CDs pay you a fixed interest rate for leaving your money untouched for a set period
A certificate of deposit (CD) is a savings account where you agree to leave money in the bank for a specific length of time—called the term—in exchange for a higher interest rate than a regular savings account. You pick the term when you open it: three months, six months, one year, two years, five years, or longer depending on the bank. The bank pays you interest on top of your deposit, and you get both back when the term ends.
The catch is that you cannot withdraw the money before the term ends without paying a penalty. That penalty is usually a certain number of months' worth of interest—so if you have a one-year CD earning 4% and you withdraw after six months, the bank might take away three months of interest as the fee. Some banks charge a flat dollar amount instead. The exact penalty varies by bank and CD type, so you need to read the terms before you open one.
CDs are insured by the FDIC (Federal Deposit Insurance Corporation) up to $250,000 per depositor per bank, which means your money is protected if the bank fails. This makes them one of the safest places to put money that you know you will not need for a while.
Key Takeaways
- You lock money into a CD for a fixed term and receive a may provide interest rate that does not change, even if rates rise or fall.
- Withdrawing before the term ends costs you a penalty, usually measured in months of interest, so only use a CD for money you can actually leave alone.
- CD rates vary by bank and term length; longer terms usually pay more, but online banks often beat brick-and-mortar banks on rate.
- Your deposit is FDIC insured up to $250,000, so the principal itself is safe even if the bank fails.
- You can ladder CDs—opening multiple CDs with different term lengths so money becomes available at different times—to balance safety with access.
How the interest rate and term length work together
The interest rate on a CD is fixed, meaning it does not change for the entire term. If you open a two-year CD at 4.5%, you will earn 4.5% every year for two years, even if the Federal Reserve raises rates and new CDs start paying 5.5%. This is both a strength and a weakness: you are protected if rates fall, but you miss out if rates rise.
Term length and rate are linked. A three-month CD will almost always pay less than a one-year CD at the same bank, and a one-year CD will pay less than a five-year CD. The bank pays you more for locking your money away longer because they want to use it for longer. However, this relationship is not may provide—sometimes a one-year CD pays more than a two-year CD if the bank is trying to attract short-term deposits.
The interest compounds, usually daily or monthly depending on the bank. Compounding means you earn interest on your interest, so your balance grows faster than simple math would suggest. A $10,000 CD earning 4% compounded daily will grow to about $10,408 after one year, not exactly $10,400.
Where to find the best CD rates
Online banks almost always pay higher rates than traditional banks because they have lower overhead costs. A brick-and-mortar bank might offer 0.5% on a one-year CD while an online bank offers 4.5% on the same term. The difference adds up fast: on a $25,000 CD, that is $1,000 more in your pocket over one year.
You can compare rates across banks using sites like Bankrate, DepositAccounts, or the bank's own website. Rates change constantly—sometimes daily—so check a few days before you plan to open the CD. Some banks offer promotional rates for new customers or for larger deposits, so read the fine print to see if there are conditions.
Credit unions also offer CDs, and they sometimes pay competitive rates. If you are a member of a credit union, check their rates alongside online banks before deciding.
The penalty for early withdrawal and when it matters
Early withdrawal penalties are the main reason to think carefully before opening a CD. If you withdraw before the term ends, the bank deducts the penalty from your interest earnings or from your principal. A common penalty structure is three months of interest on a one-year CD, six months on a two-year CD, and so on—but this varies widely.
Some banks charge a flat fee instead, like $25 or $50. A few banks offer no-penalty CDs, which let you withdraw without a fee, but they pay lower interest rates to offset that flexibility. If you think you might need the money, a no-penalty CD is worth considering even at a lower rate.
The penalty matters most if you are not sure you can leave the money untouched. If you have an emergency fund or money you might need for a down payment in the next year, a regular CD is not the right place for it. Use a CD only for money you genuinely will not touch.
CD laddering: spreading money across multiple terms
A CD ladder is a strategy where you open several CDs with different term lengths so that money becomes available at different times. For example, you might open five $5,000 CDs with terms of one, two, three, four, and five years. After one year, the first CD matures and you can withdraw or reinvest it. After two years, the second one matures, and so on.
This approach gives you regular access to some of your money while keeping most of it locked in longer-term CDs earning higher rates. When a CD matures, you can open a new five-year CD with that money, which keeps the ladder going. Laddering works best when you have a lump sum to invest and you want to balance safety with the ability to access money periodically.
Laddering also protects you if rates rise. If you put all your money into a five-year CD and rates jump next year, you are stuck earning the old rate. With a ladder, you can reinvest maturing CDs at the new higher rates.
What happens when your CD matures
When the term ends, your CD matures. The bank pays you the principal plus all the interest you earned. You then have a choice: withdraw the money, move it to a savings account, or open a new CD.
Most banks have a grace period—usually seven to ten days—during which you can decide what to do without penalty. If you do nothing during the grace period, the bank will automatically renew the CD into a new term at the current rate. This is convenient if you want to keep the money in a CD, but it means you might lock in a lower rate if rates have fallen. Read your CD agreement to see what the grace period is and what the renewal rate will be.
If you want to move the money somewhere else, do it during the grace period. After that, you will owe the early withdrawal penalty if you take it out.
CDs versus savings accounts and money market accounts
A regular savings account is more flexible than a CD—you can withdraw money anytime without penalty—but it pays much less interest. A savings account might pay 0.01% while a CD pays 4% or more. The tradeoff is access versus return.
A money market account sits between the two. It usually pays more than a savings account but less than a CD, and it gives you limited check-writing or debit card access while still requiring you to keep a minimum balance. Money market accounts are useful if you want some flexibility and a better rate than savings, but you do not want to lock money away.
If you have money you will not need for at least six months to a year, a CD almost always beats a savings account on rate. If you might need the money sooner, a savings account or money market account is safer.
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 number of months of interest—check your CD agreement for the exact amount. Some banks offer no-penalty CDs that let you withdraw without a fee, though they pay lower rates.
What if interest rates go up after I open my CD?
Your rate stays the same for the entire term. You cannot change it or move to a higher-rate CD without closing the current one and paying the penalty. This is why laddering CDs can help—when one matures, you can reinvest at the new higher rate.
Is my money safe in a CD if the bank fails?
Yes. The FDIC insures CDs up to $250,000 per depositor per bank. If the bank fails, the FDIC will return your principal and accrued 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 taxable income in the year you earn it, even if you do not withdraw the money. The bank will send you a 1099-INT form at tax time showing how much interest you earned. This is one reason CDs work better in retirement accounts like IRAs, where the interest can grow tax-deferred.
What is the difference between a CD and a high-yield savings account?
A high-yield savings account pays almost as much interest as a CD but lets you withdraw anytime without penalty. The downside is the rate can change at any time. A CD locks in a rate for the full term, so you know exactly what you will earn, but you cannot access the money without paying a penalty.