Opening a CD account: How it works

A certificate of deposit (CD) may be an effective way to add structure to your savings and possibly boost your returns. But how does opening a CD work? Is it different from a traditional savings account? And what do you need to get started? Let’s answer all those questions and walk through the CD account opening process.

1. Pick a type of CD

The first step to saving is picking the right CD for you. There are many types of CD accounts to pick from, each one with its own features and characteristics. However, you may want to consider some basic variables to help you find your CD:

• CD term length: This is how long your deposit is held in the account. Be sure to look at the term and the rate as they sometimes correlate; you may find higher rates on CDs with longer terms than with shorter terms.
• CD rates: Interest rates for your CD may be a prime factor in choosing CDs. However, considering the compounding frequency may be equally important as this can affect the overall growth of your deposit. The annual-percentage yield (APY) of any savings account may provide a clearer picture of potential returns than a flat interest rate by considering compound frequency.
• Early withdrawal penalties: Another important consideration may be early withdrawal penalties. Most CDs come with penalties for withdrawing funds before the end of the term. These penalties can vary greatly, so it may be helpful to understand the terms and conditions of the CD before opening an account.
• Minimum opening deposit requirements: Traditionally, CDs work with singular opening deposits. Some CDs, however, might have a minimum opening deposit requirement. Knowing ahead of time may help maintain a smooth account opening process.

2. Research banks and institutions

After identifying the CD account that best suits your financial goals, your next step may be to research and compare different banks and financial institutions that offer this type of CD account. While shopping around, some key considerations may be:

• FDIC insurance: Deposits at a bank insured by the Federal Deposit Insurance Corporation provide protection up to $250,000 per depositor per bank.
• Promotional CD rates: Some financial institutions offer a promotional CD rate that may be higher than a standard CD rate if a customer meets certain requirements or qualifying transactions.
• Convenience: Financial institutions with easily accessible services and reputable customer support may aid in managing your CD account over the course of its term.

3. Get your documents in order

When opening a CD account, ensuring your documents are in order before applying may save you time and help smooth your account-opening process. While the exact details may vary between institutions, most banks and credit unions will typically require:

• A government-issued ID: Typically, a driver's license, passport or equivalent.
• Your tax identification number: A personal identification number used by the internal revenue service (IRS) for tax administration purposes. Your Social Security number (SSN) and Individual Tax Identification Number (ITIN) are common examples.
• Proof of address: This may include a utility bill or bank statement that shows your name and current address.
• The CD’s opening deposit: Typically, your opening deposit will be the only one you make to your CD, unless otherwise indicated (such as with an add-on CD). Minimum deposits vary by institution and CD type, so carefully reviewing the terms and conditions of your chosen CD can help you stay prepared.

4. Apply for the CD account

Once you’ve gathered the required documents, chosen your financial institution and picked the right CD account for you, the next step in opening a CD is to send your application. Many banks allow customers to open accounts both online and in-person. While applying, it may help to provide accurate and complete information and to fully understand the terms and conditions of your CD account. This can help prevent unexpected surprises later.

Once you’ve finished the necessary paperwork, the final step is usually to fund the account.

5. Consider more ways to save with CDs

After successfully opening your CD account, you may want to consider other ways to leverage the power of CD accounts and bolster your savings. A CD ladder, for example, is a strategy that helps you net the higher interest rates of longer-term CDs while providing some added flexibility along the way. Depending on your financial goals, another option might be to consider opening multiple CD accounts. For some, separate CD accounts earmarked for specific savings goals can help keep your money organized and make it easier to track progress towards each goal.

In summary

Opening a CD account is similar to your usual savings account, but some added thoughts upfront can help tailor-cut a CD strategy to your own tastes and preferences. Considering the types of CD accounts, their terms and the institution that suits you best, as well as gathering your documents before beginning the application process, may help ensure a streamlined account-opening experience. Once you’re ready, you can start saving and exploring more ways to bolster your personal finances!