The basic steps to purchase a CD
You buy a CD by opening an account at a bank or credit union, depositing a lump sum of money, and agreeing to leave it untouched for a set period—usually three months to five years. In return, the institution pays you a fixed interest rate. The process takes 15 to 30 minutes if you already have an account there, or 30 to 60 minutes if you're opening one for the first time.
Most banks let you open and fund a CD online, by phone, or in person. You'll need to choose the term length (how long your money stays locked), confirm the interest rate, and provide identification and proof of address if you're a new customer. The bank then holds your money and pays interest either monthly, quarterly, or at maturity—depending on the CD's terms.
Your money becomes available again on the maturity date. At that point, you can withdraw it, let it roll over into a new CD at the current rate, or move it elsewhere. If you withdraw before maturity, you'll pay an early withdrawal penalty, which is typically a set number of months' worth of interest.
Key Takeaways
- You need a bank or credit union account and a lump sum to deposit; most institutions require a minimum of $500 to $2,500, though some have no minimum.
- Choose your term length before you buy—common options are 3, 6, 12, 24, and 60 months—because the interest rate is locked in for that period.
- The interest rate you receive depends on the current market, the term length you choose, and the institution; longer terms usually pay more.
- Early withdrawal penalties vary widely by bank, so read the disclosure document before you commit your money.
- Your CD is insured up to $250,000 per depositor per institution by the FDIC (if it's a bank) or NCUA (if it's a credit union).
Where to buy a CD and what to compare
You can purchase a CD at any bank, credit union, or brokerage firm. Banks and credit unions are the most straightforward—you walk in, call, or log into their website and open the account. Brokerages like Fidelity, Charles Schwab, and Vanguard also sell CDs, usually from multiple institutions, which lets you shop rates across banks without opening separate accounts.
Interest rates vary significantly between institutions. A one-year CD might pay 4.5% at one bank and 5.2% at another. Check the rates at your current bank, then compare them to online banks (which often pay higher rates because they have lower overhead) and credit unions. Websites like Bankrate, DepositAccounts, and CD Ladder let you see rates across many institutions at once.
Beyond the rate, compare the minimum deposit required, the early withdrawal penalty, and whether the bank allows you to add money to the CD after you open it. Some CDs are "no-penalty" CDs, which let you withdraw early without a penalty—but they usually pay lower interest rates in exchange.
How to open a CD account online
Most online banks and many traditional banks let you open a CD entirely through their website. Start by visiting the bank's site and finding the CD product page. You'll see the available terms and current rates listed clearly.
Click the button to open a CD, then enter your personal information: full name, Social Security number, date of birth, address, and phone number. You'll need to verify your identity, which usually means answering security questions based on your credit history or uploading a photo of your driver's license. The process takes 5 to 10 minutes.
Next, you'll link a bank account to fund the CD. You can transfer money from another account at the same institution (if you already have one) or from an external account. External transfers typically take one to three business days to clear. Once the money arrives, your CD is active and the interest rate is locked in.
Understanding CD terms and interest rates
The term is how long your money is locked in the CD. Common terms are 3 months, 6 months, 1 year, 2 years, 3 years, and 5 years. Longer terms almost always pay higher interest rates because the bank gets to hold your money for a longer period. A 5-year CD might pay 4.8%, while a 3-month CD at the same bank might pay 4.0%.
The interest rate is fixed for the entire term. It does not change if market rates rise or fall. This is both a benefit and a risk: if rates drop, you're locked in at a good rate. If rates rise, you're stuck with a lower rate unless you pay the early withdrawal penalty to get out.
Interest is usually compounded daily and paid out monthly, quarterly, or at maturity. Compounding means the bank pays interest on your interest, which increases your total return slightly. If you choose to have interest paid out monthly, you receive that money in a separate account; if you choose to have it paid at maturity, it's added to your principal and you receive the total when the CD matures.
Early withdrawal penalties and what they cost
If you need your money before the maturity date, you'll pay an early withdrawal penalty. The penalty is usually expressed as a number of months' interest. For example, a CD with a "three-month penalty" means you lose three months' worth of interest if you withdraw early.
On a $10,000 CD paying 5% annual interest with a three-month penalty, the penalty would be roughly $125 (three months of the $500 annual interest). If you've only held the CD for two months, you'd lose more in penalties than you've earned in interest, so you'd actually receive less than your original $10,000 back.
Before you buy a CD, read the disclosure document (usually called the "CD Agreement" or "Terms and Conditions") to see the exact penalty. Some banks charge a flat dollar amount instead of months of interest, and a few offer "no-penalty" CDs where you can withdraw without penalty—though these pay lower rates.
FDIC insurance and account safety
Money in a CD at a bank is insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor per institution. This means if the bank fails, the FDIC will return your money up to that limit. Credit union CDs are insured by the National Credit Union Administration (NCUA) with the same $250,000 limit.
If you have $250,000 or more to deposit, you can spread it across multiple banks or credit unions to keep each deposit under the insurance limit. For example, a $500,000 CD could be split into two $250,000 CDs at two different banks, and both would be fully insured.
CDs at brokerages like Fidelity are still FDIC-insured because the brokerage holds them at partner banks, but you should confirm the insurance coverage before you deposit. The brokerage's website will show which banks hold the CDs and how much is insured at each one.
What happens when your CD matures
On the maturity date, your CD stops earning interest and your money becomes available. The bank will send you a notice 7 to 10 days before maturity telling you what happens next. You have three main options: withdraw the money, let it roll over into a new CD, or move it to a different account.
If you do nothing, many banks automatically roll your CD into a new one at the current rate for the same term length. This happens within a few days of maturity. If you don't want this, you need to contact the bank before the maturity date and tell them what you want to do instead.
If rates have risen since you opened your CD, rolling over into a new CD at maturity is a good time to lock in a higher rate. If rates have fallen, you might want to withdraw the money and look for a better rate elsewhere, or move it to a savings account temporarily while you decide.
Frequently Asked Questions
Can I add money to a CD after I open it?
Most CDs do not allow additional deposits after opening. You deposit a lump sum upfront, and that's the amount that earns interest for the term. Some banks offer "add-on CDs" that let you deposit more money during the term, but these are less common. Check the CD's terms before you open it if this matters to you.
What's the difference between a CD and a savings account?
A CD locks your money in for a set term and pays a fixed, higher interest rate in exchange. A savings account lets you withdraw money anytime without penalty, but pays a lower interest rate that can change. CDs are better if you don't need the money for several months or longer; savings accounts are better if you need access to your cash.
Do I have to pay taxes on CD interest?
Yes. CD interest is taxable income. The bank will send you a 1099-INT form at the end of the year showing how much interest you earned, and you'll report that on your tax return. Interest is taxed at your ordinary income tax rate, not as capital gains.
Can I buy a CD through my brokerage account?
Yes. Brokerages like Fidelity and Charles Schwab let you buy CDs from multiple banks through a single account. This is convenient if you want to shop rates across institutions without opening separate accounts. The CDs are still FDIC-insured at the underlying banks.
What happens if the bank fails while I own a CD?
The FDIC or NCUA will return your principal and any accrued interest up to $250,000. Your CD is treated like any other deposit account. The process usually takes a few weeks, and you'll be notified by mail about how to claim your money.