Are CDs 100% Risk Free?

Ideally, you have a decent chunk of money sitting in your savings account that you can tap in an emergency. But you might have money to put in the bank beyond your emergency fund. And you may be inclined to open a CD to earn a higher return on your cash.

CD rates tend to be higher than savings account rates because CDs are more restrictive. They require you to commit to locking your money away for a preset period of time. That could be six months, 12 months, or longer.

With a savings account, you're not really committing to anything. You can take a savings account withdrawal when you need to, or when the mood strikes you.

You may be wondering how risky it is to put money into a CD. In the context of losing out on principal, CDs aren't risky at all. But there are other risks you take on when you tie your money up in a CD.

Your principal is safe

If you open a CD at a bank that's FDIC insured, you won't have to worry about losing out on principal provided your total deposits at that bank do not exceed $250,000. So, let's say you have $5,000 in your checking account at a given bank and $20,000 in a savings account. If you come into an extra $3,000 -- say, from a tax refund -- and you open a CD at that same bank, you're well below that $250,000 limit. That means every last dollar of your money is protected.

You could risk a penalty

There's really no such thing as taking money out of a CD. If you open a $3,000 CD and later need to take a $200 withdrawal, you're generally forced to just cash out your CD entirely. And that could result in a costly penalty.

Now the amount of that penalty is something your bank has the right to determine, and penalties can differ from one bank to another. But at one well-known national bank, cashing out a 12-month CD before it comes due means losing out on three months of interest, as an example. So that's one risk you'll need to consider before putting money into a CD.

You might get stuck with a lower return

Another risk associated with opening a CD? Getting stuck with a given interest rate only to see rates rise as soon as you've officially tied your money up.

Let's say you put $3,000 into a 12-month CD paying 4.2%. What if, a couple of weeks later, that same CD becomes available at an interest rate of 4.5%? In that case, you've limited yourself to $126 of interest instead of $135.

Is that $9 difference a life-changing sum of money worth crying over? No.

Is it annoying? Yes.

Also, the more money you put into a CD, the more risk you take on in the context of shorting yourself on what could be a higher interest rate. A difference in rate of 0.3% may not amount to much for a $3,000 deposit. For a $30,000 CD, you're talking about a difference of $90 in interest.

While the sum of money you put into a CD will generally be protected, there are other risks involved. Make sure you understand those completely before committing to a CD. And if you're not comfortable with the idea, you may want to stick to a regular savings account just to play it completely safe.