A CD is a savings account where you agree to leave money untouched for a set time in exchange for a higher interest rate
CD stands for certificate of deposit. When you open one, you give the bank a lump sum of money—say $5,000—and promise not to touch it for a fixed period. That period might be three months, six months, one year, or five years. In return, the bank pays you interest at a rate higher than a regular savings account would offer. The longer you lock the money away, the higher the rate usually is.
The bank uses your money during that time. They lend it out, invest it, or use it to fund their operations. That is why they pay you more than they would for money you could withdraw anytime. When your CD reaches its maturity date—the end of the locked period—the bank returns your original deposit plus all the interest you earned.
CDs are FDIC-insured at most banks, meaning the federal government guarantees your money up to $250,000 per account, per bank. This makes them one of the safest places to keep money, though the tradeoff is that you cannot access it without penalty.
Key Takeaways
- You deposit a fixed amount of money and agree not to withdraw it until a specific maturity date, usually ranging from three months to five years.
- Interest rates on CDs are typically higher than regular savings accounts because the bank knows exactly how long they can use your money.
- Withdrawing money before the maturity date triggers an early withdrawal penalty, which is usually a set number of months of interest.
- Your deposit is protected by FDIC insurance up to $250,000, making CDs a low-risk way to earn interest on money you do not need when ready.
- When a CD matures, you can withdraw the money, open a new CD, or let it roll over into another CD at the bank's current rate.
How interest rates and terms work together
CD rates change based on what the Federal Reserve does with interest rates. When the Fed raises rates, banks raise CD rates. When the Fed lowers rates, CD rates fall. You lock in whatever rate is offered on the day you open the CD, and that rate stays the same for the entire term—even if rates drop the next week.
The term length affects the rate. A three-month CD might pay 4.5 percent, while a five-year CD at the same bank might pay 5.2 percent. Banks offer higher rates for longer commitments because they want to keep your money longer. However, this also means you take on more risk: if you need the money before five years are up, you lose interest.
Some banks offer no-penalty CDs, which let you withdraw early without losing interest. These rates are lower than standard CDs because you have more flexibility. The tradeoff is always the same: more flexibility means lower pay.
What happens if you need the money before maturity
Withdrawing money early from a CD costs you. The bank charges an early withdrawal penalty, which is usually three to six months of interest, though it varies by bank and by CD term. If you have a $10,000 CD earning 5 percent annually and you withdraw after six months, you might lose $250 in interest as the penalty.
Some banks calculate the penalty differently—a few subtract it from your principal instead of just the interest you earned. Always read the CD agreement before you open one so you know exactly what the penalty is. A few banks publish this information online; others require you to ask.
If you are not sure whether you will need the money, a shorter-term CD or a no-penalty CD is safer than locking money away for years. The interest rate is lower, but you avoid the risk of paying a penalty you cannot afford.
CD laddering: a strategy to access money gradually
One way to get some of the benefits of CDs without locking all your money away is CD laddering. You open multiple CDs with different maturity dates. For example, you might open five $2,000 CDs that mature in one, two, three, four, and five years. Each year, one CD matures and you can withdraw the money, reinvest it, or spend it.
This approach gives you access to part of your money every year while keeping the rest locked in at higher rates. It also lets you take advantage of rate changes: when a CD matures, you can open a new one at whatever the current rate is, rather than being stuck with a rate you locked in years ago.
Laddering works best when you have a larger amount to split across multiple CDs. If you only have $2,000 total, opening five CDs is not practical.
CDs versus savings accounts and money market accounts
| Account Type | Interest Rate | Access to Money | Best For |
|---|---|---|---|
| Regular Savings Account | Usually 0.01% to 0.5% | Withdraw anytime, no penalty | Money you might need soon |
| High-Yield Savings Account | Usually 4% to 5.5% | Withdraw anytime, no penalty | Emergency funds or short-term goals |
| Money Market Account | Usually 4% to 5.5% | Limited withdrawals per month; penalty if you exceed them | Money you will not touch often but might need |
| Certificate of Deposit | Usually 4.5% to 5.5% | Locked until maturity; early withdrawal penalty | Money you will not need for months or years |
CDs pay more than regular savings accounts because you give up access. High-yield savings accounts now pay almost as much as CDs without locking your money away, so the choice depends on whether you need flexibility. If you are certain you will not touch the money for a year or more, a CD usually pays slightly more. If you might need it sooner, a high-yield savings account is safer.
What happens when a CD matures
When your CD reaches its maturity date, the bank sends you a notice. You then have a few options. You can withdraw the money and the interest you earned. You can open a new CD at the bank's current rate. Or you can let the CD auto-renew, which means the bank automatically opens a new CD at the current rate for the same term length.
Auto-renewal happens by default at most banks unless you tell them otherwise. If rates have dropped since you opened the original CD, auto-renewal locks you into a lower rate. If rates have risen, you get a better rate. Many people miss the maturity date and do not realize their money has been locked away again at a worse rate, so mark your calendar or set a reminder.
Some banks offer a grace period—usually 7 to 10 days after maturity—during which you can withdraw the money without penalty if you change your mind about renewing. Check your CD agreement for this detail.
Where to find CDs and what to compare
Banks, credit unions, and online financial institutions all offer CDs. Rates vary significantly. A brick-and-mortar bank might offer 4.5 percent on a one-year CD, while an online bank might offer 5.3 percent for the same term. Over a year, that difference adds up: on a $10,000 CD, you earn $450 versus $530.
When comparing CDs, look at the interest rate, the term length, the early withdrawal penalty, and whether the account is FDIC-insured. You can find current CD rates on financial websites that track them, though rates change frequently. Call or visit the bank's website to confirm the rate before you open an account.
Credit unions sometimes offer higher rates than banks, especially if you are a member. If you have money to invest in a CD, it is worth checking both banks and credit unions in your area.
Frequently Asked Questions
Can I add money to a CD after I open it?
No. CDs are fixed-amount accounts. Once you open one, you cannot deposit more money into it. If you want to invest additional money, you have to open a separate CD. This is one reason some people prefer high-yield savings accounts, where you can deposit money anytime.
What if the bank fails while my money is in a CD?
FDIC insurance protects your deposit up to $250,000. If the bank fails, the FDIC steps in and returns your money plus any interest you earned up to the maturity date. This protection applies to most banks; credit union deposits are insured by the NCUA up to the same amount. Check that your bank or credit union carries this insurance before you open a CD.
Is the interest I earn on a CD taxable?
Yes. The interest you earn on a CD is taxable income in the year you earn it, even if you do not withdraw the money until the CD matures. The bank will send you a 1099-INT form at tax time showing how much interest you earned. If you earn more than $10 in interest, you must report it on your tax return.
Can I move a CD to a different bank?
You can withdraw the money when the CD matures and open a new one at a different bank, but you cannot transfer an active CD without withdrawing it first. If you withdraw before maturity, you pay the early withdrawal penalty. Waiting until maturity avoids the penalty but means your money sits in the original bank until then.
What is the shortest CD term available?
Most banks offer CDs with terms as short as three months. Some offer one-month CDs, though these are less common. The shorter the term, the lower the interest rate. A three-month CD might pay 4 percent while a one-year CD pays 5 percent at the same bank.