A certificate of deposit is a savings account where you lock money away for a set time in exchange for a may provide interest rate
A certificate of deposit, or CD, is an agreement between you and a bank or credit union. You give them a sum of money — anywhere from $500 to $100,000 or more, depending on the institution — and they promise to hold it for a fixed period (called the term) and pay you a set interest rate. When the term ends, you get your original money back plus the interest earned.
The catch is that you cannot touch the money during the term without paying a penalty. That penalty is usually a portion of the interest you would have earned, or sometimes a small percentage of the principal itself. Because the bank knows your money will stay put, it pays you more interest than a regular savings account would.
CDs are insured by the FDIC (Federal Deposit Insurance Corporation) up to $250,000 per account holder per bank, which means your money is protected even if the bank fails.
Key Takeaways
- You deposit a lump sum for a fixed term — typically three months to five years — and receive a may provide interest rate that does not change.
- Withdrawing money before the term ends triggers an early withdrawal penalty, usually measured in forfeited interest rather than a flat fee.
- CDs pay more interest than savings accounts because your money is locked in, which lets the bank lend it out with certainty.
- FDIC insurance protects your deposit up to $250,000, so the principal is safe regardless of what happens to the bank.
- The longer the term, the higher the interest rate — a five-year CD typically pays more than a one-year CD at the same institution.
How the interest rate and term length work together
Banks set CD rates based on how long you agree to lock your money away. A three-month CD might pay 4.5 percent annually, while a five-year CD at the same bank might pay 5.2 percent. The longer you commit, the more the bank pays you, because they have certainty about how long they can use your money.
The interest rate is fixed, meaning it does not move up or down during the term. If you buy a one-year CD at 5 percent and rates climb to 6 percent six months later, you still earn 5 percent. That is the trade-off: you get certainty, but you also miss out if rates rise.
Interest compounds — usually daily or monthly — which means you earn interest on your interest. A $10,000 CD at 5 percent compounded daily will earn slightly more than one compounded monthly, though the difference is small for shorter terms.
What happens when the term ends
When your CD matures (the term ends), the bank sends you a notice, usually 10 to 30 days before the maturity date. At that point, you have choices: withdraw the money, roll it into a new CD at the current rate, or move it elsewhere.
Many banks have a grace period — typically 7 to 10 days after maturity — during which you can withdraw without penalty or decide to renew. If you do nothing and the grace period passes, some banks automatically roll your CD into a new one at the current rate. Read your CD agreement to know your bank's policy.
If you withdraw after maturity, there is no penalty. You get your principal plus all the interest earned, and you can do whatever you want with it.
Early withdrawal penalties and when they explore
If you need the money before the term ends, you will pay a penalty. The amount varies by bank and by term length. A three-month CD might have a penalty of one month's interest; a five-year CD might forfeit six months of interest. Some banks charge a flat percentage of the principal instead — for example, 0.5 percent of what you deposited.
The penalty is deducted from your withdrawal. If you have a $10,000 CD earning $500 in interest over the full term, and you withdraw after six months with a three-month interest penalty, you might get $10,000 plus $250 in earned interest, minus $125 in penalty — leaving you with $10,125.
A few banks offer no-penalty CDs, which let you withdraw early without forfeiting interest. These pay slightly lower rates than standard CDs because the bank takes on more risk, but they are worth comparing if you are uncertain about needing the money.
CDs versus savings accounts and money market accounts
A regular savings account has no term and no penalty for withdrawal, but it also pays much less interest — often 0.01 to 0.5 percent annually. You have complete flexibility, but you earn almost nothing.
A money market account sits in the middle. It pays more than savings (usually 1 to 3 percent) but less than a CD, and you can withdraw whenever you want. The trade-off is that some money market accounts have limits on how many withdrawals you can make per month.
A CD locks your rate and term, so you know exactly what you will earn and when you will get it. That certainty is worth the loss of flexibility if you have money you will not need for a set period.
Where to find CDs and how rates compare
Banks, credit unions, and online-only institutions all offer CDs. Online banks typically pay higher rates than brick-and-mortar banks because they have lower overhead costs. A national bank might offer 4.5 percent on a one-year CD, while an online bank offers 5.2 percent for the same term.
Rates change constantly and vary by institution, term length, and deposit amount. Some banks pay higher rates for larger deposits — a $100,000 CD might earn 0.25 percent more than a $10,000 CD. Websites like Bankrate, DepositAccounts, and the banks' own sites let you compare current rates across institutions.
Credit unions sometimes offer competitive rates and may have lower minimum deposits than banks. If you are a member, it is worth checking what they offer before going elsewhere.
Who should use a CD and when
A CD makes sense if you have money you will not need for a specific period — six months, two years, five years — and you want a may provide return. If you are saving for a down payment on a house in three years, a three-year CD locks in your rate and keeps the money safe.
CDs are also useful if you are worried about spending money if it sits in a regular account. The penalty for early withdrawal acts as a barrier, which can help you stick to your savings goal.
A CD does not make sense if you might need the money sooner, because the penalty will eat into your gains. It also does not make sense if you believe interest rates will rise significantly in the near term and you want to take advantage of higher rates later — though you could use a CD ladder (buying multiple CDs with different maturity dates) to split the difference.
Frequently Asked Questions
Can I withdraw from a CD before it matures?
Yes, but you will pay an early withdrawal penalty. The penalty is usually a set amount of forfeited interest — for example, three months' worth — or a small percentage of your principal. Some banks offer no-penalty CDs that let you withdraw without losing interest, though they pay slightly lower rates.
What is the difference between a CD and a savings account?
A savings account has no term and no penalty, but pays very little interest — often less than 1 percent. A CD locks your money for a set time and pays a much higher rate in exchange. If you need flexibility, use savings; if you have money you will not touch for months or years, a CD pays more.
Is my money safe in a CD if the bank fails?
Yes. The FDIC insures CDs up to $250,000 per account holder per bank. If the bank fails, the FDIC returns your principal and all earned interest, up to that limit. If you have more than $250,000, spread it across multiple banks to stay fully covered.
Do I have to pay taxes on CD interest?
Yes. CD interest is taxed as ordinary income in the year it is earned or credited to your account. If you earn $500 in interest, you report it on your tax return. Some banks issue a 1099-INT form at tax time to track interest earned.
What happens if I do not withdraw my money when the CD matures?
Most banks have a grace period of 7 to 10 days after maturity. If you do nothing during that time, the bank automatically rolls your CD into a new one at the current rate. You can withdraw during the grace period without penalty, or let it renew. Check your bank's policy to know what happens automatically.