A Basic Guide to Certificates (aka CDs)

Older couple looks up ladder connecting their upper level in new home they could afford by investing in CD ladder aka certificates, time deposits, certificates of deposit.
April 04, 2023 | Lois Sullivan

Getting your finances in shape for the future might be easier than you think with a certificate. Certificates are among the least risky investment tools. Once customers open a certificate with the minimum deposit, it generates regular interest payments until reaching maturity.  

Understanding certificates

You can take advantage of a broad variety of certificates, depending on the structure that works best for you. Each bank or credit union is responsible for issuing its own certificate terms with regard to term lengths, interest rates and early redemption penalties. Interest rates tend to vary across financial institutions, so doing your research is the key to getting a better deal. You might be eligible for any of these certificates:

  • High-yield
  • Jumbo
  • IRA

These certificates are all about locking in higher interest rates, usually through a large minimum deposit. For instance, Alliant offers jumbo certificates if you deposit $75,000 or more.

Certificates vs. savings accounts

As with savings accounts, you can use your certificate to save money, but certain features distinguish certificates from savings accounts. Savings accounts can remain open for as long as you wish, whereas certificates are open for a specific length of time (term) and close or be renewed when the period is over. Financial institutions don't impose penalties for withdrawing money from savings accounts, even if they do limit the number and amount of withdrawals. Also, with savings accounts, you can make as many deposits as you want to increase the principal balance on which interest is calculated. 

The opposite is true for certificates. You only make one deposit when you open the account with the principal balance. Withdrawing money before the maturity date is an early redemption that exposes you to early withdrawal penalties. If you don't mind reducing your available liquidity for a while, certificates can help you save money faster because they most often have higher interest rates than savings accounts. 

Certificates vs. stocks

You could invest your money in stocks and get wildly amazing profits. On the other hand, you could lose all the money you invested. Stocks are very sensitive to market shocks and can't guarantee you'll receive a return on your investment. Certificate accounts are safer alternatives because you don't have to worry about making a poor investment decision or misjudging the market. Interest payments are guaranteed, and you'll get your principal back once the certificate's term is over. 

Building your certificate (or CD) ladder

Opening multiple certificates with staggered maturity dates is called building a certificate ladder or CD ladder. A certificate ladder is a great way to protect yourself from interest rate changes and take advantage of higher market rates when opening a new certificate. As each certificate reaches its maturity date, you use that money to open a new certificate with an even higher interest rate. Is the market experiencing a slowdown with low interest rates? Then you can bide your time and wait to restart your certificate ladder when the economy is more favorable. 

Benefits of certificates

One of the main benefits of a certificate is insurance that covers up to $250,000 of losses. The National Credit Union Association (NCUA) covers deposits and certificates at credit unions and the Federal Deposit Insurance Corporation (FDIC) covers CDs issued by banks. To get the full benefit of these national insurance policies, avoid holding more than $250,000 in deposits or certificates at any single financial institution.

Other benefits include the comparative increase in financial gains compared with savings accounts and the lower risk in comparison with stocks. Opening a certificate makes sense when you already have enough money to cover your daily expenses and can afford to set aside a large sum of money. Early withdrawal penalties serve as a strong disincentive to spend money on frivolous purchases when you're trying to save your money for an important goal. 

Opening your certificate

So, you've decided a certificate is the low-risk investment vehicle for you. You can open your certificate by going directly to a financial institution, such as a bank or a credit union. You must have certain information on hand when you apply for a certificate, including your address and Social Security number. Alliant members only need to log into online banking to apply.

You'll also need to have enough money to meet the minimum balance requirements. Certificates with low minimum balances are accessible to more customers, but you can get more interest from a higher minimum deposit. Before choosing a place to open a certificate, check interest rates online and compare your options. 

Earning interest on certificates

Monthly interest payments are a defining characteristic of certificates. The safe route is to choose a fixed interest rate instead of a variable interest rate. Fixed interest rates mean you can easily calculate your expected profit, even if it prevents you from boosting your interest rate when the Federal Reserve raises rates nationwide. Certificates generate compound interest, not simple interest. Your bank or credit union will provide monthly statements showing how much interest you've received. Review the statements carefully, because you'll have to pay taxes on that interest, even if you haven't redeemed the certificate yet. 

Certificate redemption

You can't freely withdraw your certificate principal until the maturity date. The maturity date is the last day of the certificate's term. Your certificate issuer will notify you in advance of the maturity date so you have enough time to decide what you want to do next. You can do nothing, in which case your financial institution might renew your certificate automatically if allowed by the terms of the agreement. Or, you can renew the certificate for another period with the same contractual terms. 

Another option is to close the certificate and reinvest the money in another certificate, whether by merging it into a certificate at the same institution or opening a new certificate at another financial institution. Or, you can spend your newly grown income on the goal you've been working toward. Emergencies do happen though, and you can redeem your certificate early if you don't mind paying the early withdrawal fees, which are typically assessed as a few months' worth of interest. 

Ready to save with a certificate?  Alliant offers several convenient ways for you to open a certificate. If you're already an Alliant member, just log in to online banking, select Open a New Account in the left sidebar and follow the prompts. If you're not yet a member, simply select Certificates from the list of account types in the online Alliant membership application.

Need more information about our savings plans and certificates? Consider these links:

You might like

Sign up for our newsletter

Get even more personal finance info, tips and tricks delivered right to your inbox each month.