in a CD
As with most financial products (and things in life), there are pluses and minuses to certificates of deposit. Here’s a look at the potential downsides of putting your money in a CD.
• Lack of access. Once you add money to a CD, you won’t be able to access it until the term is over. During this time, you are not able to add money either.
• Possible penalties. When you open a CD, you are making a commitment with a financial institution that you will not access that money until the CD matures. (Unless you opt for a no-penalty CD, that is.) If you break that commitment and withdraw money from your CD prior to its maturity date, you will incur early CD withdrawal penalties. This could mean the financial institution withholds an amount of interest on the money you withdraw or could even take some of your principal.
• Low returns. Yields on a CD can be competitive, but when comparing their returns to those historically earned in the stock market, they’re relatively low. That said, remember that risk plays a role in the market. If you are wondering, “Can you lose money with an index fund or other investment?” keep in mind that the answer may well be “yes.”
When you are investing in stocks and exchange-traded funds, investors take on additional risk and are compensated for that risk. But when putting money in a CD, you aren’t taking any risk, which means the returns are lower.
Recommended: What Does Private Banking Offer?
When CDs Work Best
CDs work best when you are able to put away money for a period of time and accumulate interest over the term. There are different scenarios in which a CD can be a great option, such as the following:
Saving for a Purchase in the Near Future
If you are saving up for a big future purchase, such as a home or a car, you can put your money in a CD to help protect it against inflation until you are ready to access those funds.
Building Short-Term Wealth Before You Invest
If you are new to investing and want to build up your funds to have a more consistent strategy, a CD can help. You can often use a short-term CD to steadily grow your cash position before you invest it in the stock market.
Ensuring Returns Without Stock Market Risk
Opening a CD can be a way to grow your wealth, slowly and steadily with low risk. You might consider building a CD ladder to have funds come available regularly in case you need access. This can be a good balance if you are also investing in the market.
The Takeaway
A certificate of deposit is an account you can open at a bank or credit union to lock away your cash for a certain amount of time while earning a predetermined annual percentage yield. CDs are usually considered very safe. If, however, you withdraw your funds before the maturity date, in rare cases, the penalty for doing so could possibly eat into your principal, meaning you’d lose money.
Another way to grow your funds without this kind of potential access issue could be with a high-yield checking and savings account.
Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.
FAQ
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.
Is a CD guaranteed to make money?
In return for allowing the bank or credit union to hold your money for a fixed period of time, the bank pays you interest. These payments are guaranteed.
What determines CD rates?
CD rates are determined by a combination of a few factors, such as the CD’s maturity (or term) and what the current interest rate environment is (banks will likely use an index rate, typically that of the federal funds rate). Search online to review the best options.
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SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.
As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.
SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.
Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.
Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.
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