5 Quick and Dirty Facts About Certificates of Deposit

1. FDIC Certificates of deposit are a safe type of investment

Some forms of investments carry more risk than others. For instance, some stocks fluctuate up and down, which could mean you make a lot or you lose a lot, and there is no way to absolutely predict which will happen. With FDIC certificates of deposit, there is a very low risk of loss, but a guaranteed rate of return, making it a stable investment option. Plus, the investment is insured by the FDIC.

2. Gains are taxable

After the security of deposit matures and the gains are paid to you, the amount you made over your original investment amount is considered taxable income. The exception is when the certificates are structured in a tax-differed or tax-free account, but those are not typical features and need to be discussed with the offering bank.

3. They are best for short term investments

FDIC certificates of deposit are best for set amounts of money to be invested for a short period of time, such as $5,000 for 5 years or $500 for 5 months. Because there is typically no access to the money, and because of the relatively lower return rates than other investment options, CDs are not generally considered for a long-term investment.

4. Withdrawing early will require penalties to be paid

For most certificates, if the money is needed before the time period has passed, then serious penalties for withdrawing early will be applied to the payoff amount. This investment environment is best for cash that can be applied and not touched for the few months or years of the contract.

5. A few specialty options are sometimes offered

Most FDIC certificates of deposit hold your money for a fixed time in return for a fixed rate. However, some allow you to raise the interest rate if the market improves or to make early withdrawals. Others don't pay out, but instead reinvest the funds into another CD for another term. The key to deciding if these specialty offers are worth your time is to compare the offered interest rates and time periods with the added benefits.

If you would like to learn more about FDIC certificates of deposit in Austin, visit Green Bank.