A fixed savings account holds your money at a set interest rate for a set time period
A fixed savings account — also called a certificate of deposit (CD) in the United States — is an account where you deposit a lump sum of money and agree to leave it untouched for a specific period. In exchange, the bank pays you a fixed interest rate that does not change, no matter what happens to market rates during that time. The period can be three months, six months, one year, five years, or longer, depending on what the bank offers.
The trade-off is simple: you get a higher interest rate than a regular savings account, but you cannot withdraw the money without a penalty. If you need the money before the term ends, the bank will charge you a fee — usually a few months' worth of interest — to let you out early.
Fixed accounts are different from regular savings accounts, where you can withdraw money anytime and the interest rate can change. They are also different from money market accounts, which often let you write checks or make a limited number of withdrawals per month. With a fixed account, the money stays locked until the maturity date arrives.
Key Takeaways
- You deposit a set amount of money and leave it for a fixed period — typically three months to five years — in exchange for a may provide interest rate.
- The interest rate does not change during the term, so you know exactly how much money you will have when the account matures.
- Withdrawing money before the maturity date triggers an early withdrawal penalty, usually equal to several months of interest.
- Fixed accounts pay more interest than regular savings accounts because the bank knows your money will stay put for the full term.
- When the term ends, your money and interest are returned to you, and you can either withdraw it or roll it into a new fixed account.
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. A three-month fixed account might pay 4.5 percent annual interest, while a five-year account from the same bank might pay 5.2 percent. The bank pays more for longer terms because it gets to use your money for longer without you asking for it back.
The interest rate is fixed, meaning it stays the same for the entire term. If you open a one-year account at 5 percent and interest rates drop to 2 percent six months later, you still earn 5 percent. If rates rise to 7 percent, you still earn 5 percent. This certainty is the main reason people use fixed accounts — you know exactly what you will have at the end.
Interest compounds on a schedule set by the bank, usually daily or monthly. That means you earn interest on your interest. A $10,000 deposit at 5 percent annual interest compounded daily will grow to roughly $10,512.68 after one year, not $10,500, because of compounding.
What happens when your fixed account matures
When the term ends, the bank returns your original deposit plus all the interest you earned. This is called the maturity date. You then have a choice: withdraw the money, or roll it into a new fixed account at whatever rate the bank is currently offering.
Banks typically give you a grace period — often seven to ten days — after maturity to decide what to do. If you do nothing during that window, many banks will automatically roll your money into a new fixed account at the current rate. Read your account agreement to see what your bank does, because automatic renewal might lock you in at a lower rate than you want.
If you want to withdraw the money, you can usually do so without penalty once the maturity date has passed. The bank will send you a check, transfer the funds to another account, or let you withdraw cash in person, depending on how you set it up.
Early withdrawal penalties and when they apply
If you need your money before the maturity date, the bank will charge you an early withdrawal penalty. The size of the penalty depends on the bank and the term length. A common structure is a penalty equal to three to six months of interest. On a $10,000 account earning 5 percent annually, that could mean a $125 to $250 penalty.
Some banks charge a flat dollar amount instead — say, $25 or $50 — regardless of how much money is in the account. Others use a percentage of the deposit. Read the terms before you open the account, because penalties vary widely and can eat into your earnings.
The penalty is deducted from your account balance. If you withdraw $10,000 early and the penalty is $150, you receive $9,850. You still get your original deposit back; the penalty comes out of the interest you earned.
Fixed accounts versus regular savings accounts
A regular savings account lets you deposit and withdraw money whenever you want, with no penalty. The trade-off is that the interest rate is lower — often 0.01 to 0.5 percent annually — and it can change at any time. A fixed account pays more interest but locks your money away.
Choose a fixed account if you have money you will not need for several months or years and want to earn a predictable return. Choose a regular savings account if you need to access your money frequently or want flexibility. Some people use both: a regular account for emergency money and a fixed account for savings they are building toward a specific goal.
Fixed accounts are also safer than stocks or bonds if you are risk-averse. Your money does not fluctuate in value. The only risk is that you lock in a rate that turns out to be lower than rates that come later, but that is an opportunity cost, not a loss.
Where to find fixed accounts and how to compare them
Banks, credit unions, and online financial institutions all offer fixed accounts. Online banks often pay higher rates than brick-and-mortar banks because they have lower overhead costs. Rates change frequently, sometimes daily, so the rate you see today may not be available tomorrow.
To compare, look at the annual percentage yield (APY), not just the interest rate. APY includes the effect of compounding, so it tells you the true return. A bank advertising 5 percent interest might actually pay 5.12 percent APY if interest compounds daily.
Also compare the early withdrawal penalty across banks. A bank offering 5.5 percent with a six-month penalty might be worse than one offering 5.2 percent with a one-month penalty, depending on how likely you are to need the money early. Use a calculator or spreadsheet to work out the numbers for your situation.
Federal insurance protection for fixed accounts
Money in a fixed account at a bank is protected by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor, per bank. Money at a credit union is protected by the National Credit Union Administration (NCUA) up to the same amount. This protection covers the principal and all accrued interest.
If the bank fails, the FDIC will return your money up to the limit. This makes fixed accounts very safe — you are not risking your principal, only the opportunity to earn a higher rate elsewhere. If you have more than $250,000 to deposit, you can open accounts at multiple banks to stay within the insurance limit at each one.
Frequently Asked Questions
Can I withdraw money from a fixed account before it matures?
Yes, but you will pay an early withdrawal penalty. The penalty is usually three to six months of interest, though it varies by bank. You still get your original deposit back; the penalty comes out of your earnings. Check your account agreement to see the exact penalty before you open the account.
What is the difference between a fixed account and a CD?
They are the same thing. "Fixed account" and "certificate of deposit" (CD) are two names for the same product. Banks in different countries use different terms — fixed account is common in the UK and Australia, while CD is standard in the United States.
What happens if I do nothing when my fixed account matures?
Most banks automatically roll your money into a new fixed account at the current rate during a grace period of seven to ten days. If you do not want this, you must contact the bank and request a withdrawal or a different option. Check your account agreement to see your bank's renewal policy.
Is the interest I earn on a fixed account taxable?
Yes. Interest earned on a fixed account is taxable income in the year it is earned, even if you do not withdraw it. Your bank will send you a 1099-INT form at tax time showing how much interest you earned. Consult a tax professional about how to report it on your return.
Should I open a fixed account if interest rates are rising?
That depends on how long the term is and how much rates might rise. If you lock in a rate for five years and rates keep climbing, you will miss out on higher returns. If you lock in for three months, you can reassess when it matures. There is no perfect answer — it depends on your predictions and your comfort with uncertainty.