A CD is a savings account where you lock up your money 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, agree not to touch it for a specific period—anywhere from a few months to five years or longer—and the bank pays you a fixed interest rate in return. That rate is almost always higher than what you'd earn in a regular savings account, sometimes significantly higher.

The trade-off is simple: your money is locked away. If you withdraw before the term ends, the bank charges you a early withdrawal penalty, which is usually a certain number of months' worth of interest. You lose money by breaking the contract early.

CDs are insured by the FDIC up to $250,000 per depositor per bank, the same as regular savings accounts. That means your principal is protected even if the bank fails.

Key Takeaways

  • A CD locks your money away for a fixed term—typically three months to five years—in exchange for a may provide interest rate higher than a savings account.
  • Breaking a CD early costs you an early withdrawal penalty, usually calculated as a few months of interest, so only deposit money you won't need during the term.
  • CD rates vary by bank, term length, and deposit amount, so comparing offers across banks can mean hundreds of dollars in extra interest over the life of the CD.
  • When your CD matures, the bank returns your principal plus all accrued interest, and you can then withdraw it, move it, or open a new CD.

How CD terms and interest rates work

When you open a CD, you choose how long the money stays locked up. Common terms are three months, six months, one year, two years, three years, and five years. Some banks offer shorter terms (30 days) or longer ones (10 years), but these are less common.

The interest rate you receive is fixed for the entire term. It does not change, even if the bank's rates drop or rise. You know exactly how much money you'll have when the CD matures. For example, a $5,000 CD at 4.5% annual interest for one year will earn $225 in interest, giving you $5,225 at maturity.

Interest rates on CDs vary by bank and by term length. Longer terms usually pay higher rates than shorter ones, but not always—it depends on what the bank thinks interest rates will do. Online banks typically offer higher CD rates than brick-and-mortar banks because they have lower overhead costs.

What happens when your CD matures

On the maturity date, your CD term ends. The bank adds all the interest you've earned to your principal and makes the total available to you. You can then withdraw the money, move it to another account at the same bank, or open a new CD with the proceeds.

Many banks have an automatic renewal feature: if you don't tell them what to do with the money by a certain date (usually a week or so after maturity), they automatically roll the CD into a new one at the current rate. This can work in your favor if rates have risen, but it locks your money up again if you were planning to withdraw it. Check your CD agreement for the renewal terms and set a calendar reminder for a few days before maturity.

Early withdrawal penalties and when they apply

If you need your money before the CD matures, you can withdraw it—but the bank will charge you a penalty. The penalty is typically three to six months of interest, though some CDs charge more and a few charge less. On a small CD or a short-term one, the penalty might be just a few dollars. On a large CD or a long-term one, it could be hundreds.

The penalty is deducted from your interest earnings first. If the penalty exceeds the interest you've earned so far, you lose part of your principal. For example, if you have a one-year CD earning $100 in interest and you withdraw after three months, a six-month penalty means you lose $50 of interest and $50 of your original deposit.

Some banks offer no-penalty CDs, which let you withdraw your money early without a penalty—but the interest rate is lower to compensate. These are worth considering if you're not certain you can leave the money untouched for the full term.

CD rates and how to compare them

CD rates change frequently and vary widely between banks. A rate that is competitive today may not be in a month. Before opening a CD, check rates at several banks—online banks, credit unions, and traditional banks. The difference between a 4% rate and a 5% rate on a $10,000 CD for one year is $100, so comparison shopping is worth the time.

Pay attention to the annual percentage yield (APY), not just the interest rate. APY accounts for how often the bank compounds interest (adds it to your balance), so it's the true picture of what you'll earn. Also check whether the rate applies to the full amount you deposit or only to deposits above a certain minimum.

Some banks offer promotional rates for new customers or for large deposits. These rates are real and available to you, but they may drop when the promotion ends and you open your next CD.

CDs versus savings accounts and money market accounts

A regular savings account has no term and no penalty for withdrawal, but the interest rate is much lower—often under 0.5% annually. A money market account is a hybrid: it pays more interest than a savings account (though usually less than a CD) and lets you write checks or make transfers, but it may have a minimum balance requirement and limits on how many withdrawals you can make per month.

Choose a CD if you have money you won't need for several months or longer and want the highest may provide return. Choose a savings account if you need quick access to the money. A money market account works if you want something in between—higher interest than savings, but more flexibility than a CD.

Who should open a CD and when

CDs make sense when interest rates are relatively high and you have money sitting idle that you won't need for a while. They're especially useful for saving toward a specific goal with a known timeline—a down payment in two years, a car purchase in 18 months, or a vacation in six months.

CDs are less useful if you think you might need the money before maturity, if interest rates are very low (the penalty might wipe out your gains), or if you're saving for something with no fixed deadline. They're also not a substitute for an emergency fund—that money should stay in a regular savings account where you can access it instantly.

Frequently Asked Questions

Can I withdraw money from a CD before it matures?

Yes, but you'll pay an early withdrawal penalty, usually three to six months of interest. The penalty is deducted from your earnings first, and if it's larger than the interest you've earned, you'll lose part of your original deposit. Some banks offer no-penalty CDs with lower rates if early access is important to you.

What happens if the bank fails while I have a CD?

Your CD is insured by the FDIC up to $250,000, so you'll get your full principal and accrued interest back. The FDIC will transfer your CD to another bank or pay you directly. This protection applies as long as the bank is FDIC-insured, which nearly all banks are.

Do I have to pay taxes on CD interest?

Yes. CD interest is taxable income in the year it's earned. 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 retirement accounts (like IRAs) to defer taxes on the interest.

What's the difference between a CD and a savings account?

A CD locks your money for a set term and pays a higher interest rate. A savings account has no term, no penalty for withdrawal, and a lower rate. CDs are for money you won't need soon; savings accounts are for money you might need anytime.

Can I open multiple CDs at the same bank?

Yes. Each CD is insured separately up to $250,000 by the FDIC, so you can open several CDs at one bank and be fully protected. Some people open CDs with different maturity dates so money becomes available at different times—a strategy called "laddering."