Certificate of Deposit (CD) FAQs What is a Certificate of Deposit (CD), and how does it differ from other savings options? A Certificate of Deposit (CD) is a time-based savings product offered by banks and credit unions that allows individuals to deposit money for a specified term and earn interest. CDs differ from other savings options in terms of liquidity, risk, and potential returns, as they typically have higher interest rates than traditional savings accounts but require funds to be locked in for the term length. How do I choose the right type of CD for my financial goals? When selecting a CD, consider your financial goals, risk tolerance, and liquidity needs. Research and compare various types of CDs, such as traditional, bump-up, liquid, and high-yield, to determine which aligns with your objectives. It is important to review the interest rates, term lengths, and withdrawal policies of each type of CD before making a decision. Can I withdraw my money from a CD before its maturity date? Yes, you can withdraw money from a CD before its maturity date, but doing so may result in penalties and fees. These may include loss of interest or even a portion of your principal. However, some CDs, such as liquid CDs, offer penalty-free withdrawals under certain circumstances. What strategies can I use to maximize my returns on a Certificate of Deposit (CD)? To maximize your returns on a CD, consider using strategies such as CD laddering, monitoring interest rates, comparing CD offers from different institutions, and utilizing special promotions or bonuses. CD laddering, for example, involves investing in multiple CDs with staggered maturity dates, helping to balance liquidity and interest rate risk while providing a steady stream of income. Are the interest earnings on a Certificate of Deposit (CD) taxable? Yes, the interest earned on a CD is considered taxable income and must be reported on your federal income tax return. The financial institution will provide a Form 1099-INT detailing the interest earned for the year. Some CDs, like Individual Retirement Account (IRA) CDs, offer tax-deferred interest, allowing you to delay paying taxes on the interest earned until you withdraw the funds. About the Author True Tamplin, BSc, CEPF® Facebook Linkedin Instagram Twitter Youtube True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists. True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics. To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.