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, or CD, is an account at a bank or credit union where you deposit money and agree not to touch it until a specific date. In return, the bank pays you a fixed interest rate — usually higher than what you'd get from a regular savings account. When the CD reaches its maturity date, you get your original deposit back plus the interest earned.
The tradeoff is simple: you give up access to your money for anywhere from three months to five years (or longer), and the bank gives you a may provide rate. If you withdraw the money before the maturity date, you pay a penalty — typically a few months' worth of interest. The longer you agree to lock up your money, the higher the rate tends to be.
CDs are insured by the Federal Deposit Insurance Corporation (FDIC) at banks or by the National Credit Union Administration (NCUA) at credit unions, up to $250,000 per account. That means if the bank fails, your money is protected.
Key Takeaways
- You deposit money in a CD for a fixed period — typically three months to five years — and cannot withdraw it without paying a penalty.
- The interest rate on a CD is locked in when you open the account and does not change, even if rates rise or fall.
- CDs pay more interest than regular savings accounts because you are giving up access to your money for a set time.
- Your deposit is insured up to $250,000 by the FDIC (at banks) or NCUA (at credit unions), so your principal is protected even if the institution fails.
- Early withdrawal penalties vary by bank and by CD term, so read the terms before you open one.
How the interest rate and term length work together
When you open a CD, you choose how long to lock up your money. Common terms are three months, six months, one year, two years, three years, and five years. Some banks offer longer terms or shorter ones. The interest rate the bank offers depends on the term you choose and on what rates are available in the market at that moment.
Generally, longer terms pay higher rates. A five-year CD might pay 4.5% while a six-month CD pays 4.0%, for example. But this is not a rule — it depends on what the bank is offering and what the overall interest rate environment looks like. Rates change constantly, so the rate you see today may not be the rate you get tomorrow.
Once you open the CD, your rate is locked in. If interest rates rise after you buy the CD, your rate stays the same. If rates fall, you still get the rate you agreed to. This is why CDs appeal to people who want certainty — you know exactly how much you will earn.
What happens when your CD matures
On the maturity date, your CD stops earning interest. At that point, you have a choice: withdraw the money, or let the bank roll it into a new CD at whatever rate the bank is offering at that time. Most banks have a grace period — usually seven to ten days — where you can withdraw the money without penalty or move it elsewhere.
If you do nothing during the grace period, many banks automatically renew your CD into a new one with the same term at the new current rate. Read your CD agreement to see what your bank does. If you want to avoid automatic renewal, you need to contact the bank before the maturity date or during the grace period and tell them to hold the money in a regular savings account instead.
When the CD matures and you withdraw, the bank sends you the full amount — your original deposit plus all the interest you earned. This is reported to the IRS on a Form 1099-INT, and you owe income tax on the interest portion.
Early withdrawal penalties and when they apply
If you need your money before the maturity date, you can withdraw it, but you will pay a penalty. The penalty is usually expressed as a number of months of interest. A common penalty might be three months of interest, meaning if your CD was earning $100 per month, you would lose $300 when you withdraw early.
The penalty amount varies by bank and by the CD term. A longer-term CD often has a larger penalty than a shorter one. Some banks charge a flat dollar amount instead of a months-of-interest calculation. Before you open a CD, look at the early withdrawal penalty in the disclosure document — it is usually called the "penalty for early withdrawal" or similar.
The penalty comes out of your interest earnings first. If you have not earned enough interest yet to cover the penalty, it comes out of your principal. This is why opening a CD when you might need the money soon is risky — you could end up with less than you started with.
CD rates compared to other savings options
A regular savings account at most banks pays very little interest — often less than 0.01%. A money market account typically pays more than savings but less than a CD. A high-yield savings account at an online bank can pay 4% to 5%, which is competitive with short-term CDs, but the rate can change at any time.
The main advantage of a CD over a high-yield savings account is certainty. Your rate will not drop if the bank decides to lower it. The main disadvantage is that your money is locked up. If you need access to your savings, a high-yield savings account is more flexible, even if the rate is slightly lower.
Treasury bills and bonds are another option if you want a may provide rate. A Treasury bill is a short-term loan to the federal government, and it is backed by the full faith of the U.S. government. Rates on Treasuries change based on what the market is willing to pay, and you can sell them before maturity if you need the money, though the price may have changed.
Where to find and open a CD
You can open a CD at any bank or credit union. Most banks offer CDs online, by phone, or in person. Online banks often have higher CD rates than brick-and-mortar banks because they have lower overhead costs. Credit unions sometimes offer competitive rates too, especially if you are a member.
To open a CD, you typically need to provide your name, address, Social Security number, and proof of identity. You will need to fund the account with your initial deposit — the minimum is usually $500 to $2,500, though some banks have no minimum. You can fund it from a checking or savings account at the same bank, or by transferring money from another bank.
Before you open a CD, compare rates across several banks. Websites that track CD rates can show you what different banks are paying. The difference between a 4.0% rate and a 4.5% rate might not sound like much, but over a year it adds up. On a $10,000 CD, that 0.5% difference is $50 in extra interest.
Special CD types and features
Some banks offer no-penalty CDs, which let you withdraw your money early without losing interest. The tradeoff is that the rate is usually lower than a regular CD. These make sense if you want the higher rate of a CD but are not sure you can keep the money locked up.
Bump-up CDs let you request a rate increase once during the term if rates rise. This protects you if you lock in a rate and then the bank starts offering higher rates. You do not get the highest rate automatically — you have to ask for the bump, and the bank may limit how many times you can do it.
Callable CDs let the bank end the CD early if rates fall. This is rare and usually only offered when rates are high. The bank uses this feature to protect itself if rates drop sharply. Read the terms carefully if you see a callable CD — it is not in your favor.
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. Some banks offer no-penalty CDs that let you withdraw without losing interest, but the rate is typically lower than a regular CD.
What happens to my CD when it reaches maturity?
Most banks automatically renew your CD into a new one at the current rate unless you tell them not to. You usually have a grace period of seven to ten days after maturity to withdraw the money or move it elsewhere without penalty. Check your CD agreement to see what your bank does.
Is my money safe in a CD?
Yes, up to $250,000. CDs at banks are insured by the FDIC, and CDs at credit unions are insured by the NCUA. If the bank or credit union fails, your deposit and interest are protected up to that limit. If you have more than $250,000, you can open CDs at multiple institutions to stay within the insurance limit.
How do CD rates compare to savings accounts?
CDs typically pay more interest than regular savings accounts because you lock up your money for a set time. High-yield savings accounts at online banks can pay rates close to short-term CDs, but the rate can change anytime. CDs offer certainty — your rate is locked in and will not drop.
Do I owe taxes on CD interest?
Yes. The interest you earn on a CD is taxable income. When your CD matures, the bank sends you a Form 1099-INT showing how much interest you earned. You report this on your tax return and pay income tax on it at your regular tax rate.