How to open a CD account

You may have noticed that interest rates are on the rise. To tamp down high inflation, in early 2022 the Fed began implementing some of the highest rate hikes in decades. So far, the Fed has raised the target federal funds rate (also known as the Federal Reserve interest rate) five times in 2022, to:

• 0.25%-0.50% in March
• 0.75%-1.00% in May
• 1.50%-1.75% in June
• 2.25%-2.50% in July
• 3.00%-3.25% in September
• 3.75%-4.00% in November

Only time will tell if the trend continues, but the Fed has signaled that they intend to raise rates further into 2023.

As we’ve seen, rising rates can send the stock market lower. But for savers with money in interest-bearing accounts like CDs, rising rates are a good thing. That’s because when the Fed raises rates, banks typically follow suit by increasing the rates on savings products for their customers.

If you want your money to work a little harder in this high-interest-rate environment, look into a CD. With a CD, you can earn peace of mind (oh, and savings) if you’re able to lock in your CD rate for a fixed term. Since it’s easy to estimate your earnings, opening a CD account could be just what you’re looking for to help you manage and plan for your future.

Some people use the earnings from a CD to supplement their Social Security and retirement income later in life. Others use a series of CDs, which is also called a CD ladder or CD laddering, to store an emergency fund to earn more interest than they could with a checking or savings account.

How to open a certificate of deposit

So, are you wondering how to open a certificate of deposit? The process is similar to opening a checking or savings account. However, there are more moving parts to keep in mind. If you’re considering opening a CD account, consider these six steps:

1. Find an insured financial institution. There are government institutions that insure banks and credit unions. If you open a CD account, you can sleep easily at night knowing that if an insured bank or credit union fails, you’ll be protected by insurance to the maximum allowed by law.
2. Pick a type of CD. A certificate of deposit isn’t necessarily one-size-fits-all, and there are many different types of CDs to choose from. You’ll need to decide which type to open and find a bank, credit union, or broker who can sell it to you.
3. Choose your term. When you open a certificate of deposit, one of the first things you’ll need to choose is the length of your term. “The longer the term length, which means the longer you commit to keeping your money in the account, the higher the interest rate you’ll earn,” says David Niggel, CFP^®, at a Lancaster, Pennsylvania-based firm.
4. Decide how often you want to collect your interest payments. With your payout, you’ve got options: You may be able to receive your interest as a monthly payment or once annually. You can also reinvest the interest payments into the CD to earn compounding returns. Once the CD’s term ends, you’ll get your initial deposit back, along with your final interest payment.
5. Create your account. Unless you already have one, you’ll need to create a new account with the issuing bank or credit union to open a CD account. You may have to share personal information such as your name, address, contact info, and tax identification number (such as a Social Security number).
6. Fund the CD. The last step in the process of opening a CD account is funding it via an online or phone transfer or mailing a check.

Comparing CD features

After learning how to open a certificate of deposit, you may want to review the different features of CDs to see which one best fits your financial goals. There are some common features that could vary depending on the issuer and type of CD. Here are a few to consider when you open a certificate of deposit that may affect your earnings or expenses:

Choose your term, lock in your rate, and watch your CD grow

Learn more

Discover Bank, Member FDIC

• Interest rate and APY. Similar to other types of savings accounts, the CD’s issuer will pay you interest on the money in your account. If you’re thinking about opening a CD account and are comparing different accounts, pay close attention to the annual percentage yield (APY). The CD’s APY takes compounding into account and lets you know how much you could earn per year. “Keep in mind that you will be responsible for paying taxes on any interest generated each year by the CD,” says Helen Ngo, principal of an Atlanta-based independent financial planning firm. 
• Term. When you open a CD account, you may be able to choose a term of less than a month to a decade or more. Generally, the longer the term, the higher the CD’s interest rate.  

• Minimum deposit requirements. When you consider how to open a CD account, you should note that some CDs have a minimum funding requirement, and you’ll need to deposit at least that much money to open a certificate of deposit.
• Early withdrawal penalty. After opening a CD account, you’ll need to be hands-off with your funds for the specified term. However, with a penalty, you may be able to withdraw your money early. The penalty could be several months’ worth of interest and could offset or completely negate your earnings.
• Other fees. They may be less common, but you should be aware of these fees if you’re thinking about opening a CD account. Some CDs may have monthly or annual maintenance fees, for example. In addition to an early withdrawal penalty, withdrawal, or transfer fees may be applied by some issuers. There are also brokers that charge you a fee if you purchase a CD through them.

Understanding the risks of opening a CD account

While CDs can be a relatively safe way to grow your savings, there are some risks when you open a CD account. Liquidity risk—the risk that you’ll need the money when it’s locked up in a CD—is an important one.

Ngo doesn’t recommend opening a CD account if you think you’ll need the funds in less than a year. You can always consider putting short-term funds in an online savings account, where you can earn interest and ditch the concern about liquidity.

However, Ngo adds that as long as you have an emergency savings account, “if you will not need the cash for two to five years, a CD is a great option if you are afraid to invest it in the market or in bonds.”

There’s also a risk that interest rates rise in the future. If that happens, your money could be locked in a CD and earning you less interest than you’d get from a savings account.

If you build a CD ladder, you might be able to minimize the liquidity and interest rate risk. That means rather than buying a single CD with $10,000, you could buy four $2,500 CDs with one-, two-, three- and four-year terms. Each year, one of your CDs will mature. If you need the money, you’ll be able to take it out of your ladder without paying a penalty. Alternatively, you can reinvest the funds in a new four-year CD and get an interest rate that’s higher than what you’ll find on a one-year CD.

Safety, certainty, and more earnings—is opening a CD account right for you?

While there are some risks involved with any investment, opening a CD account can be a safe way to grow your savings. “If the money to be invested is needed within a certain time frame, a CD can fit your schedule,” Niggel says. He calls them a “low-risk and low-expense savings tool.”

Whether you’re building your savings for a short-term goal or looking to increase your fixed income, now that you know how to open a CD account, you can add this financial tool to your repertoire of options.

Now that you know how to open a CD account, you might want to look at your other options by comparing money market vs. CD accounts.

Articles may contain information from third-parties. The inclusion of such information does not imply an affiliation with the bank or bank sponsorship, endorsement, or verification regarding the third-party or information.