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How to open a CD account

Financial advisor
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Trying to make mindful decisions about your money can sometimes pose a challenge. With so many options available, making the best decisions for your future—and aligning them with your current needs and values—can feel overwhelming. Many people struggle with this!

If you have money you want to make the most of in the short term or prefer to be more risk-averse with, a certificate of deposit (CD) may be an option worth exploring. CDs offer a set return on your savings with fixed terms that may suit your financial strategy. Especially during times of market volatility, these are popular options for savers.

Here are the key details to understand about CDs and how to open a CD account.

How do certificates of deposit work?

A CD is a savings product that earns a fixed interest rate on a lump-sum deposit for a set period of time. Many banks and credit unions offer CDs—credit unions may call CDs "share certificates." The account usually pays fixed interest for the entirety of the term. Typically, the longer the duration of the CD, the higher the interest.

You may think that sounds similar to a savings account, but there's a key difference. With CDs, you can't touch the deposited money until after the CD term ends. Otherwise, you may have to pay fees.

For example, say a bank offers a CD with 3.5% interest, a five-year term and a $500 minimum deposit. You decide to deposit a one-time lump sum, at least $500, into the account. Over five years, your deposit earns 3.5% interest. Once the CD matures, you can withdraw your initial deposit plus the interest earned during that time. While you can't access the money during those five years, you don't run the risk of losing any of it.

The benefits and disadvantages of CDs

Before opening a CD, review some of the pros and cons. That way, you can determine if it fits your needs and make the right decision for your situation.

Benefits of opening a CD

  • CDs typically offer a higher interest rate than you'd see with a traditional savings account.
  • CDs pay a fixed interest rate on your savings, so your money grows a set amount.
  • If you're worried about turbulent markets or have a low-risk profile, you can have a sense of reassurance you won't lose money.
  • If you're saving for shorter or medium-term goals, CDs allow you to put your money aside and gain interest.

Potential drawbacks of a CD

  • You often can't remove the money from a CD before its term is up without facing penalties.
  • You may see smaller returns than money held in stocks or mutual funds if the market increases during the term.
  • Your interest rate is locked in, so if rates rise during the term, you can't take advantage of those rates without ending your current CD.

5 FAQs around CDs

If you're unfamiliar with these saving products, you may have questions. You're not the only one. Here are answers to five of the most frequently asked questions about CDs.

1. How much do you need to open a CD account?

Minimum amounts are based on individual banks or credit unions. Some have no minimum deposit, while others may require $500, $1,000 or more.

2. How long does a certificate of deposit last?

A range of terms are available, but most commonly, you may see terms for three, six, nine and 18 months as well as for one, two, three, four and five years.

The end of a CD's term is called the maturity date. Once your CD reaches its maturity date, you have a grace period to take action; otherwise, your provider may renew it automatically (potentially at a different rate). Upon maturity, you have a variety of options, including:

  • Withdraw the funds and put them toward a goal you've been working on.
  • Withdraw the funds and put the money into a savings account or invest it in the market.
  • Renew the CD or open a new CD. In both cases, the interest rates may differ from when you opened your previous CD.

3. Are there different types of CDs?

There are several types of CDs. Additionally, it's possible to hold CDs jointly if you want to pool your funds with another saver. So, as you explore your options, run through the details of each and consult with your financial advisor to determine which might suit your needs.

These are some of the more common types of certificates of deposit:

  • Traditional CDs. This is the most common type of CD offered. They have fixed terms and interest rates with penalties for early withdrawal. If you're confident you don't need the funds during the term period, it's an option to consider.
  • No-penalty CDs. These CDs allow you to withdraw funds early and penalty-free but typically have lower interest rates. These offer a bit more flexibility in case you may need the money before the maturity date is reached.
  • Bump-up CDs. This CD allows you to request a one-time bump to a higher rate for the rest of your CD's term if rates increase. This lets you take advantage of rising interest rates if you're confident they may increase during your CD's term.

4. What's a CD ladder strategy?

CD laddering is when you buy multiple CDs at the same time but with different terms. This strategy may help maximize your rate of return while also not locking up your funds in a single long-term CD. It's a common strategy for investing during periods of high inflation.

For example, if you have $18,000 to invest in CDs, you may choose to put $6,000 each in a one-year, three-year and five-year CD.

Discuss CD ladders with your financial advisor to see if it aligns with your goals. For example, during times of high inflation, you may be able to benefit from rising interest rates.

5. Are there penalties if you withdraw funds from CDs early?

If you own a traditional or bump-up CD and withdraw early, you typically have to pay a penalty, which is generally higher for CDs with longer terms. However, if you have a no-penalty CD, you can typically withdraw any time after opening the account (following a short introductory setup period) without having to pay any fees.

How to open a CD account

If you've decided to  open a CD account, here's how to do it in six steps.

1. Decide the type and term

Your financial advisor can help you find financial clarity on the CD type and duration that best align with your current strategy.

2. Choose an individual or joint account

You can open a CD as an individual or joint account. CDs are federally protected for up to $250,000 per depositor or $500,000 for a joint account.

3. Shop around

Review interest rates, penalties and minimum deposits from various banks and credit unions to find the best mix of options for you.

4. Apply

Once you've decided on a provider, start the application. This usually can be done online. Most institutions require your Social Security number and basic personal information to apply.

5. Choose interest terms

Some banks may let you choose between getting the earned interest payments sent to you periodically or waiting until maturity.

6. Fund the CD

Most CDs allow for one lump-sum funding payment. If your provider has a minimum deposit amount, you need to meet that.

Take the next step toward meeting your savings goals

Along your financial journey, you have different needs for your money. You may want to grow your savings without risk, meet a financial goal you're saving for, provide loved ones with support or earmark some of that extra bit you've saved and donate it to a local charitable organization. Regardless of your plans, CDs are an effective way to save. These products allow you to grow your money while providing a sense of reassurance that those dollars are protected and available when needed.

Find the right CD for you and open an account.

Investing in securities involves risks such as fluctuating principal, and they may lose value. CDs offer a fixed rate of return. The value of a CD is guaranteed up to $250,000 per depositor, per insured institution, by the Federal Deposit Insurance Corp. (FDIC), an independent agency of the United States government.

Deposit and lending services, including certificates of deposit, are offered by Thrivent Credit Union, the marketing name for Thrivent Federal Credit Union, a member-owned not-for-profit financial cooperative that is federally insured by the National Credit Union Administration and doing business in accordance with the Federal Fair Lending Laws. Insurance, securities, investment advisory and trust and investment management accounts and services offered by Thrivent, the marketing name for Thrivent Financial for Lutherans, or its affiliates are not deposits or obligations of Thrivent Federal Credit Union, are not guaranteed by Thrivent Federal Credit Union or any bank, are not insured by the NCUA, FDIC or any other federal government agency, and involve investment risk, including possible loss of the principal amount invested. Must qualify for membership in TCU.

Hypothetical examples are for illustrative purposes. May not be representative of actual results.