Banks are getting free money from the Federal Reserve, but this does not mean the saver is reaping a benefit.
In fact, the highest interest cd is hovering around 2.5%, and this is only if your money is tied up for 5 years. This is not a wise decision, because chances are that inflation and interest rates will go higher during that interim, while locked into the 5 year rate.
Of course, money can be withdrawn from a cd with only a penalty of one month’s interest, which is not a lot of money. Whether the money for the cd is broken into several cd units or all put in one will not effect the loss for early withdrawal. Only the amount withdrawn is penalized.
A cd is a time deposit in that it must be kept for a set period of time. This allows the bank to know that for the most part there will not be a rush to withdraw money from the account. This fact has to do with the reserve a bank sets aside. Less of a reserve is required for money that is there for a longer period of time.
For those who have no other alternative for a variety of reasons, an investment in a cd is worthwhile. However, it is preferable to put the money in a 6 month or 8 month cd. Rates may differ whether the cd is taken out online or after a visit to the bank. Check this out carefully.
Low rates are earned on a cd, yet the government still counts this as taxable income. At this time shopping around will get the saver a few basis points of extra interest, but it will not add up to much. Go with a bank that you like and is convenient and forgo the extra basis points.
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