TIME DEPOSIT ACCOUNTS: Definition, Types, and Interest Rates

time deposit

Time deposit accounts are excellent for storing funds and may provide better annual percentage yields (APYs) than traditional savings accounts. A time deposit account is best represented by a certificate of deposit (CD). Time deposits are insured if they are kept by an FDIC member bank or a federal credit union, and most state-chartered credit unions have NCUA coverage.
It’s critical to understand how time deposit accounts work, their interest rate, and how they compare to other types of bank accounts when picking where to keep your money.

What is a Time Deposit Account?

Time deposit accounts, also known as term deposit accounts, require you to deposit your money for a set period of time. Although less flexible than traditional savings accounts, these accounts typically earn a greater interest rate. The most well-known sort of time deposit account is the certificate of deposit, which most people are familiar with.

Time deposit accounts and CDs function similarly and are frequently promoted as such. Instead of calling their accounts CDs, some banks call them time deposit accounts. Other banks may use the terms CD and time deposit interchangeably for these accounts.

The share certificate is another type of time deposit offered by credit unions. Share certificates work similarly to CDs in that they yield interest over a set term of time. Because these account holders are members, the dividends they earn on their certificates are referred to as dividends rather than interest.

Time Deposit Accounts and How They Work

A time deposit account, such as a CD, requires you to commit to putting your money in the account for a set amount of time, which is referred to as the term (another reason you may see time deposits referred to as term deposits). The time deposit account will pay interest on the money you deposit, with longer durations typically paying a greater interest rate, depending on market circumstances and the bank’s current offerings.

For example, depending on the details of the account, certain CDs may require you to leave the money in the account for 12 months, two years, or more. Shop around for the best CD rates to determine which banks and credit unions will provide you the best return on your investment based on how much money you have saved, how long you want to commit the money, and your overall financial goals.

Types of Time Deposit

Term deposits are available from financial institutions such as banks and credit unions. The term used to describe this varies depending on the banking institution. Certificate of Deposit (CD), term deposit, or fixed deposit are all terms that are regularly used. Furthermore, in some countries, post offices offer investment vehicles such as Post Office Time Deposit Schemes.

#1. Term deposit

To account for a fixed duration, a fixed deposit system requires a single large sum. The customer will not be able to access the fixed deposit until the maturity time has been completed. As a result, they are non-checkable, non-negotiable, and non-payable on demand. A reinvestment deposit is one in which the interest earned is only accessible after maturity.

#2. Recurring deposit

A recurring deposit account allows the consumer to deposit a fixed amount at regular intervals throughout the maturity term. For example, a certain sum is deposited monthly for an extended period of time.

The maturity time is often used to classify term deposits. Short-term deposit maturities range from one to twelve months, whereas long-term deposit maturities range from one to 10 years.

Example of a Time Deposit

CDs are one of the most frequent forms of time deposits in the United States. For example, Mario Lopez buys a $5,000 CD with a fixed interest rate of 4% and a maturity date of three years.

After one year, his deposit would be worth $5,200, and the next year, it would be worth $5,408. By the end of the term, Mario will be able to withdraw $5,624.32.

If Mario withdraws his money before the maturity date, he will be penalized. As a result, at the conclusion of the second year, when the CD balance is $5,408, Mario will be charged 3/12 (25%) of the annual interest received. Instead of $5,408, he will receive $5,356 in year two.

What Factors Should You Consider When Choosing a Time Deposit Account

Time deposit accounts are not appropriate in every financial circumstance. Before opening a CD or other time account, you should ask numerous questions. As an example:

#1. What Do You Hope to Achieve With This Money?

Is the money you put into the account part of your emergency fund, short-term savings, or do you wish to save for a specific long-term goal such as a new car, vacation, or a down payment on a house?

If you can commit to a longer term, the accounts may offer a higher APY. However, you must ensure that you are willing to accept the commitment of having your money locked up for several months or years. Standard bank savings or money market accounts may be a better option if you require rapid access to your savings.

#2. Is It Possible to Earn a High Enough Yield on Your Savings?

If you currently have enough cash in your emergency savings fund and want to maximize your return on investment, you may want to explore investing this money elsewhere. You may, for example, place the funds into a retirement savings account or a brokerage account and invest in other assets such as stocks and bonds. These additional asset classes are riskier yet they may provide a higher return than an FDIC-insured bank account.

#3. What if you have to pay a penalty for withdrawing early?

If you need to access the funds in your account before the agreed-upon term, you may be charged an early withdrawal penalty. This penalty varies according to the bank or credit union and the term of your account, but it can add up to a large amount of interest that you had hoped to earn on your savings. Some banks provide no-penalty CDs, which may nevertheless provide a greater APY than a savings account while allowing for early withdrawals.

