1. What is a CD?
Remember when your parents offered you cash to do chores or your homework? A certificate of deposit (CD) works the same way—except the bank pays you extra for doing nothing.

Sold by banks, CDs are low-risk – and lowish return -- investments suitable for cash you don’t need for months or years. If you leave the money alone during the investment period (known as the “term” or “duration”), the bank will pay you an interest rate that’s slightly higher than what you would have earned in a money market or checking account. All gains from CDs are taxable as income, unless they are in a tax-deferred (IRA) OR tax-free (ROTH IRA) account.

A CD also is an ultra-safe investment. Your interest rate is determined ahead of time, and you’re guaranteed to get back the amount you deposited plus interest once the CD matures. What’s more, if the bank goes belly up, your CD deposit is probably insured by the FDIC for up to $100,000. (Read more about this insurance here. )

CDs come in a range of types, each offering tradeoffs:

• Traditional CD —You receive a fixed interest rate over a specific period of time. When that term ends, you can withdraw your money or roll it into another CD. Withdrawing before maturity can result in a hefty penalty.
• Bump-Up CD —You have an opportunity to swap your CD’s interest rate for a higher one if rates on new CDs of similar duration rise during your investment period. Most institutions that offer this type of CD let you bump up once during the term of your CD.
• Liquid CD —You can withdraw part of your deposit without being penalized. However, the interest rate on this CD usually is a little lower than CDs without this feature, but it’s still higher than a money market account’s rate.
• Zero-coupon CD —You do not receive annual interest payments during the term of deposit. Instead, the payments are re-invested so you earn interest on a higher total deposit. While the interest rate offered is slightly higher than other CDs, you’ll owe taxes on the re-invested interest.
• Callable CD —The bank that issued you the CD can call it back after a set period, returning your deposit plus any interest owed. Banks do this when interest rates fall significantly below the rate it gave you. To make this type of CD attractive, banks typically pay a higher interest rate. These are typically offered through brokerages.
• Brokered CD —This is any type of bank CD that’s offered by a brokerage. Brokerages have access to thousands of bands’ CD offerings, including online banks. You may be charged a fee for the service. You generally receive a higher rate of interest from online and smaller banks because they’re competing nationally for depositors’ dollars.

2. Should You Invest?
CDs make financial sense for people of all ages who want a low-risk investment to park cash they don’t plan to use immediately. Maybe you want to use your cash to buy a car or make a down payment on a house pretty soon.

Since you won’t need your cash reserve the day after tomorrow or next week, you’ll likely want that cash to earn a better rate of return than your checking account offers—without taking on too much risk. This is when a CD is useful.

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