A CD is a savings account where you lock money away for a set time in exchange for a higher interest rate

A certificate of deposit (CD) is a contract between you and a bank. You give the bank a lump sum of money, agree not to touch it for a specific period—anywhere from three months to five years or longer—and the bank pays you a fixed interest rate on that money. The rate is almost always higher than what you'd earn in a regular savings account, which is the trade-off for leaving your money locked up.

When the CD reaches its maturity date (the end of the term), the bank returns your original deposit plus all the interest you've earned. At that point, you can withdraw the money, move it to a new CD, or do something else with it entirely. The interest rate and term length are set when you open the CD and do not change, even if the bank's rates drop or rise later.

CDs are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor, per bank. That means if the bank fails, your money is protected up to that limit. This makes CDs one of the safest places to park money if you know you won't need it for a while.

Key Takeaways

  • You deposit a fixed amount, agree to leave it untouched for a set term (three months to five years or more), and receive a may provide interest rate higher than a savings account.
  • Your money is locked until the maturity date; withdrawing early usually costs you a penalty that eats into your earnings.
  • Interest rates on CDs are fixed when you open the account and do not change, even if bank rates move up or down.
  • FDIC insurance protects your deposit up to $250,000 per bank, making CDs a low-risk savings tool.
  • When your CD matures, you can withdraw the money, open a new CD, or let it roll over into another term at the bank's current rate.

How the interest rate and term work together

The longer you commit your money, the higher the interest rate the bank will typically offer. A three-month CD might pay 4.5%, while a five-year CD at the same bank might pay 5.2%. The bank is willing to pay more because it gets to hold your money longer and knows exactly how much it owes you at the end.

The interest rate is fixed, meaning it does not change. If you lock in 5% on a one-year CD and interest rates drop to 3% six months later, you still earn 5% for the full year. Conversely, if rates rise to 7%, you're still earning only 5%. This is why timing matters: opening a CD when rates are high protects you if they fall, but it also means you miss out if they climb.

Interest compounds based on the bank's terms—some compound daily, others monthly or quarterly. More frequent compounding means you earn a tiny bit more, but the difference is usually small. The bank will tell you the annual percentage yield (APY), which accounts for compounding and shows you the true return on your money over a year.

What happens if you need the money before maturity

CDs penalize early withdrawal because the bank counts on having your money for the full term. The penalty is usually a certain number of months' worth of interest. For example, a CD might have a three-month early withdrawal penalty, meaning if you pull money out after six months of a one-year term, you lose three months of interest earnings.

The penalty amount varies by bank and by CD term. Some banks charge a flat fee; others charge a percentage of the deposit. Before you open a CD, ask the bank what the early withdrawal penalty is and whether it applies to the interest only or to your principal as well. A few banks offer "no-penalty CDs" that let you withdraw without a fee, but these almost always pay a lower interest rate to compensate.

If you withdraw early and the penalty is larger than the interest you've earned so far, you'll get back less than you deposited. This is rare but possible on very short-term CDs opened when rates are low. It's one reason to be honest with yourself about whether you can actually leave the money alone for the full term.

CD laddering: a way to balance safety and access

Many people open multiple CDs with different maturity dates—a strategy called CD laddering. For example, you might open five one-year CDs, each maturing in consecutive years. Every year, one CD matures and you can access that money without penalty. You can then open a new five-year CD with those funds, keeping the ladder going.

Laddering lets you lock in higher long-term rates while still having access to some of your money each year. It also protects you if rates rise: when each CD matures, you can open a new one at the current (possibly higher) rate instead of being stuck with an old rate for years.

You don't need a large amount of money to ladder. If you have $5,000, you could open five $1,000 CDs with different terms. The strategy works best when you have money you won't need immediately but want some flexibility over time.

How CD rates compare to other savings options

Regular savings accounts typically pay 0.01% to 0.5% interest, depending on the bank. High-yield savings accounts (usually online banks) pay 4% to 5.3% right now, though rates change. Money market accounts fall somewhere in between and often let you write checks or make withdrawals more easily than CDs.

CDs usually pay more than high-yield savings accounts when rates are stable, but the difference shrinks when the Federal Reserve is cutting rates. The main advantage of a CD is the may provide: you know exactly what you'll earn and for how long. A high-yield savings account's rate can drop at any time, and you can withdraw whenever you want without penalty.

If you need the money within a year or might need it sooner, a high-yield savings account is usually smarter. If you're certain you won't touch the money for two years or more, a CD often pays enough extra to make the lock-in worthwhile.

Opening a CD and what happens at maturity

You open a CD by visiting your bank in person, calling, or going online. You choose the term length (three months, six months, one year, two years, five years, etc.), and the bank tells you the rate for that term. You then deposit the money—the minimum is often $500 to $1,000, though some banks have no minimum. The bank issues you a certificate (now usually digital) showing the amount, rate, term, and maturity date.

As the maturity date approaches, the bank will send you a notice. You then have a choice: withdraw the money, open a new CD, or let the bank automatically roll the CD into a new term at the current rate. If you do nothing, most banks will roll it over automatically, but the new rate may be lower than what you had. It's worth checking the bank's current rates and deciding actively rather than letting it happen by default.

When you withdraw at maturity, the money goes back into your checking or savings account (or wherever you direct it) within one to two business days. There's no penalty for withdrawing at maturity—that's the whole point of the maturity date.

Where to find CD rates and what to watch for

Banks publish their CD rates online, and rates vary significantly. A one-year CD might pay 4.5% at one bank and 5.1% at another. Online banks almost always pay more than brick-and-mortar banks because they have lower overhead costs. Credit unions sometimes offer competitive rates too, especially if you're a member.

When comparing CDs, look at the APY (not just the interest rate), the term length, the minimum deposit, and the early withdrawal penalty. A CD that pays 5.2% but has a six-month penalty is less flexible than one paying 5.0% with a one-month penalty. Read the fine print or ask the bank directly about the penalty structure.

Remember that FDIC insurance covers up to $250,000 per depositor per bank. If you want to put more than that into CDs, you'll need to split it across multiple banks or use a CD ladder at different institutions.

Frequently Asked Questions

Can I add money to a CD after I open it?

No. A CD is a fixed contract. Once you open it with an initial deposit, you cannot add more money to that CD. If you want to invest additional funds, you'd need to open a separate CD. Some banks let you open multiple CDs at once if you want to split a large deposit.

What's the difference between a CD and a savings account?

A savings account has no lock-in period—you can withdraw anytime—but pays very low interest (usually under 1%). A CD locks your money for a set term but pays much higher interest (currently 4% to 5%+). You trade flexibility for a better rate.

Do I pay taxes on CD interest?

Yes. CD interest is taxable income in the year it's earned. The bank will send you a 1099-INT form at tax time showing how much interest you earned. If you're in a high tax bracket, the after-tax return on a CD might be lower than you think, which is why some people use CDs in retirement accounts (IRAs) where the interest isn't taxed immediately.

What happens if the bank fails while my CD is open?

The FDIC insures your deposit up to $250,000, so you'll get your money back even if the bank goes under. The FDIC will either transfer your CD to another bank or pay you directly. Your CD continues to earn interest at the original rate until maturity, even during the transfer process.

Is there a best time to open a CD?

When interest rates are high and expected to fall, locking in a CD makes sense. When rates are low and expected to rise, you might wait or use a CD ladder to spread your money across multiple terms. Check the Federal Reserve's rate outlook and your bank's current rates to decide, but remember that nobody can predict rates perfectly.