What Are the Different Types?

• One of the more common types of CDs include the traditional, where an amount of money is locked in at an interest rate for a predetermined amount of time. For investors willing to accept an initially lower interest rate than a traditional CD, a bump-up CD allows for switching to a higher rate when interest rates rise. A liquid CD allows for early withdrawal of funds without penalty. A brokerage CD is one that is purchased from a brokerage firm that may represent one or more banks.
  
  

What Is the Length of Term?

• A CD can be purchased for virtually any length of time, although three months and five years are the most popular terms. Generally, the longer the term, the higher the interest rate will be. The drawback of investing in a CD for the long haul is that interest rates could rise in the interim, meaning that the investor would be locked in at the lower rate and could not take advantage of the higher rates
  
  

What Are the Advantages?

• CDs are safe investments, as amounts up to $250,000 are insured by the Federal Deposit Insurance Corporation (FDIC). They usually provide a better return on an investment than money market funds. CDs are good investments for individuals who are averse to risk and want to know exactly how much their investment will be worth at the end of the term.
  
  

What Happens at the End?

• Once the term of the CD expires, the investor has several options available. In some cases, the CD can simply be "rolled over" into another CD for the same or different term. Investors may also decide to take the matured CD as a lump sum to use as they wish. The investor may also decide to place the money into another investment vehicle such as a mutual fund or IRA.
  
  

What Happens if I Withdraw Money?

• Unless it is a liquid CD which allows for early withdrawal, severe penalties can result if money is withdrawn before a CD matures. Depending on the length of the CD term and the financial institution, this could mean having to repay all or a portion of the interest. However, as of 2009, early withdrawal penalties are deductible on the federal income tax return if the investor itemizes deductions.