Callable CDs: Are They Worth It? (2024)

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• Callable CDs are interest-earning bank accounts financial institutions can call back before maturity.
• A callable CD may offer a higher rate than a traditional CD.
• You might not earn the maximum potential interest on a callable CD.

If you're looking to take advantage of the best CD rates, there are a variety of CDs you can explore. Callable CDs, in particular, can offer high interest rates. But because of their distinct features, they may not be suitable for risk-averse investors.

Here's what you need to know about callable CDs to see if they're a good fit for you.

What is a callable CD?

Callable CD definition and how it works

A callable CD is a special type of certificate of deposit. If a CD is callable, that means a brokerage firm or financial institution can ask for the CD back before it reaches maturity.

When an institution calls back a CD, you won't lose any money you had initially deposited into the account or interest earned. However, you will lose out on any interest you would have earned if the CD reached maturity.

Callable CDs are likely to be called by institutions when interest rates are dropping. By redeeming the CD early, the bank does not have to continue paying the customer a high rate.

Callable CD vs. traditional CD

Traditional CDs have a guaranteed term. During that time, your money remains safe in a CD and earns a fixed interest rate.

With callable CDs, the bank or brokerage has the right to redeem your CD early. In that case, you lose any future earning potential. To compensate for the increased risk of a callable CD, many institutions will offer higher interest rates than they do on traditional CDs.

Call dates and call protection

Callable CDs have a call protection period, which is a timeframe after opening an account when you are protected from the issuer calling the CD. The call date — the point at which the issuer can call back the CD — is often a few months, or even years, after account opening, depending on the CD term.

"After that period, if they want to call it in, they can say, 'You can either reinvest or have your money back — have your principal back and any interest that's been earned up to that point,'" says Elizabeth Plot, a CFP professional and founder of Primas Financial Planning.

The risks of callable CDs

Callable CDs are the riskiest type of CD available to investors. Here are callable CD risks.

Early redemption on callable CDs

A traditional CD is typically utilized as a fixed-term savings account that offers predictable growth. With a callable CD, the only guaranteed period of safety is during the initial call protection period. After that, your future interest earnings are not guaranteed.

Reinvestment risk on callable CDs

Callable CDs are more likely to be called if the Federal Reserve cuts rates, because a bank has less incentive to keep paying customers a higher rate. This is a disadvantage compared to a traditional CD, which is not affected by changing interest rates.

When a CD is called, you may have no option but to trade in for a lower rate. "They're going to give you your money back, and then you're going to go to the marketplace, and you're only going to be able to get 2.5% off of your cash reserves versus the 5% or 4% they were giving you," says Spencer Betts, a CFP professional and financial consultant with Bickling Financial Services.

Future interest rate risk on callable CDs

While callable CDs issued by banks can be redeemed early, the investor is still locked in to a specified term. By opening a callable CD, you agree to earn the set interest rate until the bank calls the CD or until the term is up.

If interest rates rise, the issuer is unlikely to call the CD early. If you want to reinvest your money in a higher-paying CD before your maturity date, or you need the money for an unforeseen circ*mstance, you will be subject to early withdrawal penalties.

How to choose a callable CD

Consider a brokerage vs. bank for a CD

You can get a callable CD from a brokerage or a bank. Bank CDs come with fixed terms and a specified maturity date. If you withdraw money from the CD prior to its maturity date, you will usually face a penalty.

Brokerage firms buy large quantities of CDs from banks and sell them to customers as brokered CDs.

You will need a brokerage account to invest in one. Brokered CDs can be sold on the secondary market before their maturity date. In general, if interest rates go down, the value of your CD will go up.

Compare CD features

Here are the most important features to consider when comparing CD offers:

• Call period or call date: Understand when your CD can be called. For example, if the call date is one year, then the bank can decide whether or not it wants to redeem your CD starting one year after your opening date. If your CD is called, you will be paid the interest earned up until this point and your principal will be returned.
• Interest rate: Note that brokered CDs do not compound interest daily, like bank CDs do.
• Maturity date: Though there's a high likelihood that your CD will be called before the maturity date, it's still important to know the full timeframe that your money could be locked in.
• Early withdrawal fees: Check whether the CD issuer charges early withdrawal fees, which are usually equal to a few months of interest.

Is a callable CD right for you?

Plot says a callable CD may be a good option if you expect CD rates to remain steady or rise, because then it's less likely to get called back.

Callable CDs aren't a good option for people who want predictable growth for their savings. "The traditional one is going to be a better option for you because you're set and locked in," says Plot. Or consider a high-yield savings account, which allows you to access your money at any time while earning a decent return.

Callable CD FAQs