How to open a certificate of deposit (CD)

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If you want a guaranteed return on your savings, then opening a certificate of deposit may be a logical choice: CDs are a low-risk place to park cash that come with a fixed interest rate. Although these deposit products require locking in your money for a specified amount of time, they tend to pay more interest than savings and money market accounts.

Here’s a closer look at how to open a CD.

1.  Find the right CD

The biggest upside of a certificate of deposit is that your money will grow steadily at a guaranteed rate. In exchange for that guaranteed rate, you must commit to leaving the funds in the account for a specified term, which can range from a few months to many years.

Before you open a CD, make sure that you have a goal and timeline in mind for these funds. For example, you might want to fund a vacation in a year or buy a car in two years. With a predetermined goal in mind, you’ll be able to pick an appropriate CD term — one that matures when you expect to fulfill that goal.

Lengths of term

The most common CD terms tend to range from three months to five years. With many CDs, you will not have access to the funds until the CD matures without incurring an early withdrawal penalty, which could wipe out any interest earned and potentially some of your principal. Hence, it’s important to choose a CD with a term that you know you can afford to put the money away for.

Types of CDs

There are a dozen types of CDs to choose from. Here are some of the more common types, which offer different levels of flexibility:

• Traditional CD: Traditional CDs typically pay higher interest rates — especially for longer terms — but lock funds in for a specified period. Most traditional CDs will not allow you to add additional money after the initial deposit and will penalize you for early withdrawals.
• Add-on CD: An add-on CD allows savers to make several deposits over the course of the term. The amount that can be added to the CD may be limited, depending on the CD’s terms.
• No-penalty CD: This type of CD, sometimes called a liquid CD, charges no penalty fees for withdrawing funds early, though interest rates may not be as favorable as with a traditional CD.
• Bump-up CD: Bump-up CDs are a good option in a rising rate environment, allowing you to take advantage of a higher rate for the duration of the CD term. Typically, one bump up is allowed per term, but terms vary depending on the length of the CD’s duration. Bump-up CDs frequently pay less interest than traditional CDs and may still be subject to penalties for early withdrawal.

2. Choose a bank to open a CD account

By doing a bit of extra research and comparing top CD rates, you’ll get rewarded with a better payout. The first step to narrowing your search is deciding whether you want to shop in person or online.

An online bank, or direct bank, is a good option for finding the highest annual percentage yield (APY). With lower overhead expenses than brick-and-mortar banks, online banks tend to offer more favorable APYs. Plus, many online banks also offer low fees.

A CD offered through an online bank can be opened from the comfort of your couch, but you’ll sacrifice the personal service that a brick-and-mortar bank can provide.

Whichever direction you take, ensure that the institution you are working with is backed by the Federal Deposit Insurance Corp. (FDIC), which insures deposits up to $250,000 per customer, per bank. If the bank fails, you will get your money back within the insurance guidelines.

In searching for the right CD, you’ll also want to note the minimum opening deposit requirements and the early withdrawal penalties. Minimum deposits vary from bank to bank; some institutions don’t require an opening deposit while others may require a standard $1,000 (sometimes even more, as is the case for most jumbo CDs.)

Likewise, early withdrawal penalties differ from bank to bank. A relatively standard penalty is 180 days of interest for one-year CDs, but since penalties vary widely, you’ll want to take a close look at the fine print.

3. Create your account

As with all financial products, documentation is needed to open a CD so that the financial institution can verify your identity. Before starting the application process, gather the required information ahead of time to avoid scrambling for paperwork.

Here is the information typically needed to open any bank account:

• Your Social Security number (or individual taxpayer identification number).
• A valid ID, such as a driver’s license.
• The date of birth of all account holders, if you are opening a joint account.
• A physical U.S. address.
• A phone number.
• An email address.
• An opening deposit amount (and the funding account information).

4. Determine when to have interest disbursed

Financial institutions may give you two disbursement options: Leave the interest in the CD until it matures to let it continue to compound; or you can request a regular interest-only payout to spend as you wish.

Disbursements depend on the financial institution’s rules. If you choose to receive the interest earned before the CD’s maturity, you may have the option to receive a check or direct deposit monthly, quarterly or annually.

5. Fund the CD

Opening a CD often requires having money on hand to deposit into the new account. Although some banks require no minimum deposit to open a CD, others may have minimums of a few hundred or thousand dollars.

Here are a few examples:

• Synchrony offers a variety of CD terms — from three months to five years — that require no minimum deposit.
• Bank of America offers standard CDs that require a $1,000 minimum deposit, but it also offers Featured CDs that require a $10,000 minimum deposit.
• LendingClub’s CDs, which typically range from six months  to five years, require a minimum of $2,500 to open.

With so many options, you can find a CD with an opening deposit requirement that suits your budget and goals. In general, expect to have at least $1,000 on hand to open a CD with a competitive rate.

Bottom line

Before deciding to open a CD, be sure to compare products. The money you are putting into a CD will grow at a guaranteed rate, so it pays to shop for the best CD rate and terms that fit within your savings timeline.

— Bankrate’s René Bennett and Marcos Cabello contributed to an update of this article.