Are CDs Safe? What Protects Your Money — and What Doesn't

Yes, CDs are generally considered safe if the account is with an FDIC-insured bank or an NCUA-insured credit union. Deposits at FDIC-insured banks and NCUA-insured credit unions are insured up to $250,000 per depositor, per insured institution and per ownership category.

CDs store your money and let it grow gradually based on a fixed interest rate. However, it's still possible to lose money with CDs if you withdraw your money before the CD matures and the withdrawal penalty exceeds the amount of interest you've earned. Here's what you should know.

Key Takeaways

• Yes, CDs are safe at insured institutions. If you're asking "are CDs safe," the short answer is yes — deposits at FDIC-insured banks and NCUA-insured credit unions are protected even if the institution fails.

• Coverage runs up to $250,000. Insurance is $250,000 per depositor, per insured institution, per ownership category, and it covers both principal and accrued interest.

• You can insure more by spreading money out. Using separate ownership categories — such as single, joint and certain retirement accounts — or different insured institutions can raise your total coverage above $250,000.

• Insured doesn't mean risk-free. You can still lose money through early withdrawal penalties, locking in a rate before rates rise or inflation outpacing your fixed APY.

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How CDs Are Insured

Most CDs are FDIC- or NCUA-insured, depending on whether you do business with a bank or a credit union. The principal and accrued interest are covered in case the financial institution fails.

• CDs are insured for up to $250,000 by the FDIC or NCUA, depending on the type of financial institution that you use.

• You can increase your FDIC or NCUA coverage by spreading deposits across different insured institutions or by using different types of ownership, such as individual or joint accounts.

• Accrued interest is also insured by the FDIC and NCUA. 

Most of the major big banks are FDIC-insured, but you can use the FDIC BankFind tool to verify if a bank has this insurance policy.

The NCUA Credit Union Locator is the equivalent for credit unions. It’s important to only work with a bank or a credit union that has the right insurance, even if you don't intend to open a CD.

You can insure more than $250,000 if you open multiple accounts of different ownership categories. Individual, joint, and retirement accounts are each eligible for the $250,000 maximum insurance.

When a CD Isn't Fully Covered

While most CDs are covered, there are three exceptions you should keep in mind before committing to an account:

• Brokered CDs: Sold by investment firms rather than by a bank, though you can still qualify for FDIC insurance.

• Foreign/Yankee CDs: Issued by non-U.S. banks.

• Over-limit balances: If your balances exceed the $250,000 combined limit at one financial institution, every dollar above $250,000 is above the limit.

You should confirm FDIC/NCUA membership with any bank before taking out a CD, especially if it's a foreign bank. A brokered CD is only insured if the broker’s records show that it's holding the CD on your behalf as an agent or a custodian. If the broker places the deposit under its name or along with a pool of other CDs, then the broker is insured instead of you. 

It’s good to call your broker and ask if you are insured for brokered CDs before putting money into an account. These are the questions to use:

• Is the issuing bank FDIC-insured?

• How are these CDs titled in your brokerage system?

• Is the premium insured?

If you have more than $250,000 in the same account ownership category, you can insure every dollar by opening accounts with multiple banks. As long as you do not have more than $250,000 in a single account ownership category at a single bank or credit union, the money you put into a CD will be insured. This assumes that the banks and credit unions you use are FDIC- and NCUA-insured, respectively. 

Other Ways CDs Can Still Cost You

You should generally always look for a CD with insurance, but even with FDIC or NCUA insurance, you can still end up losing money with a CD. These three risks demonstrate how you can lose money on an insured CD. Take a look at these examples:

Insurance protects your principal, but your returns aren't guaranteed. Leaving money in the CD until maturity lets you avoid early withdrawal penalties, while short-term CDs and ladders minimize your inflation risk and let you adjust more seamlessly if rates go higher.

Is a CD the Right Move for You?

A CD is a useful resource for risk-averse investors who want to earn a predictable return on their money without worrying about their balance's value fluctuating. It can also help people secure higher APYs than most savings accounts, and fixed rates offer more financial certainty than variable-rate savings accounts.

That’s the general summary, but there are a few questions worth asking yourself to determine if a CD is right for you:

• Do I need this money before the term ends?

• Am I trying to beat a savings account rate or beat inflation?

• Am I already near the $250,000 coverage limit at this bank?

You should only put money into a CD if you're OK with not using the funds until the term ends. A small likelihood of an early withdrawal warrants a no-penalty CD. While it's feasible to find CDs that outperform current savings account rates, inflation outperformance is less predictable if you opt for a long-term CD.

Finally, if you're getting close to the $250,000 coverage limit, consider opening a CD with another bank or credit union.

Comparing CDs against each other and reviewing high-yield savings accounts can help you determine the best thing to do with your idle cash.

FAQs 

What happens to my CD if my bank fails?

The CD will be transferred to another bank, and your funds will be safe. In the unlikely event the FDIC can't find a suitable bank to acquire the CD, you'll receive a check in the mail that includes your principal balance and any accrued interest up to the insured limit.

Are jumbo CDs less safe than regular CDs?

No. Both CDs are safe, but jumbo CDs have higher minimum balance requirements and often have slightly higher rates.

Is a credit union share certificate as safe as a bank CD?

Yes. A credit union share certificate is just as safe as a bank CD. They're insured by different entities but have the same general limits and rules.

Is my money safer in a CD than in a high-yield savings account?

No. Your money is equally safe in a CD or a high-yield savings account, as long as the bank is FDIC-insured.

Key Terms

• Certificate of deposit (CD): A deposit account that holds a fixed sum for a set term at a fixed interest rate, paying the principal plus accrued interest at maturity.

• FDIC insurance: Federal Deposit Insurance Corporation coverage that protects deposits at insured banks up to $250,000 per depositor, per bank, per ownership category.

• NCUA share insurance: The credit union equivalent of FDIC coverage, protecting insured share accounts, including share certificates, up to the same $250,000 limit.

• Ownership category: How an account is held — single, joint, certain retirement, trust. Deposits in different categories at the same institution are insured separately.

• Early withdrawal penalty: A fee, usually a set number of days of interest, charged for taking money out before the term ends. It varies by institution and can exceed interest earned.

• CD ladder: A strategy of opening multiple CDs with staggered maturity dates so part of your money frees up periodically.

• Inflation risk: The chance that a fixed CD rate ends up below the inflation rate, reducing your purchasing power even while you earn interest.

Sources

• FDIC. Understanding Deposit Insurance.

• FDIC. Deposit Insurance FAQs.

• SEC Investor.gov. Brokered CDs: Investor Bulletin.

• NCUA. Share Insurance Coverage.

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