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

A certificate of deposit (CD) is a product offered by banks and credit unions. You give them a sum of money — anywhere from $500 to $100,000 or more, depending on the institution — and agree to leave it untouched for a specific period. In return, they pay you a fixed interest rate, usually higher than what a regular savings account offers. The time period, called the term, typically ranges from three months to five years, though some banks offer longer or shorter terms.

The trade-off is straightforward: the longer you lock the money away, the higher the interest rate you usually receive. A three-month CD might pay 4.5 percent annual interest, while a five-year CD from the same bank might pay 5.2 percent. You know exactly how much you will earn before you buy the CD, because the rate does not change. When the term ends, the bank returns your original deposit plus all the interest you earned.

CDs are different from regular savings accounts because you cannot withdraw the money without a penalty. If you need the cash before the term ends, the bank will charge you a fee — often three to six months' worth of interest. This penalty is why CDs work best for money you genuinely will not need for a while.

Key Takeaways

  • A CD locks your money for a fixed term in exchange for a may provide interest rate that does not change.
  • Interest rates on CDs are usually higher than savings accounts, and longer terms typically pay more than shorter ones.
  • Withdrawing money before the term ends triggers an early withdrawal penalty, usually equal to several months of interest.
  • CDs are insured by the FDIC (at banks) or NCUA (at credit unions) up to $250,000, so your principal is protected even if the institution fails.

How much interest you earn depends on the rate and the term length

The amount you earn from a CD is straightforward math. If you deposit $10,000 in a two-year CD paying 4.8 percent annual interest, you will earn roughly $480 per year, or $960 over two years (the actual amount varies slightly depending on how the bank compounds interest — daily, monthly, or quarterly). At the end of two years, you receive your $10,000 back plus the $960 in interest.

Interest rates change constantly based on what the Federal Reserve does with its benchmark rate. When the Fed raises rates, banks typically raise CD rates too. When the Fed cuts rates, CD rates fall. This means a CD opened today will pay more or less than one opened three months from now. You lock in whatever rate exists on the day you open the CD, so timing matters if rates are moving quickly.

Some banks offer promotional rates for limited periods — for example, a higher-than-usual rate for new customers or for a specific term length. These rates are real and competitive, but they do not last forever. Once the promotion ends, new CDs at that bank return to standard rates.

What happens when your CD term ends

When your CD reaches its maturity date — the day the term ends — the bank automatically returns your money. You then have a choice window, usually five to ten days, to decide what to do next. You can withdraw the cash, move it to a savings account, or roll it into a new CD at whatever rate the bank is currently offering.

If you do nothing during that window, many banks will automatically roll your CD into a new one at the same term length, using the current rate. This is called auto-renewal. If rates have dropped, you will earn less on the new CD. If rates have risen, you will earn more. Read your CD agreement to see whether your bank does this, because you may want to shop around instead of accepting the auto-renewal rate.

Some banks charge a fee to close a CD after maturity, though most do not. Check the terms before you open one so you know what to expect.

Early withdrawal penalties and when they explore

If you need your money before the term ends, the bank will charge you an early withdrawal penalty. The size of the penalty varies by institution and by term length. A three-month CD might have a penalty of one month's interest, while a five-year CD might have a penalty of six months' interest. A few banks offer no-penalty CDs, which let you withdraw without a fee, but these pay lower interest rates to compensate.

The penalty is deducted from your interest earnings first. If you have earned $200 in interest and the penalty is $150, you receive your original deposit plus $50. If the penalty exceeds your earnings, it comes out of your principal — you get back less than you deposited. This is rare with short-term CDs but possible with longer ones if you withdraw very early.

Some life events, like the death of the account holder or a court order, may waive the penalty. Ask your bank what circumstances allow an exception.

CDs versus savings accounts and money market accounts

A regular savings account has no term and no penalty for withdrawal. You can take money out whenever you want. The trade-off is that savings accounts pay much lower interest — often 0.01 to 0.5 percent annually, depending on the bank. A CD pays more because you commit to leaving the money alone.

A money market account sits between the two. It pays higher interest than a savings account but lower than a CD, and it usually requires a higher minimum balance. You can withdraw money, but the bank may limit how many withdrawals you can make per month. Money market accounts are useful if you want better returns than savings but need more flexibility than a CD offers.

If you know you will not need the money for several years and want the highest may provide return, a CD wins. If you might need the cash within a year or want to access it without penalty, a savings account or money market account is better.

FDIC and NCUA insurance protects your deposit

CDs at banks are insured by the FDIC (Federal Deposit Insurance Corporation) up to $250,000 per depositor, per bank. This means if the bank fails, the government guarantees you will get your money back, up to that limit. CDs at credit unions are insured by the NCUA (National Credit Union Administration) with the same $250,000 limit.

This insurance covers your principal and any interest you have earned. It does not matter what happens to the bank — if it goes under, you are protected. This is why CDs are considered one of the safest places to keep money, even safer than stocks or bonds.

If you have more than $250,000 to invest, you can spread it across multiple banks or credit unions, and each deposit will be insured separately. Some people open CDs at several institutions specifically to stay within the insurance limit while investing a large sum.

Where to open a CD and how to compare rates

You can open a CD at any bank or credit union. Large national banks like Chase and Bank of America offer CDs, as do smaller regional banks and online banks. Online banks often pay higher rates than brick-and-mortar banks because they have lower overhead costs.

To compare rates, visit the websites of several banks and look for their CD rates by term length. Most banks list rates publicly without requiring you to log in. Websites like Bankrate, DepositAccounts, and the FDIC's own rate search tool let you see what banks in your area are paying. Compare not just the interest rate but also the minimum deposit required and the early withdrawal penalty.

Once you choose a bank, you can usually open a CD online in minutes. You will need to provide your Social Security number, address, and funding source (a bank account to transfer money from). The money moves into the CD, and your term begins.

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 equal to several months of interest and is deducted from what you receive. Some banks offer no-penalty CDs that let you withdraw without a fee, though they pay lower rates. Check your CD agreement to see the exact penalty amount.

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

A savings account has no term and no penalty for withdrawal, but it pays much lower interest — often less than 1 percent. A CD locks your money for a set period and pays higher interest in return. Choose a savings account if you need access to the money; choose a CD if you can leave it alone for months or years.

Do I have to pay taxes on CD interest?

Yes. CD interest is taxable income. The bank will send you a 1099-INT form at the end of the year showing how much interest you earned, and you report that on your tax return. The interest is taxed as ordinary income at your regular tax rate.

What happens if the bank fails while I have a CD?

Your deposit is protected by FDIC insurance (at banks) or NCUA insurance (at credit unions) up to $250,000. The government guarantees you will receive your principal and all earned interest, even if the bank goes under. You do not need to do anything — the insurance is automatic.

Is a CD a good investment right now?

That depends on current interest rates and your financial situation. CDs offer a may provide return with no risk to your principal, which makes them attractive when rates are high. They are best for money you will not need for a while and do not expect to earn high returns on. If you need the money soon or want growth potential, other options may be better.