A CD is a savings account where you lock up money for a set time in exchange for a may provide interest rate
A certificate of deposit (CD) is an agreement between you and a bank. You give the bank a lump sum of money, agree not to touch it for a specific period—anywhere from three months to five years—and the bank pays you a fixed interest rate on that money. When the term ends, you get your original deposit back plus the interest earned.
The tradeoff is simple: you lose access to your money during the term, but you get a higher interest rate than a regular savings account offers. The bank uses your money during that time, which is why they pay you more for the may provide that you won't withdraw it early.
CDs are FDIC insured at most banks, meaning your deposit is protected up to $250,000 if the bank fails. That protection applies per depositor, per bank, per account type—so you can have multiple CDs at the same bank and each one is covered separately up to $250,000.
Key Takeaways
- You deposit a fixed amount, agree to leave it untouched for a set term (three months to five years), and receive a may provide interest rate that does not change.
- Early withdrawal before the term ends triggers a penalty, usually a loss of some or all of the interest you earned, sometimes a portion of your principal.
- CD rates are higher than regular savings accounts because the bank knows exactly how long it can use your money.
- FDIC insurance protects your deposit up to $250,000 per bank, making CDs one of the safest places to store money.
- When your CD matures, you can withdraw the money, open a new CD, or let it roll over into another term at the bank's current rate.
How the interest rate and term work together
The interest rate on a CD is fixed—it does not move up or down while your money is locked in. If you open a one-year CD at 4.5%, you will earn 4.5% for the full year, even if rates rise to 5.5% the next month. That certainty is part of what you are paying for.
Longer terms usually come with higher rates. A six-month CD might pay 3.8%, while a two-year CD at the same bank might pay 4.2%. The bank is willing to pay more because they want to hold your money longer. Shorter terms—three or six months—are useful if you think rates might rise soon and you want the flexibility to move your money.
Interest compounds based on the bank's schedule, usually daily or monthly. Some banks show you the annual percentage yield (APY), which is the total return you will see after compounding over one year. That number is always higher than the stated rate because it accounts for the effect of compounding.
What happens if you need the money before the term ends
Withdrawing money early from a CD triggers an early withdrawal penalty. The penalty varies by bank and by CD term. A common penalty is three months of interest, but some banks charge six months or even a full year of interest. A few charge a percentage of your principal instead.
The penalty is deducted from your total payout. If you earned $500 in interest but the penalty is $300, you walk away with your original deposit plus $200. If the penalty exceeds your interest, you lose principal—you get back less than you deposited. This is why CDs are best for money you genuinely will not need.
Some banks offer no-penalty CDs that let you withdraw without a penalty, but they pay lower interest rates in exchange. These are useful if you want the higher rate of a CD but need some flexibility. Read the terms carefully: "no penalty" usually means no penalty on interest, but some banks still charge a small fee.
CD laddering: spreading your money across multiple terms
One strategy to balance safety with access is CD laddering. You divide your money into several CDs with different maturity dates. For example, you might open five one-year CDs, each maturing in consecutive years. Each year, one CD matures and you can withdraw the money, reinvest it, or let it roll over.
Laddering gives you regular access to portions of your money without the penalty of early withdrawal. It also lets you take advantage of rising rates: when a CD matures and rates have gone up, you can open a new CD at the higher rate. If rates fall, you still have money locked in at the old higher rate.
The downside is that you need enough money to split across multiple CDs, and you have to track multiple maturity dates. Some banks make this easier by offering CD ladder products that automate the process, though these are less common.
What to watch when comparing CDs across banks
CD rates vary significantly between banks. A large national bank might offer 3.5% on a one-year CD, while an online bank offers 4.8% for the same term. Online banks typically pay more because they have lower overhead costs. Credit unions sometimes offer competitive rates too, especially to members.
Compare the rate, the term length, the penalty structure, and whether the bank is FDIC insured. A slightly higher rate at an uninsured institution is not worth the risk. Also check whether the bank automatically renews your CD when it matures—some do, some do not. If it does renew, find out whether you have a grace period (usually seven to ten days) to withdraw without penalty before the new term locks in.
Some banks offer bump-up CDs that let you increase your rate once if rates rise during your term. Others offer add-on CDs that let you deposit more money into the same CD. These features cost you in the form of a lower starting rate, so only choose them if you think you will actually use them.
When a CD matures and what your options are
When your CD term ends, the bank sends you a notice (usually 30 days before maturity). At that point you have three choices: withdraw the money, open a new CD, or let it roll over.
If you do nothing, most banks automatically roll your CD into a new term at their current rate. This is convenient if rates have stayed similar, but it can work against you if rates have dropped significantly. Read your maturity notice carefully and set a reminder to act before the grace period ends if you want to move your money elsewhere.
If you withdraw, the bank deposits the principal plus interest into your checking or savings account, usually within one to two business days. If you want to open a new CD, you can do so immediately at the current rate, which may be higher or lower than what you just earned.
CDs versus other savings options
A regular savings account is more flexible—you can withdraw anytime without penalty—but pays much lower interest, often under 0.5% APY. A money market account sits between the two: it pays more than savings but less than a CD, and it lets you write checks or make a limited number of withdrawals per month.
A high-yield savings account at an online bank can pay nearly as much as a CD (sometimes 4% or higher) while keeping your money accessible. The tradeoff is that the rate is not fixed—it can drop if the bank lowers rates. A CD locks in your rate, so you know exactly what you will earn.
Treasury bills and bonds are another option if you want a may provide return. They are backed by the U.S. government rather than FDIC insurance, and they have different tax treatment. For most people saving under $250,000, a CD is simpler and offers the same safety.
Frequently Asked Questions
Can I open a CD with a small amount of money?
Most banks require a minimum deposit to open a CD, typically $500 to $2,500, though some online banks have minimums as low as $100 or even $1. Check the bank's website or call to confirm the minimum before you apply. If you have less than the minimum, a high-yield savings account is usually a better option.
Do I have to pay taxes on CD interest?
Yes. CD interest is taxed as ordinary income in the year you earn it, even if you do not withdraw the money. The bank will send you a 1099-INT form at tax time showing the interest earned. If you have multiple CDs, you may receive multiple 1099 forms.
What happens if the bank fails while my CD is open?
FDIC insurance protects your deposit up to $250,000. The FDIC will transfer your CD to another bank or pay you directly. Your CD term and rate are honored by the new institution. This protection is automatic—you do not need to do anything.
Can I move my CD to a different bank before it matures?
Technically yes, but you will pay the early withdrawal penalty. If the penalty is less than the rate difference between your current CD and a higher-paying CD elsewhere, it might be worth it. Calculate the math: compare the penalty cost against the extra interest you would earn at the new bank over the remaining term.
What is the difference between a CD and a savings bond?
A CD is issued by a bank and insured by the FDIC. A savings bond is issued by the U.S. Treasury and backed by the government. Savings bonds have different maturity periods and tax rules. For most people, CDs are simpler and offer comparable safety and returns.