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 (CD) is a bank or credit union account where you deposit a lump sum of money and agree not to touch it until a specific date. In return, the bank pays you a fixed interest rate—almost always 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 all the interest earned.
The trade-off is simple: you give up access to your money for a defined period (called the term), and the bank rewards you with better interest. If you withdraw the money before the maturity date, you pay an early withdrawal penalty—usually a certain number of months' worth of interest. That penalty is the cost of breaking the agreement.
CDs are insured by the FDIC (if at a bank) or the NCUA (if at a credit union) up to $250,000 per account, per institution. This means your money is protected even if the bank fails. You cannot lose your principal to bank collapse.
Key Takeaways
- A CD locks your money away for a fixed term—typically three months to five years—and pays a may provide interest rate that does not change.
- Early withdrawal before the maturity date triggers a penalty, usually equal to several months of interest, so only deposit money you will not need.
- CD interest rates vary by bank, term length, and current market conditions, so comparing rates across institutions can add hundreds of dollars to your earnings.
- Your deposit is FDIC or NCUA insured up to $250,000, so the principal is safe regardless of what happens to the bank.
- When a CD matures, you can withdraw the money, move it to a new CD, or let it roll over into a new CD at the bank's current rate.
How CD terms and interest rates work
CD terms range from as short as three months to as long as ten years, though most banks offer terms between three months and five years. The longer the term, the higher the interest rate the bank will typically offer—this is because the bank gets to hold your money longer and lend it out. A one-year CD will pay less than a five-year CD at the same bank.
The interest rate on a CD is fixed, meaning it does not change for the entire term. If you lock in 4.5% for two years, you earn 4.5% for the full two years, even if rates drop to 2% next month. This is different from a savings account, where the rate can move up or down at any time. The downside: if rates rise, you are stuck with your original rate.
Interest is typically compounded daily or monthly and added to your account. When the CD matures, you receive your original deposit plus all accumulated interest as one lump sum. Some banks allow you to withdraw interest before maturity without penalty, but the principal stays locked.
What happens when your CD reaches maturity
On the maturity date, your CD stops earning interest. At that point, you have three main options: withdraw the money, open a new CD, or let the bank automatically roll it over.
Most banks have a grace period after maturity—usually seven to ten days—during which you can withdraw your money without penalty or move it elsewhere. If you do nothing during that window, many banks automatically roll the CD into a new one at the current rate. This can work in your favor if rates have risen, but it locks you in again if rates have fallen. Always check your bank's rollover policy and watch for the maturity date so you can make an active choice.
Some banks notify you by mail or email before maturity; others do not. Mark the maturity date on your calendar or set a phone reminder so you are not caught off guard.
Early withdrawal penalties and when they apply
If you withdraw money before the maturity date, the bank deducts an early withdrawal penalty from your interest earnings or principal. The penalty amount varies by bank and by CD term. A typical penalty for a one-year CD might be three months of interest; for a five-year CD, it might be twelve months of interest. Some banks charge a flat dollar amount instead.
The penalty is calculated based on the rate you locked in, not the current rate. If you earned $500 in interest and the penalty is $400, you receive $100 plus your principal. If the penalty exceeds your interest, the bank deducts the difference from your principal—you lose money, not just interest.
A few banks offer no-penalty CDs that let you withdraw early without a penalty, but these pay lower interest rates to compensate. They are useful if you think you might need the money but want better returns than a savings account.
CD rates vary by bank and market conditions
CD rates are not set by the Federal Reserve; each bank decides its own rates based on what it needs to attract deposits and what it can earn by lending that money out. This means rates differ significantly across banks. One bank might offer 4.2% on a one-year CD while another offers 3.8% for the same term.
Rates also move with market conditions. When the Federal Reserve raises its benchmark rate, banks typically raise CD rates within weeks. When the Fed cuts rates, CD rates fall. Online banks and credit unions often offer higher rates than large brick-and-mortar banks because they have lower overhead costs.
Shopping around matters. A 0.5% difference on a $10,000 CD over one year is $50 in lost earnings. Over five years, it compounds to much more. Use rate comparison sites or call banks directly to see current offers.
Who should use a CD and when
CDs work best for money you know you will not need for a specific period. Common uses include saving for a down payment you plan to make in two years, building an emergency fund beyond your regular savings account, or parking money you want to keep safe from yourself while earning more than a savings account pays.
CDs are less useful if you might need the money unexpectedly—the penalty makes them expensive to break. They are also not ideal if you think interest rates will rise significantly; you will be locked into a lower rate. In a falling-rate environment, locking in a high rate is smart.
Some people use a CD ladder—opening multiple CDs with different maturity dates so that one matures every year or every few months. This gives you regular access to portions of your money while keeping the rest locked in at higher rates.
FDIC insurance and account safety
Your CD is protected by FDIC insurance (at banks) or NCUA insurance (at credit unions) up to $250,000 per depositor, per institution. This means if the bank fails, the government guarantees you get your money back, up to that limit. The insurance covers your principal and all accrued interest.
If you have more than $250,000 to deposit, you can open CDs at multiple banks or credit unions to stay within the insurance limit at each one. You can also open separate CDs in different ownership categories—for example, one in your name alone and one in joint ownership with your spouse—and each is insured separately up to $250,000.
CDs are among the safest places to put money because they are insured and the rate is may provide. You cannot lose money to market swings or bank failure.
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 several months of interest, though some banks charge a flat fee or a percentage of the principal. A few banks offer no-penalty CDs, but they pay lower rates. Check your CD agreement to see the exact penalty amount before you open the account.
What is the difference between a CD and a savings account?
A CD pays a fixed, higher interest rate but locks your money away for a set term. A savings account lets you withdraw anytime but pays lower interest that can change. CDs are for money you do not need to touch; savings accounts are for money you might need soon.
Do I have to pay taxes on CD interest?
Yes. CD interest is taxable income in the year it is earned, even if you do not withdraw it. The bank will send you a 1099-INT form at tax time showing how much interest you earned. Report this on your tax return.
What happens if I do not withdraw my money when the CD matures?
Most banks automatically roll your CD into a new one at the current rate during a grace period (usually seven to ten days after maturity). If you do not want this, you must contact the bank and withdraw or move the money before the grace period ends. Set a reminder for the maturity date so you do not miss it.
Are CD rates higher now than they were before?
CD rates change based on Federal Reserve policy and market conditions. Rates have varied significantly over the past decade. Check current rates at multiple banks to see what is available today, since rates differ by institution and term length.