Time Deposit

A time deposit is an interest-bearing bank account that has a pre-set date of maturity. A certificate of deposit (CD) is the best-known example. The money must remain in the account for the fixed term in order to earn the stated interest rate.

Time deposits generally pay a slightly higher rate of interest than a regular savings account. The longer the time to maturity, the higher the interest payment will be.

Another name for this type of investment is term deposit.

A time deposit such as a CD can be purchased at virtually any bank, credit union, or other financial institution. The interest rates paid vary, as do other terms. For example, one bank may offer a higher return but require a larger deposit.

It pays to shop around. Most post their rates prominently and advertise them widely.

A CD is essentially a savings account that is opened with the promise that the owner won't touch the money for a set period of time. This can range from a few months to years. A term of a year or less is considered a short-term time deposit. Anything over that is a long-term deposit.

The owner of a time deposit can withdraw the money out if necessary but will lose some or all of the promised interest and may pay penalty fees. The terms are in the fine print that the saver receives when opening the account. A customer can earn a slightly higher interest rate with a time deposit account than would be available in a standard savings account or an interest-bearing checking account. The better return is offered because the funds remain locked until the maturity date of the account.

Time deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per investment. Those opened at a credit union carry protection from the National Credit Union Administration (NCUA).

Time deposit accounts provide banks with the cash flow they need to lend money to other customers. The bank makes a profit by lending the funds held in time deposit accounts for a higher interest rate than the rate it pays on the time deposits.

The bank may also invest the money from the time deposit in other securities that pay a higher return than it is paying the customer.

Banks and other financial institutions may accept any maturity term that a customer requests, as long as it is a minimum of 30 days.

Once the investment matures, the funds can be withdrawn without penalty. Or, the investor may choose to renew the time deposit account for another term. For example, a one-year CD could be rolled over into another one-year CD.

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