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Guide to CDs

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You probably already know that a Certificate of Deposit (or CD) is a pretty easy way to save. But did you also realize that CDs can serve as a great tool in your overall financial plan?

Consider all the different types of CDs, range of terms and CD strategies.

That’s why we’ve put together this CD guide. We want to demystify CDs, make them a little bit easier to understand, and arm you with information you need to help you get the most out of your savings. We cover everything from the fundamentals to CD strategies, and even the CD products Marcus offers. So let’s get started.

What we’ll cover

CDs: What they are and how they work

We know you probably understand the basics. But we’d be remiss if we didn’t offer you a quick refresher on what CDs are and how they work.

In a nutshell, a CD is a type of deposit account that, depending on the term, usually offers a higher interest rate than a traditional savings account.

The trade-off for the higher interest rate is that your cash may be  less accessible. You agree to leave your money deposited at a for a set amount of time, called the CD term. If you withdraw your money before the CD term ends, you could pay a penalty, though there are a few ways to avoid paying for early withdrawal.

Generally, a CD with a longer term will have a higher interest rate. Because the interest rate on a CD, expressed as an annual percentage yield (APY), is typically a fixed rate, it won’t change over the length of your CD term.

Highlights:

  • A CD could be a great option if you’re looking to earn interest on excess cash you have and don’t need to access it for a certain period of time
  • Some CDs allow you to receive interest payouts monthly, quarterly, semiannually or annually. Want to see how much your money could grow with a Marcus CD? Check out our High-Yield CD Calculator

At the end of the term, you can crack it open and take the money out, drop it in another CD with the very same term or into a CD with a different term. Depending on your CD, you could also receive periodic interest payouts during the term of the CD (more on that in a bit).

What happens when a CD matures?

When you open a CD your bank may have a variety of terms, or maturity dates, to choose from.

And you’ll have several options of what to do with your money when a CD matures. First, be on the lookout for a maturity notice; your bank is required to send one to you via email or mail before your CD matures.

The notice will tell you the maturity date and the rate on your CD if you choose to renew. The choice is yours. You can withdraw the money or roll it over to a different CD. Or if you don’t do anything the default action typically is to renew the CD for the same term.

Types of CDs

Look around the web, or your preferred bank, and you’ll come across a range of CD accounts offered at various financial institutions. Each will come with its own features, benefits, terms and rules. It’s always nice to have options, right?

There are a slew of CD types like high-yield CDs, which come with a higher interest rate compared to traditional CDs, and no-penalty CDs, which allow you to withdraw all your funds after a certain point without penalty, both of which Marcus offers (more on those later).

Highlights:

  • Each type of CD comes with its own features, benefits, term and rules
  • Some CDs require a high minimum deposit
  • If you withdraw funds before the end of the term, you’re likely to incur a penalty

 

You may have heard of other types of CDs, including:

  • Bump-up CD – With a bump-up CD, you have the ability to take advantage of increasing interest rates. When interest rates increase, this type of CD gives you the option to direct the bank to change your interest rate (usually only once) to the current, higher rate offered, for the remainder of your term. The downside of this type of account is that the initial interest rate offered may be lower than that of typical CDs.
  • Step-up CD – It’s different than a bump-up CD in that a step-up CD has predetermined rate increases during the term
  • Zero coupon CD Purchased at a lower cost than the face value of that CD. You won’t receive any periodic interest payments over the life of the CD. Instead, you’ll receive the face value of the CD, including the accrued interest, when it matures in the future. For example, let’s say you paid $80,000 for a 10-year, $100,000 zero coupon CD. You won’t receive any interest on this CD during the 10-year term, but you’ll get the full value of $100,000 at the end of the 10 years (accounting for the interest you waited to receive). A downside to this type of CD?  Even though you’re not receiving your interest payments, you’ll still be taxed annually on the accrued interest since the interest is treated as taxable income.

Of course, there are other CD types out there. Just know this – CDs come in all shapes and sizes. And they can help you reach a range of savings goals. 

No-Penalty CDs

As we discussed, CDs are not created equal.

