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

A certificate of deposit is a savings product where you give a bank a lump sum of money and agree not to touch it for a specific period — typically three months to five years. In return, the bank pays you a fixed interest rate, which is almost always higher than what you'd earn in a regular savings account. You know exactly how much interest you'll receive before you hand over the money, and that rate doesn't change, even if the bank's rates drop.

The trade-off is straightforward: you lose access to your money during the CD term. If you withdraw before the term ends, you pay an early withdrawal penalty, which the bank deducts from your balance. The penalty amount varies by bank and by CD term length — a three-month CD might charge 10 days of interest, while a five-year CD might charge 150 days of interest. You get your principal back either way, but the penalty reduces what you actually receive.

CDs are FDIC insured at most banks, meaning if the bank fails, the federal government guarantees your deposit up to $250,000. This makes CDs one of the safest places to park money if you don't need it right away.

Key Takeaways

  • You deposit a fixed amount, choose a term length (three months to five years), and receive a may provide interest rate that does not change for the duration.
  • Withdrawing before the term ends triggers an early withdrawal penalty, which reduces your total return but does not wipe out your principal.
  • The longer the CD term, the higher the interest rate typically is, but you also give up access to your money for longer.
  • FDIC insurance protects your deposit up to $250,000 if the bank fails, making CDs safer than stocks or bonds.
  • When your CD matures, you can withdraw the money, move it to a new CD, or let it roll over into a new term at the bank's current rate.

How the interest rate and term length work together

Banks offer higher rates on longer CD terms because they want to keep your money locked in for as long as possible. A three-month CD might pay 4.5% annual interest, while a five-year CD from the same bank might pay 5.2%. The longer you commit, the more the bank pays you — but you also give up the chance to move your money if rates rise.

The interest rate is stated as an annual percentage rate (APR), but the bank calculates and pays it based on your actual term. If you buy a one-year CD at 5% APR with $10,000, you earn $500 over that year. If you buy a six-month CD at 4.8% APR with the same $10,000, you earn $240 (half of the annual rate). The bank typically adds the interest to your account at maturity, though some CDs pay interest monthly or quarterly.

Rates change constantly based on what the Federal Reserve does with short-term interest rates. When the Fed raises rates, new CDs pay more. When the Fed cuts rates, new CDs pay less. But your rate is locked in the moment you buy the CD and does not move, no matter what happens in the market.

What happens when your CD reaches maturity

When your CD term ends, you reach the maturity date. At that point, the bank gives you three options: withdraw the money, buy a new CD, or let the CD automatically roll over into a new term.

If you do nothing, most banks automatically roll your CD into a new term at the current rate. This happens within a few days of maturity. If rates have dropped, you'll earn less on the new CD. If rates have risen, you'll earn more. You usually have a grace period — often 7 to 10 days — to withdraw or move your money without penalty before the rollover locks in.

Some banks notify you by mail or email before maturity; others do not. If you want to avoid an automatic rollover into a lower rate, mark your maturity date on a calendar and contact your bank a week or two before it arrives. You can move the money to a different bank's CD, put it in a savings account, or withdraw it entirely.

Early withdrawal penalties and when they apply

If you need your money before the maturity date, you can withdraw it, but you'll pay a penalty. The penalty is usually stated as a number of days of interest. A CD with a 90-day penalty means the bank deducts 90 days' worth of interest from your balance. On a $10,000 CD earning 5% annually, that's roughly $123 in lost interest.

The penalty is always deducted from your interest earnings first. If you haven't earned enough interest yet to cover the penalty, the bank takes the difference from your principal. For example, if you withdraw after two months on a CD with a 90-day penalty, you might get back $9,877 instead of $10,000 — the bank took $123 from your principal to cover the shortfall.

Some banks offer no-penalty CDs, which let you withdraw without a penalty, though the interest rate is lower than a standard CD. These are useful if you think you might need the money but want a rate better than a savings account. Read the fine print: some no-penalty CDs still charge a penalty if you withdraw within the first few days.

How CD laddering spreads out your access to money

A CD ladder is a strategy where you buy multiple CDs with different maturity dates so that money becomes available at regular intervals. For example, you might buy five one-year CDs, each maturing in years one through five. Each year, one CD matures and you can withdraw the money or reinvest it. This gives you regular access to portions of your money without paying early withdrawal penalties.

CD laddering also protects you against falling rates. If you buy all your money into one five-year CD and rates drop the next month, you're stuck earning the lower rate. With a ladder, you reinvest maturing CDs at whatever the current rate is, so you capture some of the benefit if rates rise and avoid locking in a rate for five years if you're unsure about the direction of rates.

To build a ladder, divide your money equally among CDs with staggered terms. If you have $50,000, you might buy five $10,000 CDs maturing in one, two, three, four, and five years. When the one-year CD matures, you can buy a new five-year CD, shifting the ladder forward.

Comparing CDs across banks and finding the best rate

CD rates vary significantly between banks. A large national bank might offer 4.2% on a one-year CD, while an online bank offers 5.1% for the same term. Over one year, that difference costs you roughly $90 per $10,000 deposited. Shopping around takes 15 minutes and can add hundreds of dollars to your return.

Online banks and credit unions typically offer higher rates than brick-and-mortar banks because they have lower overhead costs. However, make sure any bank you choose is FDIC insured (or NCUA insured if it's a credit union). You can verify this on the FDIC's website or ask the bank directly.

When comparing rates, look at the APY (annual percentage yield), not just the APR. APY accounts for how often interest is compounded and paid, so it's the true rate you'll earn. Also check the early withdrawal penalty — a slightly lower rate with a smaller penalty might be better than a higher rate with a steep penalty if you think you might need the money.

CDs versus savings accounts and money market accounts

A regular savings account offers flexibility but pays almost no interest — often 0.01% to 0.5% annually. A CD pays two to five times more but locks your money away. If you have money you won't need for at least three months, a CD almost always beats a savings account.

A money market account sits between the two. It pays more than a savings account (usually 4% to 5% currently) and lets you withdraw money without penalty, but it often requires a higher minimum balance and limits how many withdrawals you can make per month. If you need flexibility and don't want to lock money away, a money market account is worth comparing to a CD.

The choice depends on your timeline and your need for access. If you're saving for something specific three years from now, a three-year CD locks in a rate and removes the temptation to spend the money. If you might need the money sooner, a money market account or high-yield savings account is safer.

Frequently Asked Questions

Can I withdraw from a CD before it matures without a penalty?

Standard CDs charge an early withdrawal penalty if you withdraw before maturity. Some banks offer no-penalty CDs that let you withdraw anytime without a fee, but the interest rate is lower. Check your CD's terms before you buy to know what penalty applies.

What happens to my CD if the bank fails?

Your CD is protected by FDIC insurance up to $250,000. If the bank fails, the federal government guarantees you get your principal and accrued interest back. Credit union CDs are protected by NCUA insurance with the same $250,000 limit.

Can I move my CD to a different bank before it matures?

You can withdraw your money and move it, but you'll pay the early withdrawal penalty. It's usually not worth paying the penalty to move to a slightly higher rate unless the rate difference is large enough to offset the penalty cost.

What's the difference between APR and APY on a CD?

APR is the annual interest rate without accounting for compounding. APY includes the effect of how often interest is compounded and paid. APY is always equal to or higher than APR, and it's the number you should use to compare CDs across banks.

Do I have to pay taxes on CD interest?

Yes. CD interest is taxable income in the year you earn it, even if you don't withdraw the money. The bank sends you a 1099-INT form at tax time showing how much interest you earned. This is one reason CDs in retirement accounts like IRAs are useful — the interest grows tax-deferred.