8 Things Financial Advisors Wish All Retirees Knew About CDs

Certificates of deposit (CDs) are gaining in popularity among savers. A combination of market uncertainty and relatively high interest rates has some retirees flocking to these "safe" investments.

While tucking money into a CD might be the right fit for many savers, it's important to weigh all the details before using this tool to grow your wealth. We explore what financial advisors wish retirees knew before they opened a CD.

Not all high rates are created equal

"Read the fine print," says Shalini Dharna, CPA at Dharna CPA.

While some CDs offer a higher initial rate, it might be a teaser rate that drops sharply after the initial term. By reading the fine print, you can avoid getting pulled into a low-paying CD after your first term.

If you realize you'll get a lower rate after the initial term, consider a different CD or making a note to switch to another financial institution after the CD matures the first time around.

Early withdrawal penalties can wreck your plan

When you open a CD, you agree to part with your funds for the entire term. If you need to access the funds before the maturity date, expect to pay an early withdrawal penalty.

"Understand the cost of early withdrawal and the intent of the funds before locking them in (i.e., a CD should not be your emergency fund)," says Dharna.

While putting your emergency savings into a CD is tempting, it's better to only put funds into one that you won't need during the term. Keep your emergency savings in a separate high-yield savings account to avoid dealing with an early withdrawal fee.

CDs aren't great for long-term growth

While CDs offer a way to preserve your savings, they aren't a great option if you want to grow your funds over the long term. Generally, CDs represent a portion of a larger retirement plan, not the entire picture.

If you are looking to grow your funds for the long term, you might need to invest. For some, this means building a stock portfolio. For others, it could mean buying real estate. Still, others might have a different investment opportunity in mind.

The bank you choose matters

"Shop around - different institutions offer different rates, terms, and penalties," says Dharna.

While opening a CD at your local branch might be tempting, shopping around can help you find the best possible rates. Generally, smaller banks and credit unions can offer higher rates than big-name institutions.

Taking the time to shop around could be well worth the effort and help you get ahead financially. 

CD growth isn't tax-free

As your funds grow through a CD, it's easy to forget about taxes. But like other types of income, your CD's growth is taxable.

"Interest earned from a CD is taxed in the year it is earned, not the year it is withdrawn. Knowing this and planning ahead before tax time can help save you some headache," says Steve Sexton, CEO of Sexton Advisory Group.

CD principal isn't taxed

When a CD matures, you'll receive your principal and interest back. Luckily, you don't have to pay taxes on the principal returned to you because you've already paid taxes on those funds at some point.

"However, some retirees mistakenly believe that when a CD matures and they withdraw principal, it triggers additional taxes. That is not the case. Principal values are not taxed," says Dana Anspach, CFP, RMA, and founder of Sensible Money LLC.

Laddering isn't just a buzzword, it's a lifeline

A CD ladder involves opening multiple CDs with varying maturities. When using a CD in this way, you can maintain liquidity without sacrificing access to the higher yields typically associated with longer terms.

"CD laddering also allows retirees to invest in a series of CDs with different maturity dates, allowing the account holder to access funds at various points in time," says Sexton.

Sexton continues, "You're also able to withdraw funds from a CD early, but doing so may incur penalties and fees. That said, there are some banks that offer no-penalty CDs."

Inflation can take a bite out of your returns

While you might lock in a great CD rate, if inflation outpaces it, you'll lose purchasing power over the life of your CD. Before opening a CD, look closely at the rates offered and the current inflation rate.

If inflation is higher than the CD rate, it might not be worth taking the chance of losing purchasing power.

Bottom line

Building CDs into your retirement plan isn't a bad idea. But it's important to weigh the risks and benefits before taking the plunge. As you navigate paying for your golden years, take advantage of every opportunity to stretch your retirement dollars further.

You May Also Like

23 Ways To Get Money Without Getting A Second Job

By FinanceBuzz Editors

How To Save Money on Car Insurance: 12 Ways to Lower Rates

By Elyssa Kirkham

10 Things Seniors Born Between 1941-1969 Could Take Advantage Of

By FinanceBuzz Editors

19 Dumbest Things Smart People Waste Money On

By Team FBZ

7 Moves If You Want to Stop Living Paycheck to Paycheck

By FinanceBuzz Editors

7 Clever Ways to Crush Your Debt

By FinanceBuzz Editors

Help Protect Your Savings From Stock Market Volatility With Gold

American Hartford Gold Benefits

• American Hartford Gold helps individuals protect their retirement by rolling over IRAs and 401(k)s into physical gold.
• Includes FREE IRA rollover and storage for up to 3 years.
• Get up to $20,000 in free silver on qualifying purchases.

Download your guide for free

---

Subscribe Today

Learn how to make an extra $200

Get vetted side hustles and proven ways to earn extra cash sent to your inbox.

or

Subscribe Now →

By submitting this form you agree to receive emails from FinanceBuzz and to the privacy policy and terms