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 or credit union. You give them a lump sum of money—say $5,000—and agree not to touch it for a specific period: three months, six months, one year, five years, or longer. In return, the bank pays you a fixed interest rate that is almost always higher than what you would earn in a regular savings account. When the term ends, you get your original money back plus the interest earned.

The trade-off is simple: you lose access to your money during the term. If you withdraw before the end date, you pay a early withdrawal penalty—usually a few months' worth of interest, though the exact amount varies by bank and CD length. That penalty is why CDs work best for money you know you will not need for a while.

CDs are insured by the Federal Deposit Insurance Corporation (FDIC) if held at a bank, or by the National Credit Union Administration (NCUA) if held at a credit union. This means if the bank fails, your money up to $250,000 per account is protected. That protection applies to each CD separately, so you could hold multiple CDs at the same bank and each would be covered up to $250,000.

Key Takeaways

  • You deposit a fixed amount of money for a fixed time period and receive a may provide interest rate that does not change.
  • Withdrawing money before the term ends costs you an early withdrawal penalty, usually several months of interest.
  • CD rates are higher than regular savings accounts because the bank knows exactly when it will have access to your money.
  • Your money is protected by federal insurance up to $250,000 per CD, even if the bank fails.
  • When the CD matures, you can cash it out, move the money to another account, or roll it into a new CD at the current rate.

How interest rates and terms work

The interest rate on a CD is locked in when you open it and does not change for the entire term. If you open a one-year CD at 4.5 percent, you will earn 4.5 percent for the full year, even if rates rise to 5.5 percent the next month. That certainty is valuable if rates are falling, but it works against you if rates climb.

CD terms range from as short as three months to as long as ten years or more, depending on the bank. Longer terms usually pay higher rates because the bank gets to hold your money longer. A five-year CD might pay 4.75 percent while a one-year CD pays 4.25 percent. However, rates vary widely between banks and change daily, so comparing offers from multiple institutions matters.

Interest on a CD can be paid in different ways. Some banks pay interest monthly or quarterly. Others hold it until maturity and pay it all at once. A few allow you to withdraw interest without penalty while keeping the principal locked in. Ask your bank how often interest is credited and whether you can access it early without penalty.

What happens when your CD reaches maturity

When the term ends, your CD matures. You now have a window—usually seven to ten days—to decide what to do with the money. Most banks will automatically roll the CD into a new one at the current rate if you do nothing, though some will move it to a regular savings account instead. Check your bank's policy so you are not surprised.

You have three main options at maturity. First, you can withdraw the full amount—principal plus interest—and move it elsewhere or spend it. Second, you can roll it into a new CD, either at the same bank or a different one. Third, you can move the money to a different type of account at your bank, such as a money market account or high-yield savings account.

If your bank automatically renews your CD and you do not want it to, you must contact them before the renewal date. Some banks have a grace period of a few days after maturity during which you can still withdraw without penalty, but do not count on it. Mark your calendar when your CD matures so you do not miss the window.

Early withdrawal penalties and when they apply

If you need your money before the CD matures, you can withdraw it, but you will pay a penalty. The penalty is usually expressed as a number of months of interest—for example, "180 days of interest" or "six months of interest." On a $10,000 CD earning 4 percent annually, 180 days of interest is roughly $200. That amount is subtracted from your withdrawal.

The penalty applies to the interest you have earned, not to your principal. If you have not earned enough interest yet to cover the penalty, the bank will take the difference from your principal. For example, if you withdraw after two months on a CD with a 180-day penalty, and you have only earned $67 in interest, the bank deducts $200 and you lose $133 of your original deposit.

Some banks offer no-penalty CDs that let you withdraw early without a penalty, though the interest rate is usually lower than a standard CD. These work well if you are unsure whether you will need the money, but they defeat the purpose of locking money away for a higher rate. Read the fine print: some no-penalty CDs still charge a small penalty or limit how many times you can withdraw.

CD ladders and how to use them

A CD ladder is a strategy where you open multiple CDs with different maturity dates instead of putting all your money into one. For example, you might open five $2,000 CDs with terms of one, two, three, four, and five years. Each year, one CD matures, giving you access to money without the early withdrawal penalty.

Laddering solves two problems at once. It gives you regular access to portions of your money, and it lets you take advantage of rising rates. When the one-year CD matures, you can roll it into a new five-year CD at whatever the current rate is. If rates have risen, you lock in the higher rate on that portion of your money.

Laddering works best when you have a lump sum to invest and you do not know when you might need it. It also works well in a rising-rate environment because you get chances to reinvest at higher rates. The downside is that you have to manage multiple CDs and keep track of multiple maturity dates.

CDs versus savings accounts and money market accounts

A regular high-yield savings account offers lower interest than a CD but gives you full access to your money anytime without penalty. You can withdraw whenever you want, though some accounts limit the number of withdrawals per month. If you might need the money soon, a savings account is safer than a CD.

A money market account sits between a savings account and a CD. It usually pays more interest than a savings account but less than a CD, and it gives you limited access to your money—typically three to six withdrawals per month without penalty. Money market accounts work well if you want some growth but also need occasional access.

Choose a CD if you have money you will not need for months or years and you want the highest rate available. Choose a savings account if you might need the money within a few months or want the flexibility to withdraw anytime. Choose a money market account if you want a middle ground—better rates than savings but more flexibility than a CD.

How to open a CD and what to compare

Opening a CD takes minutes. You can do it online at most banks and credit unions, or in person at a branch. You will need to provide your name, address, Social Security number, and the amount you want to deposit. You choose the term length and the bank deposits the money into the CD account.

Before you open a CD, compare rates across at least three banks or credit unions. Rates change daily and vary significantly between institutions. A bank offering 4.5 percent on a one-year CD might be offering 3.8 percent on a five-year CD, while another bank offers 4.75 percent and 4.2 percent. Online banks often pay higher rates than brick-and-mortar branches because they have lower overhead.

Check whether the bank is FDIC-insured (for banks) or NCUA-insured (for credit unions). Verify the early withdrawal penalty before you commit—some banks charge more than others. Also confirm how interest is paid and whether you can access it without penalty. Once you have compared, choose the CD that best matches your timeline and rate needs.

Frequently Asked Questions

Can I withdraw money from a CD before it matures?

Yes, but you will pay an early withdrawal penalty. The penalty is usually several months of interest and is deducted from your withdrawal. If you have not earned enough interest to cover the penalty, the bank takes the difference from your principal. Some banks offer no-penalty CDs, but they pay lower rates.

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

Your money is protected by federal insurance up to $250,000. If the bank is FDIC-insured, the FDIC covers your CD. If the credit union is NCUA-insured, the NCUA covers it. Each CD is insured separately, so you could hold multiple CDs at the same bank and each would be covered up to $250,000.

Do I have to pay taxes on CD interest?

Yes. CD interest is taxable income in the year it is earned or credited to your account, depending on how your bank pays it. The bank will send you a 1099-INT form at tax time showing how much interest you earned. Interest from a CD held in a traditional IRA is tax-deferred, but interest in a regular CD is taxed as ordinary income.

What if I need the money right after I open a CD?

You can withdraw it, but the early withdrawal penalty will likely exceed any interest you have earned. You will lose money. If you think you might need the money within a few months, a high-yield savings account is a better choice than a CD because you can withdraw anytime without penalty.

Can I move a CD from one bank to another without penalty?

Not during the term—moving it counts as an early withdrawal and triggers the penalty. However, when your CD matures, you can move the money to a CD at a different bank without penalty. You have a grace period of a few days after maturity to withdraw or transfer the funds before the bank renews it automatically.