A no-penalty CD differs from a typical CD account because it allows you to withdraw your money after a certain date, without paying a penalty. As with a Marcus No Penalty CD, the tradeoff for that convenience is that your interest rate will likely be lower than what you could receive on a CD that doesn’t allow for early withdrawals, but it could still be higher than the interest rate on savings accounts.

Why you’d want one depends on your objectives.

Highlights:

  • A no-penalty CD could have a higher interest rate than traditional savings accounts
  • There are no partial withdrawals – you have to withdraw the full amount
  • Typically, you can withdraw your funds beginning seven days after funding

 

Say you have a specific goal and deadline you want to meet. Or you want a high rate – maybe higher than traditional savings accounts. Or if you want to be able to take advantage of a potential rise in interest rates.

What a no-penalty CD would offer in any of those situations above is the ability to access your funds.

While a no-penalty CD allows for the flexibility of withdrawing your funds, you typically need to withdraw the full amount. At Marcus, you can withdraw your money beginning seven days after funding.

Highlights:

  • A no-penalty CD could have a higher interest rate than traditional savings accounts
  • There are no partial withdrawals – you have to withdraw the full amount
  • Typically, you can withdraw your funds beginning seven days after funding

 

Why open a CD?

We touched on this briefly, but consider your full financial landscape. How does liquidity fit into it? How diversified is your plan?

When you have excess cash and you’re looking for a way to earn additional interest, then a CD can come in handy.

There are a handful of other reasons why you might consider opening a CD. Want to save for something specific like a vacation home or home renovation? Looking for an FDIC-insured place to park some of your cash while the rest remains invested in the market?

Remember, if you’re willing to save money for a predetermined amount of time without needing access to it, you could receive a much more favorable interest rate with a CD than you would a traditional or online savings account.

Most CDs also come with fixed rates. So once you’ve locked in a rate, you know exactly how much interest you can earn by the end of the term. In other words, you won’t have to worry about rates going up or down.  

See how much interest you could earn with a Marcus high-yield CD.

CDs vs. online savings accounts

CDs and online savings accounts share some similarities. However, there are differences. 

CD

Online Savings Accounts

Interest Rates

Many types of CDs have fixed rates – meaning you lock in one rate for the term of the CD. But there are variable rate CDs, too.

Interest rates are variable; your account's interest rate could go up or down.

Withdrawals

Check with your bank for rules about making an early withdrawal of your principal; you'll almost certainly have to pay a fee. But depending on where you opened your CD, you might be able to receive interest payments monthly, quarterly, semiannually or annually.

Due to a Federal rule change, you are now free to make more than six withdrawals or transfers from your savings account in a monthly statement period. There is no limit to the number of withdrawals or transfers you can make.

Minimum Balances

There's usually a mimimum deposit required for a CD to start earning interest. With Marcus, it's $500.

Typically, there's either a low or no minimum deposit required to open a savings account online.

CD Rates: What you need to know

You want the best CD rate out there that fits your needs, right? Well, here’s a glimpse into how CD rates work.

Deposit your money into a CD with a long term (i.e., 5 years) and it will likely have a higher CD rate than what would be offered on a shorter term, like a 1-year CD. This is because a bank has more flexibility – that is, more things it can do with your money – the longer you leave it deposited. And a bank is typically willing to pay you a better rate for that convenience.

Highlights:

  • Typically, you can find higher interest rates on CDs with longer terms
  • Most CD rates are fixed, so you don’t have to worry about rate fluctuation

Learn more: Marcus CD Rates

CD Strategies

Ah, now we’re getting to the good stuff – the information that could help you move the needle on your savings goals.

Now that you understand the different types of CDs, scenarios when you might consider one, and how rates work, let’s break down some common CD strategies. 

Let’s start with a CD ladder. On its face, it’s exactly how it sounds. A CD ladder is when you deposit money into a mix of short-, medium-, and long-term CDs, and continue to do so as each CD matures. Each rung on a CD ladder represents a CD with a different maturity date. Say you have $25,000 to build a CD ladder that matures in one-year increments. Your CD ladder could look like this:

  • $5,000 in a 12-month CD
  • $5,000 in a 24-month CD
  • $5,000 in a three-year CD
  • $5,000 in a four-year CD
  • $5,000 in a five-year CD 


As each of the shorter term CDs mature, you take those funds and deposit them into new longer-term CDs.

