A CD is a savings account where you lock money away for a set time to earn a higher interest rate
A certificate of deposit (CD) is a savings product offered by banks and credit unions. You give the bank a sum of money, agree not to touch it for a specific period—called the term—and in return the bank pays you a fixed interest rate. That rate is almost always higher than what you'd earn in a regular savings account.
The trade-off is simple: access for rate. You can't withdraw the money without a penalty until the term ends. Terms range from three months to five years or longer, depending on the bank. When the term ends, you get your original deposit back plus the interest earned, or you can roll it into a new CD.
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 holder per institution. That means your money is protected even if the bank fails.
Key Takeaways
- A CD locks your money for a set term—typically three months to five years—in exchange for a higher interest rate than a regular savings account.
- You pay a penalty if you withdraw before the term ends, usually equal to a few months of interest or a percentage of your deposit.
- CD rates change based on the current interest rate environment and the length of the term; longer terms usually pay more.
- Your deposit is insured up to $250,000 by the FDIC or NCUA, so the bank's failure does not put your money at risk.
- When a CD matures, you receive your principal plus interest, and you can then open a new CD, move the money to savings, or withdraw it.
How CD interest rates and terms work
The interest rate on a CD is fixed—it does not change for the entire term, no matter what happens to market rates. If you lock in 4.5% for one year, you earn 4.5% for that full year, even if rates drop to 2% the next month.
Rates vary by bank, by term length, and by how much money you deposit. A three-month CD at one bank might pay 4.0%, while a five-year CD at the same bank might pay 5.2%. Online banks often pay higher rates than brick-and-mortar banks because they have lower overhead costs. You can compare rates across banks on financial websites or by calling banks directly.
Some banks offer no-penalty CDs, which let you withdraw early without a penalty—but the rate is lower than a standard CD. Others offer bump-up CDs, which let you move to a higher rate once during the term if rates rise. These options cost you in rate, so they're worth considering only if you think you might need the money or if rates are likely to climb.
What happens if you need the money before the term ends
If you withdraw from a CD before maturity, you pay an early withdrawal penalty. The size of the penalty varies by bank and term length. A common penalty is three to six months of interest, though some banks charge a percentage of your deposit instead—typically 0.5% to 2%.
Example: You open a $10,000 CD earning 4.5% annually. After six months, you need the money. If the penalty is three months of interest, you lose about $112.50. If the penalty is 1% of the deposit, you lose $100. Either way, you still get most of your money back, but you lose some of the gain.
Before you open a CD, read the bank's disclosure document to see what the penalty is. Some banks charge more for longer terms; others charge the same regardless. If you're not certain you can leave the money untouched, a regular savings account or a no-penalty CD might be a better fit, even at a lower rate.
CD laddering: spreading your money across multiple terms
One strategy people use to balance higher rates with access to cash is called CD laddering. Instead of putting all your money into one five-year CD, you split it across five one-year CDs. Each year, one CD matures, and you can withdraw the money, spend it, or roll it into a new five-year CD.
This approach gives you regular access to portions of your money without paying early withdrawal penalties. It also lets you take advantage of rising rates: if rates climb, you can reinvest maturing CDs at the new, higher rate instead of being locked into an old rate for years.
Laddering works best when you have a larger sum to divide—at least $5,000 or $10,000—and when you're comfortable managing multiple accounts. If you have a smaller amount or prefer simplicity, a single CD or a regular savings account may make more sense.
When a CD matures and what your options are
When your CD term ends, the bank sends you a notice—usually 10 to 30 days before maturity. At that point, you have three choices: withdraw the money, move it to a regular savings account, or open a new CD.
If you do nothing, many banks automatically roll your CD into a new one at the current rate for the same term length. This is called auto-renewal. If you don't want that, you must contact the bank before the maturity date and tell them what you want to do instead. Some banks give you a grace period of a few days after maturity to change your mind, but don't count on it—act before the maturity date.
When you open a new CD at maturity, you lock in whatever rate the bank is offering at that moment. If rates have risen, you benefit. If rates have fallen, you earn less than before. This is why some people use laddering: it spreads out the timing of when you have to reinvest, so you're not forced to lock in a low rate all at once.
CD accounts versus regular savings accounts
| Feature | CD Account | Regular Savings Account |
|---|---|---|
| Interest rate | Fixed, usually 3% to 5.5% depending on term and bank | Variable, usually 0.01% to 0.5%, can change anytime |
| Access to money | Locked for the term; early withdrawal costs a penalty | Withdraw anytime without penalty |
| Best for | Money you won't need for months or years | Emergency fund or money you might need soon |
| FDIC insurance | Yes, up to $250,000 | Yes, up to $250,000 |
A CD makes sense if you have money sitting in a low-rate savings account and you know you won't need it for at least three to six months. The higher rate means your money grows faster. A regular savings account makes sense if you need quick access or if you're building an emergency fund that you might have to tap on short notice.
Some people use both: they keep three to six months of expenses in a high-yield savings account for emergencies, and put longer-term savings into CDs. This way, they earn a higher rate on money they truly don't need while keeping emergency cash accessible.
How to open a CD and what to watch for
Opening a CD is straightforward. You can do it online, by phone, or in person at a bank or credit union. You'll need to provide your name, address, Social Security number, and the amount you want to deposit. The bank will ask you to choose a term length and confirm you understand the early withdrawal penalty.
Before you open a CD, compare rates across at least three banks. Online banks almost always pay more than branches because they have lower costs. Check the bank's FDIC or NCUA insurance status to confirm your deposit is protected. Read the disclosure document to understand the exact penalty for early withdrawal and whether the CD auto-renews.
Watch out for promotional rates that apply only to new customers or only for the first term. After that, the rate may drop significantly. Also check whether the bank requires a minimum deposit—some require $500, others $2,500 or more. If you have less, look for a bank with a lower minimum or consider a savings account instead.
Frequently Asked Questions
Can I withdraw money from a CD before it matures?
Yes, but you'll pay an early withdrawal penalty. The penalty varies by bank and term length—typically three to six months of interest or 0.5% to 2% of your deposit. You still get most of your money back, but you lose part of the interest you earned. If you think you might need the money, a no-penalty CD or savings account is a better choice.
What's the difference between a CD and a money market account?
A money market account is a hybrid: it earns interest like a savings account but usually pays more, and it lets you write checks or make withdrawals like a checking account. A CD locks your money for a set term but pays a fixed, higher rate. Money market accounts are more flexible; CDs pay more if you can leave the money alone.
Do I pay taxes on CD interest?
Yes. Interest earned on a CD is taxable income. The bank will send you a 1099-INT form at tax time showing how much interest you earned. You report this on your tax return. The interest is taxed as ordinary income at your regular tax rate, not as capital gains.
What happens if the bank fails while my money is in a CD?
Your deposit is protected up to $250,000 by the FDIC (at banks) or NCUA (at credit unions). If the bank fails, the insurance agency steps in and returns your money. You don't lose anything as long as your deposit is under the limit and the bank is insured.
Can I move a CD to a different bank?
You can withdraw the money when it matures and open a new CD at a different bank, but you'll pay a penalty if you withdraw early. Some banks offer CD transfers, where they pay the penalty on your old CD and move the money to a new CD at their bank, but this is rare. It's usually easier to wait for maturity or accept the penalty if rates have risen significantly elsewhere.