How to Establish a Time Deposit Account

If you’re ready to open a time deposit account, contact your bank or credit union to discover what alternatives are available. Before opening the account, make sure you understand the following details:

  1. APY: What percentage return can you expect from your savings?
  2. Term: How long do you have to devote your funds to the time deposit account? Some banks and credit unions sell CDs and certificates with terms ranging from seven days to ten years.
  3. Deposit requirements: How much money must you deposit into the time deposit account to be eligible for the APY?
  4. Penalty for early withdrawal: If you need to withdraw funds from your time deposit account before the term is up, be sure you understand any penalties or fees that may apply.
  5. Compounding interest: Find out how frequently your account’s interest compounds and the period of payout. Compounding intervals are often daily or monthly.

The Benefits and Drawbacks of Time Deposits

Benefits

  • Greater returns than savings accounts: A time deposit can earn you more interest than a savings account. This is because you agree to lock up your money for a specific length of time, with the interest rate increase on an annual basis.
  • Predictable returns: If you choose a time deposit, you will know precisely how much you will earn and when you will receive it. The predictable return can help you reach a certain financial objective.
  • FDIC Insured: The accounts are FDIC guaranteed up to the legal maximum of $250,000 by the Federal Deposit Insurance Corporation (FDIC). This means that if the financial institution collapses, your money will be safe.

Drawbacks

  • Limited liquidity: If you need to access the money in your time deposit account to cover an unforeseen expense, it will be difficult. When you put money onto a CD, it is virtually locked up. You will lose some or all of the planned interest and may be compelled to pay penalty fees if you remove funds early.
  • Can find larger returns elsewhere: Time deposits give low returns when compared to equities and ETFs. You might be able to earn more money by investing in higher-risk vehicles, but as the name implies, there is a greater danger.
  • Tax liability: You must pay tax on any interest rate earned on your time deposit on an annual basis. This has the potential to drastically reduce your earnings.

Fixed Deposit vs Time Deposit

Some people may have difficulties distinguishing between a time deposit and a fixed deposit. The fundamental issue is that distinct traits are difficult to distinguish because they are essentially the same thing. Fixed deposits are, in general, a subset of term deposits.

Different places of the world use different names to refer to the same concept. Time or term deposits, for example, are primarily used in anglophone countries. In the United States, however, they commonly use the term certificate of deposit. Fixed deposits are popular in Asian countries such as India.

A few financial organizations may distinguish between the two worlds, but they will generally follow the same standards with just a few exceptions, such as the contract’s maturity.

Demand Deposit Account vs. Time Deposit Account

A demand deposit account, such as a checking or savings account, is not the same as a time deposit account. With checking and savings accounts, you have the option of withdrawing funds “on-demand” at any time. Another type of demand deposit account is a money market savings account.

Get a checking account if you need money for everyday expenses. Put your money in a savings or money market account if you require quick access to it. Any of these demand deposit accounts can meet your short-term and daily financial demands.

The time deposit accounts may be a preferable place to put your savings, particularly if you do not plan to require the money for an extended period of time. Time deposit accounts, such as CDs, often pay a greater rate of interest than conventional bank savings accounts, but you must ensure that you can leave your money in the time deposit account until the term expires.

Time Deposit Alternatives

Consider these options if you determine that time deposits are not for you.

#1. Dividend-Paying-Stocks

A dividend is a percentage of a company’s profit distributed to shareholders. While risky, this investment can give a moderate-income as well as the possibility of long-term financial appreciation. You’ll most likely be able to earn a larger yield as a shareholder in a high-dividend stock than you would with a time deposit.

#2. Short-Term Bond Mutual Funds

This fund invests in bonds with maturities of less than five years. Short-term bond funds have comparable terms and provide liquidity as well as a greater yield. However, note that they are vulnerable to both interest rates and credit risk. There is no guarantee that you will receive at least the amount you placed into the fund.

Conclusion

Depending on your needs, a time deposit can be an excellent savings vehicle. If you decide to include a time or term deposit in your total savings plan, search around for the greatest CD and share certificate rates. If you open a time deposit account with an online bank or a credit union, you may be able to obtain a higher interest rate on your money.

Time Deposit FAQs

Is a time deposit worth it?

While traditional investments can provide a larger return, time deposits require no work beyond the initial deposit. In summary, a time deposit provides larger returns than conventional savings account while posing far less risk than an investment.

What is maximum deposit period?

The minimum duration for a bank fixed deposit for retail individuals, including senior persons, is 15 days. A bank deposit can only be held for a maximum of 20 years.

What is another name for time deposits?

A time deposit or term deposit (also known as a certificate of deposit in the United States and a Guaranteed investment certificate in Canada) is a deposit with a financial institution having a set maturity date or duration to maturity, generally referred to as its “term.”

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