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Pros and Cons of a Certificate Account


Want to make the most of your money? Known for being a secure investing choice, a certificate account is one way to enhance your savings. This type of account allows you to deposit a specific amount of money for a designated amount of time with a predetermined withdrawal date that can be anywhere from a few months to a few years down the road. Banks call them certificates of deposit.

With this approach to saving, your money earns dividends at a locked-in rate throughout the term — or length — of the certificate. The amount of dividends you earn may be impacted by how much you initially deposit, the term length, and your financial institution.

So when it comes to your savings, what are the pros and cons of opening a certificate account?

Pros of Certificate Accounts


Certificate accounts are a safe way to grow your savings because, depending on the account ownership type, they're included in the $250,000 that is insured by the National Credit Union Administration (NCUA) (for federal and many state-chartered credit unions) or the Federal Deposit Insurance Corporation (FDIC) for banks. That means you'll have coverage even if your financial institution closes.


You can plan ahead with confidence because you'll know exactly how much money will be there for you when it's time to withdraw your funds. You get to choose your term, plus the annual percentage yield (APY) and dividend rate are generally fixed for certificate accounts, so once you open your account and lock in your rate, you can expect to earn the same rate throughout the term you selected.

Higher Rates

Certificates tend to yield more than traditional savings accounts. Moreover, the longer your certificate term, the more dividends you can potentially earn. Keep in mind, factors such as your financial institution and market conditions may still impact your rate.

Certificate Ladders

Looking to take your earning potential a step further? Certificate laddering is an investment strategy that may help you earn better returns by investing your money for increasing periods of time — it can also serve as a workaround for accessing your money along the way.

With laddering, you'll invest in several certificates with varying terms, rather than keeping your money in one account.

For example, let's say you have $10,000 you want to invest in savings. Instead of putting the total amount into one account, you could go with a five-year laddering plan by investing $2,000 in five separate certificates with consecutive terms of one, two, three, four, and five years:

  • One-year certificate: $2,000 investment
  • Two-year certificate: $2,000 investment
  • Three-year certificate: $2,000 investment
  • Four-year certificate: $2,000 investment
  • Five-year certificate: $2,000 investment

You can either withdraw your money once each certificate matures, while the others are still earning dividends, or move the balance into another certificate with a longer term (i.e., adding a rung to the ladder), which again, will earn more.


See what laddering might look like for you.

Cons of Certificate Accounts

Limited Accessibility

A certificate account is meant to complement your regular savings and emergency funds rather than replace them. When you open a certificate account, you're essentially locking away your funds for the length of the term you designated, unlike a regular savings account that allows you to access funds at any time.

Fees for Early Withdrawals

Since a certificate account is best left until it reaches its maturity date, you'll have to pay a penalty fee to access the money before then. It's good to know that this is possible if you run into an unforeseen circumstance and need the money right away but be aware you may be charged a flat fee, a percentage of the dividends your certificate has earned, or all of the dividends earned, depending on your bank's or credit union's policy.

Getting Locked in at a Low Rate

Having a fixed rate can be to your advantage if the rate you lock in is high, as your certificate will likely earn a better return. However, if you open an account when rates are low, you'll have that same low rate throughout the term, which means potentially lower earnings.

What to Consider When Opening a Certificate Account

In addition to pros and cons, here are some factors to think through if you're ready to open a certificate account.

Savings Goals

Review your savings goals. If you need continual access to your funds, a savings account might be a better option for you. Or if you know you likely won't need to tap into your savings, especially in the short term, then a certificate account may suit your needs.

Types of Certificates

A variety of certificates are available, so you'll want to decide which type you need and make sure your financial institution offers it. Here's a quick rundown to help you consider the most common options.

Money Market Certificates

Offered by many credit unions, a money market certificate is a basic certificate account that functions the same as a traditional certificate of deposit offered by most banks. Generally, money market certificate terms can range from several months to around seven years. Once you choose a term, you can lock in a rate and earn a fixed return on your initial deposit.

IRA Certificates

As a way to boost your retirement savings, you may want to consider an IRA certificate. A fitting example of previously mentioned pros, an IRA certificate can offer a safe investment for your future with an account that grows dividends and earns predictable returns.

Education Certificates

A smart way to invest in your family's future, an education savings account (ESA) can help you build up funds for your child's elementary, secondary, and higher-education costs. With a minimum initial deposit, you can potentially enjoy tax-free earnings and get a higher yield — an A+ option for tending to your tomorrow.

Add-on Certificates

As the name indicates, this type of certificate allows you to make additional deposits throughout the term of your certificate instead of making one initial deposit. First, you'll want to check whether your financial institution offers add-on certificates. If add-on certificates are an option, you can find out how many deposits you're allowed to make during your term, as well as any other regulations that are required. An add-on certificate may make sense for you if you want to continually add funds to your account and timeliness is a priority in reaching your goals.

Jumbo Certificates

A jumbo certificate is one way being more intentional about savings may pay off. Investors can make a minimum deposit of $100,000 to open a jumbo account, which may potentially pay a higher APY than traditional certificates due to that larger investment. A jumbo account is still a safe investment, but it's likely best for meeting more conservative money goals.

Certificates are a vast category, though. In addition to what we've covered here, there are many other types of certificates to consider, such as:

  • Bump-up certificates
  • Step-up certificates
  • Brokered certificates
  • Zero-coupon certificates
  • No-penalty certificates
  • High-yield certificates


Overall, annual percentage yields vary based on the certificate term you choose. Terms typically range from three months to seven years. As a reminder, longer certificate terms generally tend to bring higher yields.

You can gain a general sense of rates by following the national average. Then, try looking for a certificate account with an APY that's higher than the average — and don't forget to make sure the term and minimum investment amount work for you as well.

If you're interested in what that might look like, Forbes provides an updated yearly snapshot of the best rates. Rates may also differ by financial institution and state.

Key Takeaways

As you think over the different certificate account options that are available, consider these key points:

  • Certificates are generally a predictable, safe investment.
  • Certificates offer a convenient way to keep — and earn dividends on — savings funds you don't plan to access for the long-term.
  • You'll likely have to pay an early-withdrawal penalty for taking out funds before your certificate matures. This can be a flat fee, a percentage of earned dividends, or possibly all earned dividends, which could defeat the purpose of choosing a certificate account as your preferred method of storing your savings.

Finding a certificate account that's in line with your goals and time horizon may be just the way to take your savings to the next level.

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