What Is A Time Deposit Account?

Ben GranBanking Reviewer and Writer

Ben Gran is a freelance contributor for Forbes Advisor on banking. He also writes for The Ascent (a Motley Fool service), where he covers insurance, credit cards, personal finance and investing. Ben has over 10 years of experience as a freelance content writer for regional banks, tech startups, and financial services companies like LendingTree and Prudential. He also works as a ghostwriter for business executives, with bylines in publications such as Fast Company, Entrepreneur and TechCrunch.

Daphne ForemanEditor

Daphne Foreman is a former Banking and Personal Finance Analyst for Forbes Advisor. She has worked as a personal finance editor, writer, and content strategist covering banking, credit cards, insurance and investing. As a small business owner and former financial advisor, Daphne has first-hand experience with the challenges individuals face in making smart financial choices.

Ben Gran,

Ben GranBanking Reviewer and Writer

Daphne Foreman

Daphne ForemanEditor

Banking Reviewer and Writer, Editor

Doug WhitemanEditorial Director, Financial Services

Doug Whiteman is an award-winning journalist with three decades of experience covering personal finance, starting when he was the Washington, D.C.-based consumer news editor and reporter for Associated Press Radio in the 1990s and early 2000s. He's passionate about making financial information clear and useful for consumers — taking personal finance from "Huh?" to "Ah!" He has been quoted by numerous media outlets including The Wall Street Journal, CBS News and USA Today.

Reviewed

Doug Whiteman

Doug WhitemanEditorial Director, Financial Services

Editorial Director, Financial Services

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Updated: Sep 27, 2021, 7:00am

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A time deposit account is a type of interest-bearing bank or credit union account that requires you to leave your money in the account for an agreed-upon length of time, or term. If you want to access the funds in a time deposit account, you need to wait until the term is up. Otherwise, you may have to pay an early withdrawal penalty.

Time deposit accounts are useful for holding savings, and may offer higher annual percentage yields (APYs) than regular savings accounts. A certificate of deposit (CD) is the best example of a time deposit account. Time deposit accounts are covered by insurance, if the account is held by an FDIC member bank or any federal credit union and most state-chartered credit unions, which have NCUA coverage.

When you’re deciding where to keep your money, it’s important to understand how time deposit accounts work and how they compare to other types of bank accounts.

What Is a Time Deposit Account?

Time deposit accounts, also called term deposit accounts, require you to deposit your savings for a specific length of time. Although these accounts are less flexible than typical savings accounts, they also tend to earn higher interest rates. Most people may be more familiar with the name certificate of deposit, which is the most well-known type of time deposit account.

Time deposit accounts and CDs work the same way and are often marketed under the same names. Some banks offer accounts that are called time deposit accounts, instead of using the CD name. Other banks may use the names CD and time deposit interchangeably for these accounts.

Another form of time deposit, offered by credit unions, is the share certificate. Share certificates function like CDs, earning interest over a defined term. Because these account holders are members, the certificate yields they earn are referred to as dividends rather than interest.

How Time Deposit Accounts Work

With a time deposit account, such as a CD, you have to commit to leaving your money in the account for a specific period of time, which is referred to as the term (another reason you may see time deposits referred to as term deposits). The account will pay interest on the amount you deposit, and longer terms often pay a higher interest rate, depending on market conditions and the bank’s current offerings.

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

Time Deposit Account vs. Demand Deposit Account

A time deposit account is not the same as a demand deposit account, such as a checking or savings account. With checking and savings accounts, you have the flexibility to take money out of the account “on demand,” at any time you choose. A money market savings account is another form of demand deposit account.

If you need money for everyday spending, get a checking account. If you need easy access to short-term savings, put your money in a savings or money market account. Any of these demand deposit accounts can be a good choice for your short-term and everyday financial needs.

Time deposit accounts may be a better place to put your savings, especially if you do not expect to need to access the money for a certain length of time. Time deposit accounts such as CDs typically pay a higher rate of interest than regular bank savings accounts, but you have to make sure that you can leave your money in the time deposit account until the term is up.

What To Consider When Choosing a Time Deposit Account

Time deposit accounts are not the best choice for every financial situation. There are several questions to ask before opening a CD or other time deposit account. For example:

What Do You Want to Accomplish With This Money?

Is the money you are putting into a time deposit account part of your emergency fund, your short-term savings or do you want to save for a specific longer-term goal like a new car or a vacation or a down payment on a house?

Time deposit accounts might give you a better APY if you can commit to a longer-term. But you need to make sure that you can accept the commitment of having your money locked up for several months or years. If you need immediate access to your savings, a regular bank savings or money market account may be a better choice.

Can You Get a High Enough Yield on Your Savings?

Shop around for the best CD rates and think about your overall long-term financial plans before committing to a time deposit account. In the current near-zero interest rate environment, many banks are not paying significant yields on time deposit accounts.

If you already have enough cash in your emergency savings fund, and your goal is to maximize the return on your investment, you may want to consider putting this money into other investments. For example, you could put the money into a retirement savings account, or a brokerage account, and invest in other assets like stocks and bonds. These other asset classes are riskier than time deposit accounts, but they might also deliver a higher return than an FDIC-insured bank account can offer.

What if You Have To Pay a Penalty for Early Withdrawal?

If you need to access the cash in your time deposit account sooner than the agreed-upon term, you may have to pay an early withdrawal penalty. This penalty depends on the bank or credit union and the length of your account’s term, but it can add up to a significant amount of interest than you had planned to earn on your savings. Some banks offer no-penalty CDs that may still give you a higher APY than a savings account, but with the flexibility of early withdrawals.

How To Open a Time Deposit Account

If you’re ready to open a time deposit account, start by checking with your bank or credit union to see which options are available to you. Make sure you understand the details before opening a time deposit account, such as:

APY. What percentage yield can you expect to earn on your savings?
Term. For what length of time do you have to commit your money to the time deposit account? Some banks and credit unions offer CDs and certificates with terms as short as seven days or as long as 10 years.
Minimum deposit amounts. How much money will you need to deposit into the time deposit account to qualify for the APY?
Early withdrawal penalty. If you need to pull your money out of the time deposit account before the term is up, make sure you understand any penalties or fees you may incur.
Interest compounding. Find out how often the interest compounds on your account and when interest is paid to the account. Common compounding periods are daily or monthly.

Bottom Line

A time deposit can be an effective savings vehicle, depending on your needs. If you decide to make a time or term deposit part of your overall savings plan, be sure to shop around for the best CD and share certificate rates. Don’t assume that a traditional bank is the only place to look—you may be able to get a better yield on your savings by opening a time deposit account with an online bank or a credit union.