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. You give the bank a lump sum of money, the bank agrees to pay you a fixed interest rate, and you agree not to withdraw that money until a specific date arrives. That date is called the maturity date. When it arrives, you get your original money back plus the interest earned.

The trade-off is simple: you give up access to your money for a defined period (usually three months to five years), and in return the bank pays you more interest than it would on a regular savings account. A regular savings account at most banks currently pays 0.01% to 0.05% annual interest. A CD at the same bank might pay 4% to 5%, depending on how long you lock the money away.

CDs are FDIC-insured at most banks, meaning the federal government guarantees your deposit up to $250,000 per account owner per bank if the bank fails. This makes them one of the safest places to keep money that you do not need to touch.

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 interest rates are typically much higher than savings account rates because the bank knows it can use your money for a longer period.
  • If you withdraw money before the maturity date, you pay an early withdrawal penalty that usually wipes out most or all of the interest you earned.
  • CDs are FDIC-insured up to $250,000 per account owner per bank, making them a low-risk savings tool.
  • You can open a CD at most banks, credit unions, and online financial institutions, and rates vary significantly between providers.

How the interest rate and term length work together

The longer you agree to lock your money away, the higher the interest rate the bank will offer you. A three-month CD might pay 4.5%, while a five-year CD at the same bank might pay 5.25%. The bank is willing to pay more because it has certainty about how long it can lend out your money.

The interest rate is fixed, meaning it does not change. If you open a one-year CD at 4.75%, you will earn 4.75% for the entire year, even if the bank's rates drop to 3% next month. This predictability is one reason people choose CDs over bonds or stock investments, where the return fluctuates.

Interest on a CD is usually compounded daily or monthly and added to your account. When the CD matures, you receive the full balance: your original deposit plus all the interest earned. You can then withdraw the money, move it to another account, or roll it into a new CD.

What happens if you need the money before maturity

If you withdraw money from a CD before the maturity date, you pay an early withdrawal penalty. The size of this penalty varies by bank and by CD term. A common penalty is three to six months of interest, though some banks charge a percentage of the principal or a flat dollar amount.

For example, if you open a $10,000 one-year CD earning 4.5% and withdraw the money after six months, you might owe a penalty of three months' interest (roughly $112.50). You would receive $10,000 plus three months of interest ($112.50), minus the penalty ($112.50), leaving you with $10,000 — essentially as if you had earned nothing.

This is why CDs work best for money you genuinely do not need. If there is any chance you will need the funds within the term, a regular savings account or money market account is safer, even though the interest rate is lower.

Where to open a CD and what rates look like now

You can open a CD at any bank, credit union, or online financial institution. Online banks typically offer higher rates than brick-and-mortar banks because they have lower overhead costs. Rates change frequently and vary widely between institutions.

As of early 2024, CD rates at online banks range from roughly 4% to 5.5% depending on the term, while rates at traditional banks are often lower. Credit unions sometimes offer competitive rates, especially if you are a member. You can compare current rates across institutions using financial websites that track CD offerings, though you will need to visit each bank's website to see the exact rate they are offering today.

When you open a CD, you will need to provide your Social Security number, proof of identity, and the initial deposit amount. Most banks let you open a CD online in a few minutes. Your CD will be FDIC-insured as long as the bank is FDIC-insured and your total deposits at that bank do not exceed $250,000.

CDs versus savings accounts and money market accounts

A regular savings account gives you full access to your money at any time with no penalty. The trade-off is a much lower interest rate — typically under 0.5% at traditional banks, though online savings accounts pay 4% to 5%. You choose a savings account when you need liquidity (quick access to cash) more than you need a high interest rate.

A money market account is a hybrid. It pays interest higher than a regular savings account (usually 4% to 5% at online banks) but lower than a CD, and it gives you limited check-writing or debit card access. You can withdraw money, but there are restrictions on how often. Money market accounts work well for an emergency fund or money you might need within a few months.

A CD locks in the highest rate but removes access entirely until maturity. Choose a CD when you have money you will not need for a specific period and you want the highest may provide return. Choose a savings account or money market account when you need flexibility or are not certain how long you can leave the money untouched.

What happens when your CD matures

When the maturity date arrives, the CD stops earning interest. The bank will notify you (usually by email or mail) a few days before maturity. At that point, you have a few options: withdraw the money, open a new CD with the full balance, or move the money to a savings account.

Some banks have an automatic renewal feature, meaning if you do not tell them what to do, they will automatically roll your CD into a new one at the current rate. Check your CD agreement to see if your bank does this. If rates have dropped significantly, you may not want to renew at the new rate — in that case, contact the bank before maturity to withdraw the money or move it elsewhere.

If you do nothing and the bank auto-renews, you will have a grace period (usually 7 to 10 days) to withdraw the money without penalty if you change your mind. After that grace period, you are locked in again until the new maturity date.

CD laddering: a strategy to balance rate and access

One way to get higher CD rates while keeping some money accessible is CD laddering. You divide your money into equal amounts and open multiple CDs with different maturity dates — for example, one CD maturing in one year, one in two years, one in three years, and one in four years.

As each CD matures, you can withdraw the money, use it for an expense, or open a new CD at the longest term (currently four years in this example). This way, you always have some money becoming available while still locking in higher rates on the rest. Laddering works best when you have at least $5,000 to $10,000 to divide across multiple CDs.

For example, if you have $20,000, you might open four $5,000 CDs maturing in one, two, three, and four years. In one year, the first CD matures and you can access $5,000. If you do not need it, you open a new four-year CD with that $5,000. This keeps money locked in at higher rates while ensuring you have access to some funds every year.

Frequently Asked Questions

Can I withdraw money from a CD before it matures?

Yes, but you will pay an early withdrawal penalty that typically equals three to six months of interest. The penalty amount depends on the bank and the CD term. In many cases, the penalty wipes out all the interest you earned, leaving you with just your original deposit or slightly less.

Is a CD safe if the bank fails?

Yes, as long as the bank is FDIC-insured. The FDIC guarantees your deposit up to $250,000 per account owner per bank. If the bank fails, the FDIC will return your money in full. You can verify a bank's FDIC status on the FDIC website.

What is the difference between a CD and a savings bond?

A CD is issued by a bank and FDIC-insured. A savings bond is issued by the U.S. Treasury and backed by the federal government. Savings bonds have different interest structures and tax treatment. CDs typically offer higher rates but less flexibility; bonds have tax advantages but lower rates.

Do I have to pay taxes on CD interest?

Yes. CD interest is taxable as ordinary income in the year it is earned. If your CD earns $500 in interest, that $500 is added to your taxable income. The bank will send you a 1099-INT form at tax time if you earned $10 or more in interest.

What happens if I need my money back during the grace period after maturity?

Most banks give you 7 to 10 days after maturity to withdraw your money without penalty if the CD auto-renewed. After that grace period ends, you are locked in again until the new maturity date. Check your CD agreement for your bank's specific grace period.