Many people use a CD ladder strategy to have the option of a steady, periodic cash flow as CDs mature at different dates. When those CD terms end at different dates, you can rollover that cash into new CDs or use the money as you see fit. 

So you can either start small (shorter-term, lower-yield CDs) or start big (longer-term, higher-yield CDs). Just know that if you opt for the latter, you could earn a higher rate.

So that covers a few pointers on CD laddering.

Now let’s talk about another CD strategy you might have heard of. Ever heard of the CD barbell strategy?

Highlights:

  • A CD ladder allows you to take advantage of rates on longer-term CDs, which are typically higher than shorter term CDs while not locking up all of your savings.
  • A CD barbell strategy can help increase the interest you earn and provide more flexibility to access funds when you need to. 

A barbell is different from a CD ladder. With a barbell strategy, you can spread a single deposit amount evenly between short-term and long-term CDs – there’s no medium-term CDs with this approach. 

When those short-term CDs mature, you can deposit that money into long-term CDs. This approach is designed to help you earn a higher interest rate, on average, over time. One reason people opt for a barbell strategy is that it can allow you to take advantage of a higher yield (on the long-term CDs) while being able to maintain liquidity (with short-term CDs).

Here’s a basic example. Say you have deposit $10,000 in CDs. Using a barbell strategy, you would put $5,000 into a short term CD and $5,000 into a long-term CD with the following terms and rates:

*Annual Percentage Yield (APY): stated APYs are for illustrative purposes only and do not necessarily reflect APYs that are currently available.

At the end of the five years, you will have earned an overall average yield of 2.0% (1.5%+2.5% / 2).

Marcus High-yield CDs and No-Penalty CDs

11-Month No-Penalty CD

Rate:
0.65% APY (fixed)

Access:
Withdraw full balance beginning 7 days after funding.

Fees / Penalties:
No fees, and no early withdrawal penalty beginning 7 days after funding

Min Balance:
$500

Learn more

12-Month CD

Rate:
0.85% APY (fixed)

Access:
Principal amount is locked in until term ends. Interest earned can be withdrawn at any time.

Fees / Penalties:
Early withdrawal penalty if you withdraw funds before term ends.

Min Balance:
$500

Learn more

Annual Percentage Yields (APYs) as of September 30, 2020. Maximum balance limits apply.

No-Penalty CD: APY may change at any time before a No-Penalty CD is opened and funded. Withdrawals permitted beginning seven days after the funding date. $500 minimum to earn stated APY for No-Penalty CD.

Certificate of Deposit: APY may change at any time before CD is opened and funded. Penalties that may reduce CD earnings will apply to a withdrawal of principal prior to maturity. $500 minimum to open a CD and earn stated APY.

Our range of high-yield CDs offer steady growth and a guaranteed return. 

How to get started

By now you should have a good understanding of how CDs work and why you might consider one. When you’re ready to open a CD, we suggest you do these four things:

  • Think about the length of term you want to commit to
  • Find the right type of CD that fits your goals
  • Determine how much money you want to deposit Shop around to find the best rate
  • Make sure your CD is held at an institution that has FDIC insurance


So whether you have a particular goal you’re trying to reach or just want a product with a competitive rate, our Marcus CDs – both the High-Yield CD and No-Penalty CD – come with a range of terms and rates to suit your objectives.

We hope this CD guide gave you better insight into how CDs work, as well as some tips on how CDs can keep your money growing. 

Content to keep you on the path to financial well-being.

This article is for informational purposes only and is not a substitute for individualized professional advice. Articles on this site were commissioned and approved by Marcus by Goldman Sachs®, but may not reflect the institutional opinions of The Goldman Sachs Group, Inc., Goldman Sachs Bank USA or any of their affiliates, subsidiaries or divisions.