What a CD account is and how your money grows
A CD account is a savings account where you deposit money for a fixed period — usually three months to five years — and the bank pays you a set interest rate for leaving it there. You agree not to touch the money until the maturity date. In return, the bank gives you a higher interest rate than a regular savings account, because the bank knows exactly how long it can use your money.
When your CD reaches maturity, the bank returns your original deposit plus all the interest you earned. You then have a choice: withdraw the money, or let the bank roll it into a new CD at whatever rate is current at that time. Most banks send a notice 7 to 10 days before maturity so you have time to decide.
The interest rate is locked in on the day you open the CD. If rates rise after you buy your CD, your rate stays the same. If rates fall, you still get the rate you agreed to — which is why CDs are popular when interest rates are high.
Key Takeaways
- You deposit a lump sum, agree to leave it untouched for a set term, and receive a fixed interest rate that does not change.
- Early withdrawal usually costs you a penalty — often three to six months of interest — so only put money in a CD if you will not need it before maturity.
- Interest rates vary by bank and by term length; shorter CDs (three to six months) typically pay less than longer ones (two to five years).
- When your CD matures, the bank notifies you and gives you a window to withdraw, roll into a new CD, or let it sit while you decide.
- CD accounts are insured by the FDIC up to $250,000 per depositor per bank, so your principal is protected even if the bank fails.
How interest rates and term length work together
The longer you commit your money, the higher the interest rate usually is. A three-month CD might pay 4.5 percent, while a five-year CD from the same bank might pay 5.2 percent. The bank pays more because it has your money for longer and can lend it out for longer periods.
Interest rates change constantly based on what the Federal Reserve does and what banks decide to offer. If you lock in a rate today and rates drop next month, you win — your CD still pays the higher rate. If rates rise, you are stuck with the lower rate unless you withdraw early and pay the penalty.
Some banks offer bump-up CDs or step-up CDs, which let you increase your rate once or twice during the term if rates rise. These usually start with a slightly lower rate than a standard CD, so the trade-off is built in. Read the terms carefully — not all banks offer these, and the rules vary.
What happens if you need the money before maturity
Most CDs charge an early withdrawal penalty if you take your money out before the maturity date. The penalty is usually three to six months of interest, though some banks charge a flat dollar amount or a percentage of your deposit. A few banks charge no penalty, but they typically offer lower interest rates to make up for it.
Example: You open a one-year CD with $10,000 at 5 percent interest. After six months, you need the money. The bank might charge a penalty of three months' interest — about $125 — so you would receive $9,875 instead of $10,000. You lose money, not gain it.
Before you open a CD, read the disclosure document the bank provides. It must state the penalty amount or formula. If you think there is any chance you will need the money, a regular savings account or money market account is safer, even if the interest rate is lower.
How CD interest is calculated and paid
Banks calculate CD interest in different ways, and the method affects how much you actually earn. Most banks use daily compounding, meaning they calculate interest on your balance every day and add it back to your account. Some use monthly or quarterly compounding, which pays slightly less because interest is added less often.
Interest can be paid to you monthly, quarterly, or at maturity. If you choose to receive interest payments during the term, that money goes into a linked savings account and you can withdraw it without penalty. The principal — your original deposit — stays locked in the CD until maturity.
If you choose to have interest added to the CD itself (called compounding), the interest earns interest too. This is called compound interest, and it means your balance grows faster. At maturity, you receive the full amount: original deposit plus all accumulated interest.
FDIC insurance and what it protects
CD accounts at banks insured by the FDIC (Federal Deposit Insurance Corporation) are protected up to $250,000 per depositor per bank. This means if the bank fails, the FDIC pays you back up to that limit. Your principal is safe, even if the bank goes under.
The $250,000 limit applies to all your deposits at one bank combined — checking, savings, money market, and CDs all count toward the same limit. If you have $150,000 in CDs and $100,000 in savings at the same bank, you are covered for the full $250,000, but not a dollar more.
If you want to protect more than $250,000, you can open CDs at different banks. Each bank's FDIC insurance is separate. You can also open CDs in different ownership categories — for example, one in your name alone and one in a joint account with your spouse — and each category has its own $250,000 limit at the same bank.
Comparing CD rates across banks
CD rates vary significantly by bank and change weekly or even daily. A large national bank might offer 4.0 percent on a one-year CD, while an online bank offers 5.1 percent for the same term. Over a year, that difference adds up to real money.
Online banks and credit unions often pay higher rates than brick-and-mortar banks because they have lower overhead costs. However, online banks are still FDIC-insured if they are members of the FDIC, so the insurance protection is the same.
Before you open a CD, check rates at several banks. Websites like Bankrate, DepositAccounts, and your own bank's site show current rates. Look at the term you want (three months, one year, five years) and compare the annual percentage yield (APY), which includes the effect of compounding. A difference of even 0.5 percent can mean hundreds of dollars over the life of the CD.
What to do when your CD matures
Most banks send a notice 7 to 10 days before your CD matures. The notice tells you the maturity date and your options: withdraw the money, roll it into a new CD, or let it sit in a non-interest-bearing account while you decide.
If you do nothing, the bank will automatically roll your CD into a new one at the current rate for the same term length. This is called automatic renewal. If you do not want this, you must contact the bank before the maturity date and tell them to withdraw the funds instead. Some banks let you do this online; others require a phone call or a visit.
When you roll into a new CD, the interest rate will be different from your old one — it could be higher or lower depending on what rates are at that moment. You have a grace period (usually 7 to 10 days after maturity) to change your mind and withdraw without penalty, even if the bank has already rolled you into a new CD.
Frequently Asked Questions
Can I withdraw money from a CD before it matures without a penalty?
Most banks charge an early withdrawal penalty if you take money out before the maturity date. A few banks offer no-penalty CDs, but they pay lower interest rates. Read your CD's terms to see what the penalty is before you open the account.
What is the difference between a CD and a savings account?
A CD locks your money in for a set term and pays a higher interest rate. A savings account lets you withdraw anytime with no penalty, but pays lower interest. Choose a CD only if you will not need the money before maturity.
Do I have to pay taxes on CD interest?
Yes. CD interest is taxable income in the year it is earned or paid to you, depending on your bank's policy. The bank will send you a 1099-INT form at tax time if you earned $10 or more in interest. Report this on your tax return.
What happens if interest rates drop after I open a CD?
Your rate stays locked in at the rate you agreed to when you opened the CD. You keep earning that rate until maturity, even if the bank lowers rates for new CDs. This is one reason CDs are popular when rates are high.
Can I open multiple CDs at the same bank?
Yes. You can open as many CDs as you want at one bank. However, FDIC insurance covers all your deposits at that bank combined up to $250,000. If you want to protect more than $250,000, open CDs at different banks.