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How to Open a CD Account in 5 Simple Steps

Jeremy Flint Updated: January 23, 2024 • 8 min read

Key Points:

  • CDs are safe assets that generate interest, although you’ll usually lose access to the capital for the CD’s term duration.

  • Opening a CD account is usually as easy as opening a bank account, and many online institutions make buying a CD simple.

  • If you want to take advantage of rising rates, advanced strategies like CD laddering are alternatives to buying a single CD and waiting.

Starting a certificate of deposit (CD) is a reliable method for securing guaranteed returns on your funds while exposing yourself to minimal risk. CDs generally offer the most competitive interest rates among various bank account options and come with the added security of federal insurance, unlike investments held in stocks and bonds. Opening a CD account online is straightforward, with little due diligence and legwork.

How to Set up a CD Account

  1. Decide on the Type and Term for Your CD
  2. Select a Bank to Open a CD Account
  3. Apply for a CD Account
  4. Indicate How You Want to Receive Your Interest
  5. Fund Your CD

Here's How to Open a CD Account Online in 5 Simple Steps: 

1. Decide on the Type and Term for Your CD

First, you’ll need to assess your unique financial circumstances. Besides how much cash you’re willing to invest in a CD, you’ll need to determine which CD is best for you. The primary trait differentiating CDs is their term. 

CD terms describe how long the CD generates interest and how long you can expect your capital to be locked up in the asset. CD terms range across the spectrum to suit your needs, from a few months to 10+ years. 

The best term for your situation varies as much as the options available. Short-term CDs are likely best if you use the CD to supplement your primary savings account. On the other hand, if you're using a CD as an alternative to bonds when balancing your portfolio, you might prefer a longer term (assuming you don't anticipate needing the cash quickly). 

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Sometimes, banks let you cash in your CD early if you need the cash in a pinch. This isn't advisable, though. In addition to losing out on planned interest income, you'll usually have to pay a penalty. Penalty calculations are complex, so if you must cash out early, speak with the bank's representative to understand precisely how much the penalty is and if it's worth the cost. 

If you buy your CD through your investment brokerage, you may also be able to trade it on secondary markets – if a buyer is willing to take it off your hands. These are typically called brokered CDs. Although you won't pay a penalty, you could lose some principal if the buyer's purchase limit exceeds your price. Your brokerage may also charge additional fees or commissions on secondary market sales. 

Types of CDs

Certificates of Deposit (CDs) come in various types, each offering different features and benefits to meet diverse investment needs. Here are some common types of CDs:

  1. Traditional CD: This is the most standard type of CD, where you deposit a fixed amount of money for a fixed term, usually ranging from a few months to several years. The interest rate is typically fixed and higher than regular savings accounts.
  2. Bump-Up CD: This CD allows you to "bump up" your interest rate to a higher rate if interest rates rise during your CD term. It's beneficial in a rising interest rate environment but usually starts with a lower initial rate.
  3. Step-Up CD: The interest rate of a step-up CD increases at predetermined intervals throughout the term of the CD. This type can be advantageous if you expect interest rates to rise over time.
  4. High-Yield CD: These CDs offer a higher interest rate compared to traditional CDs, usually in exchange for a larger deposit or longer term. They are ideal for investors looking for higher returns on their deposits.
  5. Jumbo CD: Jumbo CDs require a significantly higher minimum deposit (often $100,000 or more) and, in return, typically offer a higher interest rate than standard CDs.
  6. Liquid or No-Penalty CD: These CDs offer more flexibility, allowing you to withdraw part or all of your funds before the maturity date without incurring a penalty. However, they usually offer lower interest rates compared to traditional CDs.
  7. Brokered CD: Offered by brokerage firms, these CDs are more complex. They can be bought and sold on a secondary market and may offer higher returns, but they also come with more risk, especially if sold before maturity.
  8. Callable CD: The bank has the right to "call" or terminate the CD after a set period, returning your principal with accrued interest. Callable CDs typically offer higher interest rates but come with the risk that the CD might be called before it matures.
  9. Zero-Coupon CD: You buy this CD at a discounted price, and it matures at its face value. Interest is compounded and paid at maturity, but you don’t receive periodic interest payments.
  10. IRA CD: This is a CD held within an Individual Retirement Account (IRA). It combines the benefits of a CD with the tax advantages of an IRA, making it a good option for retirement savings.

CD Related Articles 

2. Select a Bank to Open a CD Account

Remember that most offered by traditional banks are FDIC-insured. Validating that the CDs offered by the bank you're researching are FDIC-insured is a critical first step. Other assets may yield more but don't have the insurance advantage, so if you somehow stumble upon uninsured CDs, the risk/reward tradeoff doesn't work out in your favor. 

Beyond ensuring FDIC insurance, opening a CD account depends on personal preference and whether the bank offers CDs that meet your needs. Primary considerations when shopping around include:

  • Annual percentage yield (APY). APY is the CD’s interest rate that accounts for the power of compounding interest over an entire year.
  • CD term, as discussed above.
  • Whether you can meet the bank’s minimum CD requirements. 
  • Whether the CD pays interest monthly or when the CD’s term expires.
  • How much, if any, must you pay in early withdrawal penalties. 

3. Apply for a CD Account

Once you pick a bank and CD type, you can complete a CD application and open your account. You can usually open your CD account online or through the phone, but you may need to visit a branch in person if it's a smaller, local bank. The process is usually quick and painless, but you'll likely need to disclose or present:

  1. Your Social Security Number.
  2. Personal information, full name, phone number, address, and email.
  3. Banking information to fund the CD.
  4. An identification document like a photo ID, passport, or driver's license is needed. 

