A CD locks your money away for a set time in exchange for a higher interest rate

A certificate of deposit (CD) is an account where you deposit a lump sum of money and agree not to touch it for a fixed period — typically three months to five years. In return, the bank pays you a higher interest rate than you would earn in a regular savings account. The bank knows exactly when you will withdraw the money, so it can lend that cash out with confidence, and it passes some of that benefit back to you through the rate.

The trade-off is straightforward: you give up access to your money for the term length, and the bank gives you more interest. If you withdraw before the term ends, you pay a penalty — usually a few months' worth of interest, though the exact amount varies by bank and CD length. You cannot add money to a CD once it opens; you deposit the full amount upfront.

CDs are insured by the Federal Deposit Insurance Corporation (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 pays a fixed interest rate for a set term, ranging from three months to five years, and you cannot withdraw the money early without paying a penalty.
  • The longer the term, the higher the rate — a five-year CD will pay more than a three-month CD at the same bank.
  • When your CD matures (the term ends), the bank returns your principal plus interest, and you can either withdraw it or roll it into a new CD.
  • FDIC insurance covers CDs up to $250,000, so your money is protected if the bank fails.
  • Online banks typically offer higher CD rates than brick-and-mortar banks because they have lower overhead costs.

How the interest rate and term length connect

Banks set CD rates based on how long you lock your money away. A three-month CD might pay 4.5 percent, while a one-year CD at the same bank might pay 5.0 percent, and a five-year CD might pay 5.2 percent. The longer you commit, the more the bank pays you. This is because the bank can plan further ahead and lend your money out for longer periods at higher rates.

The actual rates change constantly based on what the Federal Reserve does with interest rates. When the Fed raises rates, new CDs pay more. When the Fed cuts rates, new CDs pay less. But once you lock in a rate, it does not change — you keep that same rate for the entire term, even if rates drop the next day.

The difference between CD rates at different banks can be significant. A bank offering 5.5 percent on a one-year CD will earn you $550 more per year than a bank offering 4.5 percent on the same $10,000 deposit. Shopping around matters, especially for larger amounts.

What happens when your CD reaches maturity

When the term ends, your CD matures. The bank returns your original deposit plus all the interest you earned. You then have a choice: withdraw the money, or let the bank automatically roll it into a new CD at the current rate.

Most banks have a grace period — usually seven to ten days — during which you can withdraw your money without penalty. If you do nothing during that window, the bank will roll the funds into a new CD at whatever rate it is currently offering. That new rate might be higher or lower than your old one. Read your CD agreement to see what your bank's grace period is, because missing it means you are locked in again.

This is why many people set a calendar reminder for a few days before their CD matures. You want to know the new rate before the rollover happens, so you can decide whether to accept it or move your money elsewhere.

Early withdrawal penalties and when they explore

If you need your money before the term ends, you can withdraw it, but you will pay a penalty. The penalty is usually expressed as a number of months of interest. A CD with a three-month interest penalty means you lose three months' worth of the interest you would have earned. On a $10,000 CD paying 5 percent annually, that is roughly $125.

Some banks charge a flat dollar amount instead of months of interest. Others charge a percentage of the principal. The penalty structure is spelled out in your CD agreement before you open the account, so read it carefully if you think there is any chance you might need the money early.

The penalty comes out of your interest earnings first. If you have not earned enough interest yet to cover the penalty, the bank takes the difference from your principal. This is rare with longer-term CDs, but it can happen with very short terms if you withdraw almost when ready.

CD laddering: a way to balance rate and access

Some people use a strategy called CD laddering to get higher rates while still having regular access to some of their money. Instead of putting all $10,000 into one five-year CD, you split it into five $2,000 CDs with terms of one, two, three, four, and five years. Each year, one CD matures, and you can either withdraw that money or roll it into a new five-year CD.

This approach gives you the higher rates of longer-term CDs while letting you access a portion of your money every year without penalty. It also lets you take advantage of rising rates — when a one-year CD matures and rates have gone up, you can roll it into a new five-year CD at the higher rate.

Laddering works best if you have a larger amount to invest and do not need all the money at once. It requires more attention than a single CD, because you have to decide what to do with each maturity.

CDs versus savings accounts and money market accounts

A regular savings account lets you deposit and withdraw money whenever you want, but it pays a much lower interest rate — often less than 1 percent. A CD locks your money away but pays significantly more, sometimes two to three times as much. The choice depends on whether you need the money soon.

A money market account sits in the middle. It pays more than a savings account but less than a CD, and it lets you make a limited number of withdrawals per month without penalty. If you think you might need some of your money but not all of it, a money market account might fit better than a CD.

For money you know you will not touch for at least a year, a CD almost always pays more. For money you might need within a few months, a savings account or money market account is safer because you avoid the early withdrawal penalty.

Where to find CDs and how rates compare

Every bank offers CDs, but the rates vary widely. Online banks like Marcus, Ally, and American Express typically offer the highest rates because they have lower costs than traditional banks with physical branches. A brick-and-mortar bank might offer 4.5 percent on a one-year CD while an online bank offers 5.3 percent on the same term.

You can compare CD rates across banks using financial websites that aggregate current offerings, or by visiting each bank's website directly. The rate you see is the rate you get — there is no negotiation. If you see a rate you like, you can open the CD online in minutes, and the money typically needs to be transferred from another account at the same bank or via wire transfer.

Credit unions also offer CDs, sometimes at competitive rates. If you are a member of a credit union, it is worth checking their rates alongside banks.

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 a few months of interest, though it varies by bank and CD term. The exact penalty is listed in your CD agreement before you open the account. Some banks allow penalty-free withdrawals in specific situations, like if you become disabled, so ask your bank about exceptions.

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

Your CD is protected by FDIC insurance up to $250,000. If the bank fails, the FDIC will return your principal plus any interest you have earned up to that point. You will not lose money, though there may be a delay while the FDIC processes the claim.

Is the interest on a CD taxable?

Yes. The interest you earn on a CD is treated as ordinary income and is taxable in the year you earn it, even if you do not withdraw the money. Your bank will send you a 1099-INT form at tax time showing how much interest you earned. If the CD is in a retirement account like an IRA, the interest is not taxed until you withdraw from the account.

What is the difference between a CD and a Treasury bill?

Both lock your money away for a set time and pay a fixed rate, but Treasury bills are issued by the U.S. government while CDs are issued by banks. Treasury bills are considered safer because they are backed by the government, but they typically pay slightly less. CDs are insured by the FDIC, which is also very safe. For most people, the difference in safety is negligible.

Can I add money to my CD after I open it?

No. You deposit the full amount when you open the CD, and you cannot add more money to that same CD. If you want to invest additional money, you would need to open a separate CD. Some banks let you open multiple CDs at once with different terms.