What you earn from a CD depends on the rate your bank offers, how much you deposit, and how long you lock the money away
A certificate of deposit (CD) pays you a fixed interest rate for agreeing to leave your money untouched for a set period — usually three months to five years. The bank tells you the rate upfront. If you deposit $10,000 at 4.50% annual percentage yield (APY) for one year, you will earn $450 in interest (before taxes). If you deposit $5,000 at the same rate for the same term, you earn $225.
The actual dollar amount you receive depends on three things: the APY the bank is currently offering, the principal (how much you put in), and the term length (how long you commit to). Rates change constantly — sometimes weekly — so what one bank pays today may differ from what it pays next month. Longer terms usually pay more than shorter ones at the same bank, but not always across different banks.
You get your interest either at maturity (when the CD term ends) or monthly or quarterly, depending on the bank's terms. Some banks compound interest daily, which means you earn a tiny bit of interest on your interest. The APY figure already accounts for compounding, so you do not have to calculate it yourself.
Key Takeaways
- CD rates vary by bank and change frequently, so comparing rates across multiple banks before you deposit is essential.
- Longer CD terms (12 months, 18 months, 5 years) typically pay higher rates than shorter ones (3 months, 6 months), though this is not may provide.
- Your earnings are calculated as principal × APY × (term in years), so doubling your deposit doubles your interest earned.
- You can find current rates on bank websites, CD comparison sites, or by calling banks directly — rates are public and change weekly or monthly.
- Interest earned on CDs is taxable income in the year you receive it, which reduces your actual take-home amount.
How rates differ between banks and CD terms
Banks set their own CD rates based on what the Federal Reserve does and what other banks are offering. On any given day, a one-year CD might pay 4.25% at one bank and 4.75% at another. That 0.50% difference sounds small, but on $25,000 it means $125 more per year in your pocket.
Online banks typically pay higher rates than brick-and-mortar banks because they have lower overhead costs. A national bank with physical branches might offer 3.50% on a one-year CD while an online bank offers 4.75% for the same term. Credit unions sometimes pay competitive rates too, though you have to be a member.
Term length matters because longer commitments usually come with higher rates. A three-month CD might pay 4.00%, a one-year CD might pay 4.50%, and a five-year CD might pay 4.75%. But this is not a rule — sometimes a two-year CD pays less than a one-year CD if rates are falling. The only way to know is to check what banks are actually offering right now.
What happens to your money when the CD matures
When your CD term ends, the bank sends you the principal plus all the interest you earned. You can then deposit that money into a new CD, move it to a savings account, or withdraw it. If you do nothing, many banks automatically roll the money into a new CD at whatever rate they are offering that day — which might be lower than what you were earning.
If you need the money before the term ends, you will pay an early withdrawal penalty. This penalty varies widely: some banks charge three months of interest, others charge six months or more. A few banks charge a flat dollar amount. Before you open a CD, check what the penalty is — it matters if your circumstances change.
How to compare CD rates across banks
The fastest way to see what banks are paying is to visit their websites directly and look for the CD rates page. Most banks list rates by term length (3 months, 6 months, 1 year, 2 years, 5 years) and update them regularly. Write down the APY and the term, then compare across three to five banks.
CD comparison websites like Bankrate, DepositAccounts, and DepositRates pull rates from many banks in one place, so you can see the highest-paying options without visiting each bank individually. These sites update rates frequently but not in real time, so always confirm the rate on the bank's own website before you deposit.
Call banks directly if you have questions about how interest is paid or what the early withdrawal penalty is. The website may not spell out every detail, and a customer service representative can answer in seconds.
The impact of taxes on what you actually keep
CD interest is taxable income. If you earn $500 in interest on a CD, you owe federal income tax on that $500 in the year you receive it (or the year the CD matures, depending on when the bank reports it). Your tax bracket determines how much of that $500 goes to taxes.
If you are in the 22% federal tax bracket and earn $500 in CD interest, you will owe roughly $110 in federal taxes, leaving you with $390. State income tax may apply too, depending on where you live. This is why the actual return on a CD is lower than the APY suggests — the APY is the gross amount before taxes.
If you hold a CD in a tax-advantaged account like a traditional IRA or Roth IRA, the interest may not be taxed immediately (or at all, in the case of a Roth). Check with a tax professional if you are using a retirement account.
CD rates in different economic conditions
CD rates move when the Federal Reserve changes its benchmark interest rate. When the Fed raises rates, banks raise CD rates too — usually within weeks. When the Fed cuts rates, CD rates fall. This is why rates that were 5.00% a year ago might be 4.25% today.
If you think rates are about to fall, locking in a longer-term CD at today's rate protects you. If you think rates will rise, a shorter-term CD lets you reinvest at a higher rate when it matures. But predicting rate movements is difficult, so many people split the difference by opening CDs at different term lengths (called a CD ladder).
Special CD types that pay differently
Most CDs pay a fixed rate, but some banks offer variations. A bump-up CD lets you request a higher rate once during the term if rates rise. A no-penalty CD lets you withdraw your money early without a penalty, though the rate is usually lower than a traditional CD. An add-on CD lets you deposit more money during the term.
These options cost you something — either a lower starting rate or less flexibility. Compare them to a standard CD at a higher rate before deciding. Sometimes the higher rate on a regular CD beats the convenience of a no-penalty CD.
Frequently Asked Questions
How often do CD rates change?
Banks can change their CD rates daily, though most update them weekly or monthly. Rates move when the Federal Reserve changes its benchmark rate or when a bank wants to attract or discourage deposits. Check the bank's website or call to confirm the current rate before you deposit.
Can I earn more by opening multiple CDs?
Opening multiple CDs does not change the rate you earn per dollar — it just spreads your money across different terms or banks. If you deposit $10,000 in one CD at 4.50%, you earn $450 per year. If you split that into two $5,000 CDs at the same rate, you earn $225 per CD, totaling $450. The advantage is flexibility: money matures at different times so you are not locked in completely.
What is the difference between APY and APR on a CD?
APY (annual percentage yield) includes the effect of compounding — interest earned on interest. APR (annual percentage rate) does not. Banks must show you the APY on CDs, so that is the number to use when comparing rates. APY is always equal to or higher than APR.
Do I have to pay taxes on CD interest while the money is still locked up?
Yes. You owe taxes on CD interest in the year you receive it or the year it is credited to your account, even if you cannot withdraw the money yet. The bank will send you a 1099-INT form showing the interest earned, and you report it on your tax return.
Is there a minimum deposit required for CDs?
Most banks require a minimum deposit to open a CD, typically $500 to $2,500, though some online banks have no minimum. Check the bank's website or call to confirm. The minimum does not affect the rate — a $500 CD earns the same APY as a $50,000 CD at the same bank and term.