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Quick answer
A CD (certificate of deposit) is a bank or credit union deposit that pays a fixed rate for a fixed term, such as 6 months or 5 years. You agree not to withdraw the money until the CD matures; withdrawing early usually costs a penalty. CDs are federally insured up to $250,000 per depositor, per institution, per ownership category.
Key takeaways
- CDs lock in a fixed APY for the full term, protecting you if rates fall.
- Early withdrawal penalties — often several months of interest — make CDs best for money you won’t need.
- At maturity there is a short grace period before most CDs renew automatically.
- A CD ladder spreads money across terms so part of it becomes available regularly.
In this guide
Certificates of deposit are one of the oldest and simplest savings products: you deposit money, agree to leave it alone for a set time and receive a guaranteed rate in return. That simplicity makes them a useful tool for specific goals — as long as you understand the trade-offs. Estimate your earnings with our CD calculator.
How a CD works, step by step
- Choose a term — commonly 3, 6, 9 or 12 months, or 2, 3, 4 or 5 years.
- Deposit your money. Many CDs have a minimum opening deposit; some have none.
- Earn a fixed rate. The APY is locked for the entire term.
- Leave the money alone until the maturity date.
- At maturity, withdraw your money and interest, move it to a new CD, or let it renew.
Interest is usually compounded daily or monthly. You can often choose to have it added to the CD or paid out to another account.
CD rates: what determines them
CD rates generally follow the broader interest rate environment. When market rates are high, banks pay more to attract deposits; when rates fall, new CD rates fall too. Each bank also sets its own rates based on how much funding it needs.
- Longer terms often — but not always — pay more. When the yield curve is “inverted,” shorter CDs can pay more than longer ones.
- Online banks and credit unions frequently offer higher rates than large branch banks.
- Promotional or “special” terms (such as an 11-month CD) can pay more than standard terms.
The FDIC publishes national average rates for common CD terms, which is a useful benchmark.
Early withdrawal penalties
The trade-off for a guaranteed rate is limited access. If you withdraw before maturity, most banks charge a penalty — typically a set number of days’ or months’ worth of interest, and often more for longer terms.
Example: A $10,000 CD at a 4.50% APY with a 90-day interest penalty. The penalty would be roughly $111. If you withdraw after only a month, the penalty can exceed the interest you have earned, reducing your principal.
Always read the penalty terms before opening a CD, and only deposit money you are confident you will not need.
What happens at maturity
Most banks send a notice before your CD matures. After the maturity date, there is usually a grace period — often about 7 to 10 days — to withdraw or change terms without a penalty. If you do nothing, many CDs automatically renew for the same term at whatever rate the bank is paying then, which may be lower. Put the maturity date on your calendar.
Types of CDs
| Type | How it works | Consider if |
|---|---|---|
| Traditional | Fixed rate and term, early withdrawal penalty | You are sure you won’t need the money |
| No-penalty | Withdraw after a short initial period with no penalty | You want flexibility and can accept a lower rate |
| Bump-up | Request a rate increase if the bank raises rates | You expect rates to rise |
| Add-on | Make additional deposits | You want to keep contributing |
| Jumbo | Large minimum deposit | You have a large sum and the rate is higher |
| Brokered | Bought through a brokerage account | You want access to many banks’ CDs; can be sold before maturity at market value |
CDs vs. high-yield savings accounts
| CD | High-yield savings | |
|---|---|---|
| Rate | Fixed for the term | Variable |
| Access | Penalty for early withdrawal | Anytime |
| Best for | Money with a known date | Emergency fund, flexible goals |
| Risk if rates rise | You are locked in at the lower rate | Your rate may rise |
| Risk if rates fall | You keep the higher rate | Your rate may fall |
Many savers use both: a high-yield savings account for the emergency fund and CDs for money earmarked for a specific future date.
Building a CD ladder
A CD ladder spreads your savings across several CDs with staggered maturities. For example, with $10,000:
| CD | Amount | Term |
|---|---|---|
| 1 | $2,000 | 1 year |
| 2 | $2,000 | 2 years |
| 3 | $2,000 | 3 years |
| 4 | $2,000 | 4 years |
| 5 | $2,000 | 5 years |
Each year, one CD matures. You can use the money or reinvest it in a new 5-year CD. After four years, you have a CD maturing every year while most of your money earns longer-term rates. Ladders balance access with yield and reduce the risk of locking everything in right before rates rise.
Are CDs safe?
CDs at FDIC-member banks are insured up to $250,000 per depositor, per insured bank, for each account ownership category; credit union share certificates have equivalent NCUA coverage. Brokered CDs are also typically FDIC insured at the issuing bank, but their market value can change if you sell before maturity.
Taxes
CD interest is generally taxed as ordinary income in the year it is credited to your account — even if the CD has not matured. Your bank reports it on Form 1099-INT. Holding CDs in a tax-advantaged account such as an IRA can defer or avoid tax on the interest.
When a CD makes sense
- Saving for a home down payment, tuition or a planned purchase on a known date.
- Locking in a rate you expect to fall.
- Keeping money out of easy reach to avoid spending it.
- Part of a conservative savings plan alongside other accounts.
The bottom line
A CD trades flexibility for a guaranteed rate. Choose a term that matches when you will need the money, understand the early withdrawal penalty and note the maturity date so it does not renew at a lower rate. Compare options on our CD accounts comparison and see more in the banking hub.
Frequently asked questions
Are CDs a good investment?
How much does a CD earn?
Can I add money to a CD?
What happens to a CD if the bank fails?
Sources
- Deposit Insurance — Federal Deposit Insurance Corporation
- National Rates and Rate Caps — Federal Deposit Insurance Corporation
- Certificates of Deposit (CDs) — U.S. Securities and Exchange Commission — Investor.gov
- Topic No. 403, Interest Received — Internal Revenue Service
This guide is part of our Banking & Savings hub and our complete personal finance guide. Spot an error? Request a correction.