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Plan Well, Retire Well

Saving and investing your money

Market-linked CDs: The Details are Important!


Just when you think you know the basics of saving and investing, something new comes along! Many of us have think of a Certificate of Deposit (CD) as a completely safe investment – guaranteed to provide a certain amount of return and insured by the government. And, while that is still true for many CDs, market-linked CDs are different.

While market-linked certificate of deposits have been around for a while, they're now being marketed more aggressively, according to a recent FDIC news article. The return on a market-linked CD is tied to an index such as a stock market like the S&P 500. If you are considering investing in a market-linked CD, be sure you understand ALL the details of the investment. Here are some questions you need to ask:

1) Is the amount you invest (the principal amount of the CD) insured by the FDIC?

The FDIC insures deposit accounts such as checking and saving accounts up to $250,000 per depositor, per insured bank for each account ownership category. But this is only for accounts where the principal amount is guaranteed by the bank. If you could lose some of your original investment (such as when you invest in a stock mutual fund), then it will not be insured by the FDIC. You might lose all of your investment if the bank failed.

2) When will the CD mature?

We often think of CDs of having maturities in 1, 2, or 5 years. But market-linked CDs are considered long-term commitments and may not mature for 20 years. If you pull your money early, there can be significant early-withdrawal penalty fees. Ask about these penalty fees too.

3) How will the return on the CD be calculated?

Be sure you understand how the return is calculated as it may be complex. It may not be as simple as your return goes up the same as the return on market index; instead, it may be percentage of the increase. And, your return may also go down if the market index goes down.

4) Is it possible that I might not earn any interest on a market-linked CD?

Yes, it is possible if the index performs poorly, depending on the terms set by the financial institution offering the market-linked CD. Be sure to ask!

A market-linked CD may or may not be a good investment choice for you. Do be aware that a market-linked CD is significantly different than a regular Certificate of Deposit. Be sure to ask questions so that you can decide if it is a good choice for you.



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