A CD is a savings account where you agree to leave money untouched for a set time in exchange for a higher interest rate
A certificate of deposit (CD) is a contract between you and a bank or credit union. You give them a lump sum of money, they agree to pay you a fixed interest rate, and you agree not to touch that money until a specific date arrives. That date is called the maturity date. When it arrives, you get your original money back plus all the interest it earned.
The trade-off is simple: you lose access to your cash for months or years, and in return you get a better interest rate than a regular savings account offers. Right now, CD rates vary widely depending on the bank, the amount you deposit, and how long you lock the money away — but they are typically higher than what you would earn in a standard savings account at the same institution.
CDs are insured by the Federal Deposit Insurance Corporation (FDIC) if you open one at a bank, or by the National Credit Union Administration (NCUA) if you open one at a credit union. That means if the bank fails, your money up to $250,000 is protected.
Key Takeaways
- You deposit a fixed amount of money and agree not to withdraw it until the maturity date, in exchange for a may provide interest rate.
- CD rates are higher than regular savings accounts but lower than what you might earn from stocks or bonds over the same period.
- If you withdraw money before the maturity date, you pay an early withdrawal penalty that reduces your earnings or principal.
- CDs come in different lengths — typically three months to five years — and you choose the term that matches when you will need the money.
- Your deposit is insured up to $250,000 by the FDIC or NCUA, so the principal itself is never at risk.
How the interest rate and term length work together
When you open a CD, you choose two things: how much money to deposit and how long to lock it away. The longer you agree to leave the money untouched, the higher the interest rate the bank will offer you. A three-month CD might pay 4.5%, while a five-year CD from the same bank might pay 5.2%. That extra rate is the bank's way of compensating you for giving up access to your money for longer.
The interest rate is fixed, meaning it does not change. If you open a one-year CD at 5%, you will earn 5% for the full year, even if market rates drop to 3% next month. That certainty is one reason people use CDs — you know exactly what you will have when the CD matures.
Interest compounds based on the bank's terms. Some CDs compound daily, others monthly or quarterly. The more often interest compounds, the slightly more you earn, because you earn interest on your interest. The difference is usually small, but it adds up over longer terms.
What happens when your CD reaches maturity
On the maturity date, your CD automatically matures. The bank deposits your original principal plus all earned interest into your account — usually a linked checking or savings account you specify when you open the CD. You can then withdraw the money, spend it, or move it elsewhere.
Many banks have a grace period after maturity — usually five to ten days — during which you can withdraw the money without penalty. If you do nothing during that window, the bank will automatically renew the CD for another term at whatever the current rate is. If rates have dropped, you might not want that renewal. If rates have risen, you might want to shop around before renewing. Read your CD agreement to see what your bank's renewal policy is.
If you want to avoid automatic renewal, contact your bank before the maturity date and tell them you do not want to renew. Some banks let you do this online; others require a phone call or a visit.
The early withdrawal penalty and when it applies
If you need your money before the maturity date, you can withdraw it — but you will pay an early withdrawal penalty. This penalty is set by the bank when you open the CD and is stated in your agreement. It is usually expressed as a number of months of interest. For example, a penalty might be "three months of interest" or "six months of interest."
The penalty comes out of your earnings first. If you have earned $200 in interest and the penalty is $150, you get your principal back plus $50. If the penalty is larger than your interest earned, it comes out of your principal — meaning you get back less money than you deposited. This is why early withdrawal is expensive and should be a last resort.
Some banks offer no-penalty CDs, which let you withdraw your money early without a penalty, though usually at a lower interest rate than a standard CD. These are worth considering if you are not certain you can leave the money untouched for the full term.
CD laddering: a strategy for accessing money sooner
One way to get some of the benefits of CDs while keeping money accessible is CD laddering. Instead of putting all your money into one five-year CD, you split it into five one-year CDs. Each year, one CD matures and you can access that money without penalty. You can then decide whether to spend it, reinvest it in a new CD, or leave it in savings.
Laddering works best when you have a larger sum to invest and you want to balance the higher rates of longer-term CDs with the flexibility of shorter terms. For example, if you have $5,000, you might open five $1,000 CDs with maturity dates one year apart. After year one, you have access to $1,000 plus interest. After year two, another $1,000 matures, and so on.
The downside is that you earn slightly lower rates on the shorter-term CDs than you would on one large five-year CD. But the trade-off is worth it if you need periodic access to your money.
CDs versus savings accounts and money market accounts
A regular savings account has no maturity date and no penalty for withdrawal. You can take money out whenever you want. In exchange, the interest rate is lower — often much lower — than a CD. Right now, many savings accounts pay 0.01% to 0.5%, while CDs pay 4% to 5.5% depending on the term.
A money market account sits between a savings account and a CD. It typically pays more interest than a savings account but less than a CD, and you can usually write checks or make withdrawals, though there may be limits on how many per month. Money market accounts are useful if you want better returns than savings but need more flexibility than a CD allows.
Choose a CD if you have money you will not need for several months or years and you want a may provide return. Choose a savings account if you need quick access. Choose a money market account if you want something in the middle.
Where to open a CD and what to compare
You can open a CD at any bank or credit union. Online banks often offer higher rates than brick-and-mortar banks because they have lower overhead costs. Credit unions sometimes offer competitive rates to their members. Before opening a CD, compare rates across at least three institutions — the difference between 4.5% and 5.2% on a $10,000 CD over five years is hundreds of dollars.
When comparing, look at the interest rate, the term length, the compounding frequency, the early withdrawal penalty, and the minimum deposit required. Some banks require $500 minimums; others require $25,000. Some have no minimum at all. Make sure the bank or credit union is FDIC or NCUA insured so your money is protected.
You can also use CD comparison websites to see rates across multiple banks at once, though you will still need to visit each bank's website to open the account. There is no fee to open a CD, and you should never pay to open one.
Frequently Asked Questions
Can I add money to a CD after I open it?
No. A CD is a fixed contract. You deposit a set amount on day one, and that amount stays the same until maturity. If you want to invest more money, you open a separate CD. Some banks offer "add-on CDs" that let you deposit more during a window after opening, but this is rare and usually only available for longer-term CDs.
What if I need my money before the maturity date?
You can withdraw it, but you will pay an early withdrawal penalty set by the bank. The penalty is usually several months of interest and comes out of your earnings first, then your principal if the penalty is large. A no-penalty CD lets you avoid this, though at a lower rate.
Do I have to pay taxes on CD interest?
Yes. CD interest is taxable income in the year you earn it. The bank will send you a 1099-INT form at tax time showing how much interest you earned. You report this on your tax return. Some people use CDs in tax-advantaged accounts like IRAs to defer this tax.
What happens if the bank fails?
Your CD is insured up to $250,000 by the FDIC (if it is a bank) or NCUA (if it is a credit union). If the bank fails, the insurance agency pays you your principal and accrued interest. You will not lose money, though there may be a delay while the claim is processed.
Is a CD a good investment right now?
That depends on your goals and what interest rates are doing. CDs offer a may provide return with no risk to principal, which is valuable if you want certainty. But if rates are expected to rise, locking money into a CD now means you miss out on higher rates later. If rates are expected to fall, a longer-term CD locks in today's higher rate.