How to open a certificate of deposit (CD): 5 Simple Steps

How to open a certificate of deposit (CD): 5 Simple Steps

A certificate of Deposit (CD) offers a guaranteed rate of returns and is insured by the federal government. So, opening a CD account is just like opening a savings account.  

It is your personal finance behavior that guides you to prefer opening a CD account instead of investing in stocks, savings accounts, or bonds. Personal finance and your behavior are deeply interwoven.

open a certificate of deposit (CD) account

Many banks, credit unions brokerage, and brokerage firms open CD accounts and provide personalized services to their clients. 

    Key Points:

• A certificate of deposit (CD) offers a guaranteed rate of returns and is insured by the federal government.

• FDIC and NCUA insurance protect $250,000 per person per institution.

• CDs provide fixed and variable interest rates, and banks or credit unions use the federal reserve rate as a benchmark to offer rates to their customers.

So, if you have decided to start earning more on your savings, the following straightforward process will guide you step by step to open a CD account.

    1. Decide on CD Type and Term

There are multiple types of CDs, so CD type and term mainly depend on your financial goals to achieve

        a) Types of CDs:

A standard CD requires a minimum deposit requirement for specific terms and penalties over early withdrawal, but a Liquid CD has no early withdrawal penalty (EWP). 

No penalty CDs may come with lower rates, and high fees or may vary institution-wise. The basis of CD types includes compound interest computation, minimum deposit requirements, and maturity. You can further read about CD Guidelines.

       b) Choose the CD Term 

CD term means the time length from the CD start to the maturity date. CDs have varying terms from a few months to 10 years or more, with longer terms resulting in higher interest rates and early withdrawal penalties. 

So, select the best CD term with the best rates for your financial goals to achieve your financial freedom. For example, if you want to buy a house or a car in a year, you can choose 12 months or less term CD.

        

        c) Single or Joint Account

Banks or credit unions offer single or joint CD accounts. The Federal Deposit Insurance Corporation (FDIC) and The National Credit Union Administration (NCUA) insurance protect $250,000 per person per institution.  For a joint CD account, this combined coverage is $500,000 [1], [2]. 

The CD account operated with the same name in the same institution categories as a single CD account. If you are planning to open a CD account for more than $ 500,000, Opening another CD account with the partner's name, spouse's name, or in a separate financial institution is advisable for risk coverage.

    2. Pick Banks or Credit Unions

To get better rewards, then there is a need to narrow down research on interest rates, minimum deposit requirements, and fees and penalties on CD accounts.

        a) FDIC- or NCUA-insured Institutions:

In the USA, FDIC provides insurance coverage on traditional deposits of banks that are insured with FDIC. There is no need to apply for coverage in the case of FDIC-insured banks or financial institutions. 

This coverage includes the deposit products list: certificate of deposit (CD), checking accounts, saving accounts, etc. NCUA provides insurance coverage to credit unions. So, to avail of this risk coverage, just open deposits with federally insured banks or credit unions [3].

        b) Interest Rates Comparison

CDs provide fixed and variable interest rates. Compare the CD rates to the federal reserve rate and select the best CD. Banks or credit unions use the federal reserve rate as a benchmark to offer rates to their customer and compete with each other to provide competitive rates in the market.

        c) Minimum deposit requirements:

Online banks and credit unions have varying minimum and maximum deposit requirements, with some major banks requiring up to $1,000. If you short this amount, search for others who follow no minimum deposit requirement or less than $ 1,000.

        d) Fees and Early withdrawal penalties:

There is no separate fee for opening a CD account. The fee includes an annual maintenance fee, a funds transfer fee, and an early withdrawal fee. Normally, the fee depends upon CD types, CD terms, and the institution's policy.  It is the deposits. CDs have fixed terms and depositors can't make immediate withdrawals. 

In case of an emergency need or another competitive business opportunity, he can make early withdrawals. According to the CD, he has to pay a penalty fee that eats up interest earned. 

    3. Complete the Application for a CD Account

Once you choose a bank or credit union, CD term, and CD type, you can complete the application in person or online. You can use online banking or mobile application. 

A new account will open if you have no bank account. 

To open a CD account, you provide the following documents and basic information which may vary by financial institution.

1.  Complete Legal Name
2.  Any Government Issued IDs, driving licenses, passport
3.  Birth Certificate
4.  Social Security Number, Taxpayer ID Number
5.  Address, contact details

In most USA states, you can open a CD account in your name at 18 or 19 years old.  A minor under 18 cannot open a CD account in his name. He can only hold CDs with parents or guardian custodial accounts.

    4. Determine How to Receive Your Interest

Banks or credit unions give an option to receive interest at the CD maturity. You can receive CD interest monthly or annually according to your financial need. Just inform the frequency and disbursements of interest to the financial institution.

    5. Fund Your CD

Finally, you can transfer funds or write a paper check to fund the CD account. Interim deposits in CD accounts are not allowed like other standard savings accounts. So, the initial deposit is the final deposit. You receive the accumulative balance at the CD's term up, which you can withdraw or reinvest in other CDs.

    FAQs

    ★Can I undo opening a CD?

You can undo an opening CD if banks or credit unions provide the grace days facility. Carefully, read the disclosure documents before opening a CD account.

    ★How many CDs can I open?

There is no limit on opening CD accounts. It depends on your approach to achieving financial freedom and building a CD ladder. A CD ladder is a personal savings approach to maximize returns. You can ask your financial institution regarding CD account opening limits.

    ★ What Is the Difference Between a CD and a Savings Account?

CDs offer guaranteed returns, while savings accounts allow additional deposits after the initial deposits.  CDs require an initial deposit as a final deposit and you can't withdraw funds until the maturity date, and pay higher interest rates.

    ★ Can I open a CD with $100?

Mostly, CDs require $ 500 to 1,000 as a minimum balance to open a CD account. While others require none. Ally Bank requires no minimum balance requirement but US Bank requires $ 500 as a minimum balance requirement on a CD account.

    ★ Do CDs pay monthly?

It depends on the CD type, terms, and institution policy. Many CDs pay interest daily, weekly, and monthly. Others pay an accumulative balance at the CD's maturity date.

Article Resources:

1. National Credit Union Administration. "Share Insurance Fund Overview" https://ncua.gov/support-services/share-insurance-fund 
2. Federal Deposit Insurance Corporation. "Are My Deposit Accounts Insured by the FDIC?, https://www.fdic.gov/resources/deposit-insurance/financial-products-insured/" Select "Individual Accounts" and "Joint Accounts."
3. FDIC. “Deposit Insurance FAQs, https://www.fdic.gov/resources/deposit-insurance/faq/index.html"