Different banks have different requirements, so if you must apply for a CD account in person, ensure you know what documents you need so you don't waste time traveling back-and-forth.

4. Indicate How You Want to Receive Your Interest

Depending on the CD type, you may be able to pick between monthly interest distributions or let the cash compound and get the principal plus all accrued interest at the end of the CD's term. Generally, compounding is best: if a 12-month CD offers monthly interest at 5%, picking the monthly option nets about $42 monthly. Assuming you kept the interest as cash at the end of the CD's term, you've hit just under $500 in interest. 

If you calculate the compounding factor, though, $10,000 at 5% nets a total of $511.62 in interest. It's not a huge difference, but it adds up over time – especially if you're keeping all your cash in CDs rather than sitting in a savings account.

5. Fund Your CD

Now you’re ready to buy your CD. Your account is open, and you can fund the CD via whatever option the bank allows – wire transfer, digital transaction, cash, or check. Remember that you can (usually) fund the CD only once, so ensure you have sufficient cash available to maximize your investment opportunity. 

Additional Tips for Opening a CD

When considering opening a Certificate of Deposit (CD), it's important to keep several tips in mind to ensure you make a decision that aligns with your financial goals and circumstances. Here are some additional tips for opening a CD:

Assess Your Financial Situation: Before opening a CD, evaluate your current financial status and future needs. Ensure you won't need immediate access to the funds, as CDs typically lock in your money for the term length.

  1. Shop Around for Rates: Interest rates can vary significantly between financial institutions. Compare rates from different banks and credit unions to find the best deal.
  2. Consider the Term Length: Choose a term length that aligns with your financial goals. Shorter terms offer more flexibility, while longer terms usually provide higher interest rates.
  3. Understand the Penalty for Early Withdrawal: Be clear about the penalty for withdrawing your money before the CD matures. This penalty can negate the interest earned, so it's crucial to be sure you can commit for the entire term.
  4. Look at CD Types: Depending on your financial goals and risk tolerance, consider the different types of CDs available, such as traditional, bump-up, or high-yield CDs.
  5. Read the Fine Print: Understand all the terms and conditions of the CD, including renewal policies, interest payment methods, and any fees associated with the account.
  6. Laddering Strategy: If you want to maximize accessibility and interest, consider a CD laddering strategy. This involves opening multiple CDs with different term lengths, allowing for regular access to portions of your money.
  7. Inflation Consideration: Consider the impact of inflation on your investment. In a high-inflation environment, the real return on a CD might be lower.
  8. FDIC or NCUA Insurance: Ensure that the financial institution where you open a CD is insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA) to protect your investment.
  9. Review Your Investment Plan: Regularly review your overall investment strategy to ensure that your CD still fits your needs, especially if your financial situation or goals change.
  10. Tax Implications: Be aware of the tax implications of the interest you earn from CDs. Interest income is taxable, so consider how this will affect your overall tax situation.
  11. Online vs. Traditional Banks: Online banks often offer higher interest rates on CDs compared to traditional brick-and-mortar banks. However, consider your comfort level with online banking before deciding.

You may also want to consider laddering your CDs, a slightly advanced but beneficial strategy:

CD Laddering

If you want to capture upside from rising rates and distribute your cash flow more evenly, you can explore CD laddering, which works like bond ladders. Laddering describes buying multiple CDs with varied maturities, i.e., a 3-month, 6-month, and 12-month CD. Here’s how a typical CD ladder looks:

  1. In September 2023, you have $30,000, and commit $10,000 each to:
    1. A 3-month CD at 5.56%.
    2. A 6-month CD at 5.48%.
    3. A 12-month CD at 5.37%.
  2. Your $10,000 (plus about $140 in interest) matures in three months. Now, you have a two-rung ladder with maturities in three and nine months, so you decide to roll the principal into a new 12-month CD. Rate hikes kept coming in the interim, and the 12-month CD yields 5.5%.

So, instead of locking up all your cash in a 12-month CD at 5.37%, laddering lets you spread the wealth (literally) and maintain flexibility while capturing interest rate upside. 

Bottom Line 

CDs are a great tool to take advantage of today’s interest rates while reducing risk and guaranteeing cash flow. Before buying a CD, research your options and come to the table with as much information as possible. Hundreds of CDs are available from many institutions today, so finding the best CD for you is a matter of basic due diligence – but that process shouldn't be neglected.



Is a CD right for me?

If you can afford to lock away capital for the CD’s term duration and want to capture fixed-income interest upside, then a CD might be right for you.

Do CDs have fees?

Generally, the only fee associated with CDs is the early withdrawal penalty fee. You may pay a commission or other fees if you choose a brokered CD and buy through your investment brokerage.

Which CD term should I choose?

CD term selection depends on your liquidity needs and the CD's purpose. If it's to supplement savings, you likely want better liquidity, so a shorter CD term is best. If you're balancing a stock portfolio with CDs, you might want to jump on elevated interest rates today and pick a 5-year or longer CD term.

What are the requirements for a CD account?

Requirements vary by bank but usually include proof of ID, that you’re 18 years or older, and have enough money to meet the minimum deposit.

Written by Jeremy Flint

Jeremy is a finance and investment writer who works with stock research platforms, wealth managers, and investment funds to deliver value to clients and customers. He couples his lifelong interest in financial topics with an MBA from the University of California - Davis, and loves breaking down complex topics to educate new and experienced investors alike. He lives in Austin, TX with his wife and young son.