ANSWERS: 1
  • CDs, or certificates of deposit, are accounts offered by banks that feature a set rate of interest in exchange for the promise that the money will be left in the account for a specified period of time.

    Factors

    The longer you leave your money in the account and the more money you put in, the higher the interest rate on your account. The interest rate will also be affected by market conditions.

    Interest Rate Comparison

    Interest rates on certificates of deposit will be higher than traditional savings accounts because the bank can depend on having access to your money until the term is up.

    Payout Options

    Some CDs give account holders the option to have the interest that accrues on the account paid out to them each month or to have it added to the account so it gets reinvested.

    Tax Implications

    If you have the money reinvested in the CD, or if you have a CD that does not pay the interest until the CD matures, you are still responsible for reporting the interest that accrues on your taxes even if you cannot access the money.

    Considerations

    A bump-up CD allows account holders to increase the interest rate on the CD to the current market rate once over the life of the CD.

    Source:

    SEC: Certificates of Deposit

    Bankrate: Types of CDs

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