How Do Share Certificates Work?

Are you interested in earning higher returns than a traditional savings account offers? Learn how share certificates work and if they're a good fit for you.

If you’re searching for a way to invest your money and earn dividends, you may have encountered the term “share certificate.” For those of you that are new to the credit union world, share certificates might be unfamiliar, but they’re comparable to certificates of deposit offered by banks.

Here’s everything you need to know about share certificates to help you decide if this product supports your financial goals.

What Is A Share Certificate?

While banks offer certificates of deposit (CDs), credit unions similarly offer share certificates. Essentially, a savings method with a fixed annual percentage yield (APY) for a fixed duration.

Why Are They Called Share Certificates?

Credit unions use the term “share” because instead of customers, they have members who are part-owners or shareholders of the institution. Members earn dividends from their share certificates, similar to the interest earned from a bank. Share certificates have a higher dividend rate because depositors agree to leave their money in the certificate for a set period. Any early withdrawal could result in a penalty.

How Do Share Certificates Work?

When you agree to place funds in a share certificate, you must leave it in deposit for an agreed term. A share certificate term length can be between three months and ten years, depending on what your credit union offers. The credit union will pay you dividends while your money is in deposit which will be compound either daily or monthly.

You have several choices once your share certificate reaches maturity – you can roll your funds into a new share certificate, transfer it to a checking or savings account, or withdraw it. While the share certificate is active, you’re not able to add additional funds, but you can once the term ends and before rolling them into a new share certificate.

What’s The Difference Between Share Certificates & CDs?

Share certificates versus CDs: which one is better? While these two are essentially the same, there are some notable differences. For one, share certificates are available at non-profit, member-owned credit unions, while for-profit banks offer CDs. While any banking customer can get a CD, share certificates are only available to credit union members.

The federal government backs both share certificates and CDs to protect depositors if a financial institution fails. However, the National Credit Union Administration (NCUA) backs share certificates from federally insured credit unions, insuring up to $250,000 per depositor. Meanwhile, the Federal Deposit Insurance Corporation (FDIC) insures CDs from banks, covering a maximum of $250,000 per depositor.

Another difference is that share certificates pay dividends while CDs earn interest. Despite this, the earnings from both account types are referred to as annual percentage yield (APY). It’s the return you get from your deposited funds with compound interest. It’s crucial to know the APY a credit union or bank offers so you can compare account details.

What Are The Benefits Of A Share Certificate?

A share certificate is one of the best investment products for credit union members. It’s an ideal option for anyone who wants to put their money to work without much risk.

Here are some reasons to open a share certificate:

Guaranteed Dividend Rate

Share certificates are for low-risk investors who want guaranteed gains after a specific timeframe. When you deposit funds in a share certificate, you lock in a fixed dividend rate for the duration of the term you chose. You also have peace of mind knowing your money is safe from market fluctuations. As long as you keep your money in deposit for the whole term, you’ll receive the full dividend once your share certificate matures.

It’s a bonus that credit unions usually offer higher yields on share certificates than brick-and-mortar banks do with CDs. If you want to earn extra funds, it’s worth looking into your local credit union’s rates.

Low Deposit Requirements

Many investment products are inaccessible because of their hefty initial deposit requirements. Fortunately, share certificates usually have lower deposit requirements – making share certificates an ideal investment option for beginners who aren’t ready to commit large amounts. They can also benefit seasoned investors who want to introduce stability to their aggressive strategy.

Flexible Term Options

Depositors can control how long they want to lock in their money, whether for months or years. When you agree to a term, you give up access to your money for that time frame. In return, the credit union provides a fixed dividend rate that’s typically higher than what a standard savings account offers. The longer your share certificate’s term, the higher your earnings.

Government Protection

Backed by the US government, share certificates offer guaranteed protection for your money. Like how the FDIC insures bank CDs, the NCUA backs share certificates from credit unions. Funds within $250,000 are safe in case your credit union goes bankrupt.

Can You Cash Out A Share Certificate?

One benefit of share certificates is that depositors can choose how long they want their terms to be. They also have complete freedom with their funds once their share certificates mature.

One option is to cash out your money and earned dividends and do with it what you will. However, keep in mind that if you cash out before the end of your term, you’ll likely have to pay a substantial withdrawal penalty.

Because you have no access to your funds before your share certificate’s maturity, it’s crucial to select a term you’re comfortable with and an amount you’re willing to do without for that period. While share certificates offer no liquidity, the advantage is that you have guaranteed earnings once your term is up.

Do Share Certificates Get Taxed?

The dividends you earn through share certificates within the tax year are considered income. That means your earnings will get taxed at the same rate as your ordinary income. If you’re in the 22% tax bracket, for example, 22% of your share certificate earnings will go to your federal income tax.

If your share certificate dividends are more than $10, your credit union will send you a 1099-INT indicating your earnings for the tax year. You must pay the required taxes when you receive this document, even if you rolled your funds into a new share certificate. Your dividends will only be exempt from taxes if you deposited your funds in a tax-advantaged retirement account.

Can You Lose Money In A Share Certificate?

If you’re a risk-averse investor, you don’t have to worry about losing your funds in a share certificate. It’s a low-risk investment product that keeps your principal investment safe. In addition, share certificates are insured by the NCUA, protecting you from financial loss if your credit union files for bankruptcy.

Share certificates are safer than riskier investments like mutual funds and stocks. However, that also means earnings from share certificates are lower. Share certificates are suited for credit union members who want a secure place for short-term savings while gaining moderate earnings.

Enjoy The Benefits Of A Share Certificate With A+ Federal Credit Union

If you want to enjoy the benefits of a share certificate, deposit your funds at A+ Federal Credit Union. Offering terms from 6 to 60 months, you can find a share certificate option that meets your short- and long-term financial goals.

With a minimum investment of $1,000, you can open a high-yield share certificate with terms ranging from 6 months to 60 months. Dividend rates range between 3.76% APY* for a 6-month certificate and 3.56% APY* for a 60-month certificate. The team of experts at A+FCU can help you choose the term that will work best for your needs.

*APY = Annual Percentage Yield. Rates effective 12.12.2024 and are subject to change without notice.

Membership required. Insured by NCUA. A penalty may be imposed for early withdrawals. Conditions and restrictions may apply. Subject to change without notice.