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Passive Income Investments | Certificate of Deposit (CD)

Certificate of Deposit (CD) accounts are offer fixed interest and a federally insured capital guarantee, making them a great tool for investors looking for low risk passive income. In this article we look at these often-underappreciated investment accounts.

David Garner
David Garner
Published On: February 27th, 2023

Passive Income Investments | Certificate of Deposit Accounts 

Certificate of Deposit (CD) accounts are savings accounts that are offered by banks, online banks, credit unions and other financial institutions. They allow investors to earn passive income at higher interest rates on their savings than typical saving accounts in exchange for a committing to keep funds in the account for a longer period.  

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 What are Certificate of Deposit Accounts? 

CD accounts are one of the oldest and simplest types of investment account. They are mostly popular with investors looking for safe and stable investment options that require minimal ongoing management while offering a guaranteed rate of return and consistent passive income stream. 

A Certificate of Deposit (CD) is a time deposit in which the investor commits to leave their money in the account for a set length of time known as the term or maturity. 

In exchange for this commitment, the financial institution typically provides a set interest rate that is higher than that of a standard savings account. 

What is a CD?

A CD often has a greater interest rate than a conventional savings account since the financial institution can use the funds for a longer period of time, allowing them to offer a better rate of return to the investor. 

CDs come in a variety of lengths, ranging from one month to five years or more. The higher the interest rate the investor can expect to receive, the longer the term. The disadvantage of a longer-term CD is that the investor must wait until the maturity date to receive their cash without penalty. 

Who Offers Certificate of Deposit Accounts? 

CD accounts are offered by a variety of financial institutions, including banks, credit unions, and online banks.  

Each financial institution may have different terms and conditions for their CD accounts, so it’s important for investors to shop around and compare rates before deciding where to invest. 

Here are five examples of institutions offering certificate of deposit accounts: 

  • Ally Bank: Ally Bank is an online bank that offers CD accounts with varying periods and interest rates. On their CDs, they have a 10-day Best Rate Guarantee, which implies that if their rate rises within 10 days of opening the account, they will instantly modify the rate to the higher rate. 
  • Bank of America: Bank of America is a large national bank that offers CDs with durations ranging from 28 days to ten years. They also provide a loyalty benefit to consumers who renew their CDs with the bank. 
  • Discover Bank: Discover Bank is an online bank that provides CDs with durations ranging from three months to ten years. They provide competitive interest rates and do not charge any fees for opening or maintaining a CD account. 
  • Navy Federal Credit Union: Navy Federal Credit Union is a credit union that offers CD periods ranging from three months to seven years. They provide higher interest rates on larger deposits and a penalty-free withdrawal option for members who need to access their assets quickly. 
  • Wells Fargo: Wells Fargo is a large national bank that sells CDs with durations ranging from 3 months to 5 years. They also provide a step rate CD, which lets investors receive a higher interest rate over time as they make additional deposits. 

Who Offers Certificate of Deposit Accounts? 

 Why Do Investors Use Certificate of Deposit Accounts? 

Investors use CD accounts for a variety of reasons. Primarily, CDs are a great tool to generate passive income as they require almost zero oversight after the initial investment.

Another reason is that they are a low-risk investment option. Because the funds are FDIC-insured up to $250,000 per depositor, per insured bank, investors are guaranteed to receive their principal investment plus interest earned, even if the financial institution goes bankrupt. 

This makes CDs a great way to diversify your portfolio and reduce overall risk when held in combination with higher risk, higher return investments. 

Another reason why investors use CD accounts is that they offer a guaranteed rate of return. With the interest rate locked in for the entire term, investors know exactly how much they will earn at maturity, which can be beneficial for those who are looking for a predictable income stream. 

 Why Do Investors Use Certificate of Deposit Accounts?

This makes CDs particularly attractive during periods of economic uncertainty, and periods of rising interest rates. 

 Benefits of CD Accounts  

Here is a brief summary list of the main benefits of certificate of deposit accounts: 

  • Guaranteed rate of return: CDs pay account holders fixed and guaranteed interest for the entire term for the account.  
  • Low-risk investment: A certificate of deposit is generally considered to be one of the lowest risk investments available. They are FDIC-insured up to $250,000 per depositor, per insured bank. 
  • Choice of terms: There are a range of terms for CD accounts which vary from one provider and account to another. The shortest term is generally 1 month, up to the longest of 10 years. This means there should always be a CD account with a term to suit your personal financial plan and objectives. 
  • Higher interest rates: An obvious benefit to holding certificates of deposit in your portfolio is the higher interest rates these accounts attract compared to traditional savings accounts, which means that investors can earn more interest on their deposits. 
  • Income frequency: CD account can also be a very useful tool for investors looking for monthly income-paying investments because some accounts offer monthly interest payments. This is great for investors that use interest income to fund living expense and lifestyle costs. 
  • Ease of management: Certificate of deposit accounts are extremely low maintenance. Accounts are easy to manage, and investors can open and monitor their accounts online or through mobile banking, making them a great option especially for investors looking for the best passive income investments. 
  • Penalty-free withdrawal options: Some CD accounts offer penalty-free withdrawal of your funds before the original maturity is reached. This allows you to access your funds without incurring any extra costs. 

 How Can Investors Open a Certificate of Deposit Account? 

Opening a CD account is a fairly simple process… 

Typically, investors can open an account in person at a local branch, online, or over the phone. Investors must provide personal information such as their name, address, and social security number, as well as information about the amount of the deposit and the term of the CD, in order to open a CD account. 

What Kind of Terms Do CD Accounts Offer? 

CD accounts offer a variety of terms, ranging from one month to five years or more.  

The interest rate on a CD will typically be higher for longer-term accounts, but investors will also have to commit to leaving their funds in the account for the entire term.  

What Kind of Terms Do CD Accounts Offer? 

Some CDs may also have minimum deposit requirements, such as $1,000 or $10,000, depending on the financial institution. 

CD accounts may also offer different interest rate structures, such as a fixed rate or a variable rate.  

A fixed rate CD will offer a guaranteed interest rate for the entire term, while a variable rate CD may offer a higher interest rate initially, but the rate can fluctuate over the course of the term. 

Disadvantages of CD Accounts 

One potential downside to CD accounts is that they offer less flexibility than other types of savings accounts.  

Because the funds are locked in for a specific term, investors may not be able to access their funds without penalty until the maturity date. This can be a drawback for investors who may need access to their funds in the short term. 

Disadvantage of CD Accounts 

Another fairly obvious point to mention is the fact that the interest rates on CD accounts – while guaranteed passive income – is on the low end when compared to other, riskier investment options. 


Certificate of Deposit accounts are types of savings accounts offered by financial institutions that can offer a guaranteed rate of return with almost no risk.  

They are available from a variety of financial services providers such as banks and credit unions, and a range of terms and interest rate structures are available, allowing investors to find the one that best suits their financial goals and risk tolerance. 

While CD accounts may not offer the same potential for high returns as riskier investments, they can be a stable and predictable investment option that can help investors save for specific financial goals or generate a steady income stream.  

With their FDIC-insured status and ease of management, CD accounts can be a valuable addition to any investment portfolio. 


Investopedia – What is a Certificate of Deposit 

Bankrate – Best 1 year CD Rates for 2023 

IRS – Topic No. 403 Interest Received 

FDIC – Deposit Insurance