What is a certificate (CD) account? Discover all you need to know

April 19, 2023

By Lois Sullivan

What is a certificate (CD) account? Discover all you need to know

Bearded man considers opening a certificate (CD) account while researching on his laptop.

A certificate — often referred to as a CD or time deposit — is a low-risk savings tool that can help you prepare for large purchases, retirement or other goals. Each certificate has a fixed term that is renewable and can pay you interest until it reaches maturity. Various types of certificates can help you reach your investment goals in ways that match your financial position and savings preferences. Learn more about these accounts and why they can benefit you.

Types of certificates

Here are a few certificate types you might consider:

  • High-yield
  • IRA
  • Jumbo

High-yield certificates are offered by many credit unions or other financial institutions, and generate higher interest rates.

You can open an IRA certificate account using the funds from your retirement account. Jumbo certificate accounts have significantly larger minimum deposits that could consequently generate higher interest rates. Your financial institution will set the terms of your certificate and you have the option to choose the term and the renewal options, so review them carefully to ensure they're right for you. 

Certificates vs. savings accounts

A certificate might seem similar to a savings account, but there are several key differences. You can deposit and withdraw money multiple times from a savings account without paying any penalties. Certificates have fixed terms, penalties for early closure, and typically higher interest rates. A certificate is for people who are willing to lock up funds for a fixed period in exchange for gaining a bigger payout in the future.

Certificates vs. stocks

Stocks are volatile. Their value goes up and down, and you could lose your investment principal after just a single market shock. You might be able to withstand temporary losses if your focus is on long-term investments. Unlike stocks, certificates don't lose value. Your investment can only grow over time.

Benefits of a certificate

A certificate account has many benefits. First, your investment is insured for up to $250,000. 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.*

Also, you can choose the term of your certificate. You can opt for a shorter term as low as three months or a long-term certificate with a maturity of up to five or even 10 years. You know that whatever happens, you'll continue to receive interest payments from the certificate. These accounts tend to have higher interest rates than other savings accounts.

Opening your certificate

Your credit union or financial institution may ask you for certain documentation when you open your certificate — usually your address, phone number, government identification and Social Security number. Alliant members only need to log into online banking to apply. If you are not currently a member of Alliant Credit Union, you can easily become a member and open a certificate at the same time.

After the financial institution approves your application for a certificate, you have a limited period to transfer the minimum balance into it. Note: Opening a certificate in the same financial institution or credit union as your primary account facilitates transfers and makes it easier to view all your financial information through one interface.

Earning interest on a certificate

Certificates usually pay interest on a monthly basis. Some certificate accounts are structured differently, with semiannual or annual interest payments. Your interest rate depends on your initial balance and account term. Certificate interest rates are compounded, which means your earnings increase over time. To understand how much you will earn in interest, check its annual percentage yield or APY. The APY represents your annual earnings on the certificate with the compounded interest.

Credit unions and online banks might offer certificates with higher interest rates than your local financial institution. It might take time to shop around until you find the highest certificate interest rates. Fixed interest rates can be more stable than adjustable interest rates because you know the financial institution won't lower the rates during your account's term. Certificate interest is taxed when it's paid to you, not when you redeem the account, so keep that in mind when filing your annual tax returns.

Building a certificate ladder

The economy plays a part in what the certificate rates will be. Certificate holders win when interest rates go up. But what happens if it looks like interest rates will rise but you've already committed yourself to a long-term certificate account, and you don't want to pay an early redemption penalty? That's why some savvy investors build certificate ladders.

Certificate laddering means you split up your investment into multiple certificates. Each certificate has a different term length. The result is a different certificate reaches maturity at different times, allowing you to take advantage of higher interest rates at any time while keeping some of your funds accessible.

Certificate redemption

Your financial institution will send you a notice before your certificate's maturity date, as required by law. Depending on the type of account you have, you can close the certificate and redeem the funds, renew the certificate's term, or make additional deposits to earn more interest. You could also roll the certificate and merge it into a new term. Ensure you review and confirm your renewal decision so your certificate options are in line with your financial needs.

You don't have to wait for the maturity date to redeem your certificate, but when you close your account prematurely, the financial institution might impose an early redemption penalty. The early withdrawal penalty is calculated as the interest generated over a certain number of months.

Now that you know the answer to "What is a certificate" are you ready to save with one? 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, review our Certificates page for steps on how to apply.

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

* Your deposits are federally insured up to $250,000 and backed by the full faith and credit of the United States Government.

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