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 an agreement between you and a bank or credit union. You give them a lump sum of money—say $5,000—and promise not to touch it for a fixed period: three months, six months, one year, five years, or longer. In return, the bank pays you a fixed interest rate, usually higher than what a regular savings account offers. When the time is up, you get your original money back plus the interest earned.

The bank uses your money during that locked period to make loans and investments. That is why they pay you more than they would for a regular account where you can withdraw whenever you want. You are essentially lending them money at a rate you both agree on upfront.

CDs are FDIC-insured at most banks and NCUA-insured at most credit unions, meaning your deposit is protected up to $250,000 if the institution fails. The interest rate and the time period are locked in when you open the account—they do not change, even if market rates shift.

Key Takeaways

  • You deposit a fixed amount of money for a fixed time period (the term) and receive a may provide interest rate that does not change.
  • Your money is locked until the maturity date; withdrawing early usually costs you a penalty that reduces or eliminates your interest earnings.
  • Interest rates on CDs are typically higher than regular savings accounts because the bank knows exactly when it can use your money.
  • 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.
  • When the CD matures, you can withdraw the money, open a new CD, or let it roll over into another CD at the current rate offered by that institution.

How the interest rate and term work together

The term is how long your money stays locked in. Common terms are 3 months, 6 months, 1 year, 2 years, and 5 years. Longer terms usually come with higher interest rates because the bank has your money for longer and can plan further ahead. A 5-year CD might pay 4.5%, while a 3-month CD might pay 3.2%—but rates vary by institution and change over time.

The interest rate is fixed when you open the account. If you open a 1-year CD at 4.0%, you will earn 4.0% on your money for the full year, even if market rates drop to 2.0% or rise to 5.5%. That predictability is the trade-off for locking your money away.

Interest is usually compounded daily or monthly, meaning you earn interest on your interest. The exact compounding schedule depends on the bank's terms. At maturity, your account balance will be your original deposit plus all the interest earned.

What happens if you need the money before maturity

If you withdraw money from a CD before the maturity date, you pay an early withdrawal penalty. The penalty amount varies by bank and by term length. A 3-month CD might have a penalty of one month's interest; a 5-year CD might have a penalty of six months' interest or more. Some banks charge a flat dollar amount instead.

The penalty comes out of your interest earnings first. If your penalty is larger than the interest you have earned so far, you lose some of your original deposit. For example: you open a $10,000 CD at 4% for one year. After three months, you need the money. You have earned about $100 in interest. If the penalty is $200, you get back $9,900—your original $10,000 minus the $100 penalty difference.

Some banks offer no-penalty CDs that let you withdraw without a penalty, but these come with lower interest rates to compensate the bank for the flexibility. Read the disclosure document before opening any CD to know exactly what the penalty is.

CD laddering and rolling over at maturity

When your CD reaches its maturity date, the bank sends you a notice. You then have a choice: withdraw the money, open a new CD, or let it roll over. A rollover means the bank automatically opens a new CD with the same term at whatever interest rate the bank is currently offering. You usually have a grace period (often 7 to 10 days) to cancel the rollover if you do not want it.

Some people use a strategy called CD laddering to balance access and rates. Instead of putting all your money in one 5-year CD, you open five 1-year CDs with different banks or stagger the maturity dates. Each year, one CD matures and you can withdraw, reinvest, or move the money. This gives you regular access to portions of your money while still earning higher rates than a savings account.

When rates are rising, you might want to avoid rolling over into a long-term CD. When rates are falling, locking in a longer term before rates drop further can protect your earnings. Check the current rate environment before your CD matures.

Where to open a CD and comparing rates

You can open a CD at any bank or credit union. Online banks often offer higher rates than brick-and-mortar branches because they have lower overhead costs. Credit unions sometimes offer competitive rates to members. The FDIC and NCUA insurance protections apply equally whether you use a large national bank or a small local credit union.

CD rates change frequently—sometimes daily—based on the Federal Reserve's interest rate decisions and market conditions. Before opening a CD, compare rates across several institutions. A difference of 0.5% on a $10,000 CD for one year means $50 in additional earnings. Over five years, that gap widens significantly.

Some banks offer special promotional rates for new customers or for larger deposits. Read the fine print to confirm the rate applies to the full term and that there are no hidden conditions. The rate you see advertised is the rate you will receive for the full term once you open the account.

Tax treatment and reporting

Interest earned on a CD is taxable income in the year it is earned. The bank will send you a 1099-INT form at tax time reporting the interest you earned. You report this on your federal tax return, and you may owe state and local taxes on it as well.

Some people open CDs in tax-advantaged accounts like IRAs to defer taxes on the interest. A CD inside a traditional IRA grows tax-free until you withdraw it in retirement. A CD inside a Roth IRA grows tax-free and can be withdrawn tax-free if you follow the rules. These options require opening the CD through an IRA custodian, not directly with a bank.

If you withdraw money early and pay a penalty, you can deduct the penalty from your taxable interest income on your tax return. This slightly reduces the tax damage of an early withdrawal, but it does not eliminate it.

CDs versus other savings options

A regular savings account offers lower interest rates but complete flexibility—you can withdraw anytime without penalty. A money market account sits between the two: higher rates than savings but usually with some withdrawal limits. A CD offers the highest rates but locks your money for a set time.

If you know you will not need the money for a specific period and want a may provide return, a CD makes sense. If you might need access to your money or want to move it if rates rise, a high-yield savings account or money market account may be better despite the lower rate. The right choice depends on your timeline and how certain you are that you will not need the money.

Treasury bills and bonds are another option for longer time horizons. They are backed by the U.S. government rather than insured by the FDIC, and rates fluctuate based on the secondary market. CDs offer simplicity and a may provide rate; Treasuries offer government backing and potential resale value.

Frequently Asked Questions

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

No. A CD is a fixed deposit—you choose the amount when you open it, and that amount stays the same. You cannot add to it or withdraw from it without paying an early withdrawal penalty. If you want to invest more money, you must open a separate CD.

What happens if the bank fails while my money is in a CD?

Your deposit is insured up to $250,000 by the FDIC (at banks) or NCUA (at credit unions). If the institution fails, the insurance fund pays you your full deposit plus accrued interest, even if the bank no longer exists. You will receive your money, though it may take a few weeks to process.

Is the interest rate the same at every bank?

No. Rates vary significantly by bank, term length, and deposit amount. Online banks typically offer higher rates than traditional banks. Rates also change based on Federal Reserve decisions and market conditions. Always compare rates across multiple institutions before opening a CD.

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

Technically yes, but you will pay the early withdrawal penalty to close it at the original bank. You would then use that money (minus the penalty) to open a new CD elsewhere. Unless the new bank's rate is significantly higher, the penalty usually makes this move not worth it.

What is the difference between a CD and a savings bond?

A CD is issued by a bank or credit union and insured by the FDIC or NCUA. A savings bond is issued by the U.S. Treasury and backed by the government. CDs have fixed terms and rates; bonds have different types with different rules. Both are low-risk ways to earn interest, but the mechanics and tax treatment differ.