The basic steps to open a CD
Buying a CD means giving your bank or credit union a sum of money for a fixed period—usually three months to five years—in exchange for a may provide interest rate. You walk into a branch or log into an online account, choose how much to deposit and how long to lock it away, sign the CD agreement, and the bank holds your money until the maturity date arrives. On that date, you get your original deposit back plus the interest earned.
The process itself takes minutes. The waiting—that's the hard part. Once your money is in a CD, you cannot touch it without paying a penalty, usually a chunk of the interest you earned. That's the trade-off: higher interest rates in exchange for leaving your money alone.
Key Takeaways
- You choose the deposit amount and the term length when you open the CD, and both are locked in until maturity.
- Banks and credit unions offer different rates and terms, so comparing offers before you commit saves money over the CD's life.
- You can buy a CD in person at a branch, by phone, or online through your bank's website or a third-party CD marketplace.
- Early withdrawal penalties vary widely—some banks charge three months of interest, others charge six months or more—so read the terms before you deposit.
- Your CD is insured up to $250,000 per depositor per bank by the FDIC (or NCUA if it's a credit union), so your principal is protected even if the institution fails.
Decide how much money and how long to lock it up
Before you contact a bank, know two things: the dollar amount you want to deposit and how long you can afford to leave it there. Most banks have a minimum deposit—often $500 or $1,000, though some online banks accept $100 or less. You can deposit more, but once it's in, you cannot add to it later. If you want to deposit more money, you open a separate CD.
The term length matters because it directly affects the interest rate. A three-month CD pays less than a one-year CD at the same bank. A five-year CD pays more than a one-year CD. The longer you commit, the higher the rate—that's how banks compensate you for tying up your money. If you think you might need the money in two years, do not lock it into a five-year CD just for a slightly higher rate. The early withdrawal penalty will wipe out your gain.
Write down your target amount and your realistic timeline. This is what you shop with.
Compare CD rates and terms across banks
Interest rates on CDs change daily and vary significantly between institutions. A one-year CD at one bank might pay 4.50%, while another pays 5.25% for the same term. Over a year, that difference on a $10,000 deposit is roughly $75 in extra interest. Over five years, it compounds.
You have three ways to shop. First, check your current bank's CD offerings on their website or by calling. Second, visit the websites of online banks and credit unions—they often post rates publicly. Third, use a CD marketplace like Bankrate, DepositAccounts, or your credit union's CO-OP network, which aggregates rates from many institutions in one place.
When you compare, look at three things: the interest rate (called the Annual Percentage Yield, or APY), the term length, and the early withdrawal penalty. The penalty is buried in the fine print—usually labeled "early termination fee" or "early withdrawal penalty." Some banks charge a flat fee; others charge a number of months' interest. If a bank does not list the penalty online, call and ask before you open the account.
Understand early withdrawal penalties and when they apply
The early withdrawal penalty is the price you pay if you need your money before the maturity date. It comes out of your CD balance, reducing what you get back. A typical penalty might be three to six months of interest, but some banks charge more, and a few charge less or none at all (called a "no-penalty CD," though the rate is usually lower to compensate).
Here is how it works in practice: You open a one-year CD with $10,000 at 5% APY. After six months, you need the money. The bank calculates the penalty—say, three months of interest, which is about $125. You withdraw your $10,000, but the bank deducts the $125 penalty, so you receive $9,875. You also owe taxes on the $250 in interest you earned, even though you did not keep it all.
Some banks waive the penalty if you withdraw after a certain grace period—often 7 to 10 days after the CD opens. Read the terms carefully. If you are not sure you can leave the money untouched for the full term, a no-penalty CD or a shorter term is safer, even if the rate is lower.
Open the CD in person, by phone, or online
Once you have chosen a bank and a term, you open the CD through one of three channels.
In person at a branch: Walk in with your ID and the cash or a check for your deposit. A banker will show you the CD agreement, you sign it, and the CD opens that day. This is the slowest method but the most straightforward if you have questions.
By phone: Call the bank's customer service number, give them your deposit amount and term preference, and they will walk you through the agreement over the phone. They will mail you a signed copy or email it to you. Funding happens by check or electronic transfer from another account.
Online: Log into your bank's website or the website of an online bank, navigate to the CD section, enter your deposit amount and term, review the agreement, and sign electronically. You fund it by transferring money from a linked bank account. This is the fastest method and works 24/7. Most online banks fund CDs within one to two business days.
What happens on the maturity date
When your CD reaches its maturity date, the bank automatically does one of two things: it deposits your principal plus interest into a linked savings or checking account, or it rolls the money into a new CD at the current rate. Which one depends on your bank's default policy and what you chose when you opened the CD.
Check your CD agreement for the "maturity instructions" section. If you do not want your money rolled into a new CD, contact the bank a few days before maturity and tell them to deposit it into your checking or savings account instead. If you miss the window and the bank rolls it over, you usually have a grace period (often 7 to 10 days) to withdraw the money without penalty and move it elsewhere.
The interest you earned is taxable income in the year the CD matures. The bank will send you a 1099-INT form in January showing the interest amount. You report this on your tax return.
FDIC and NCUA insurance protects your deposit
When you open a CD at a bank, your deposit is insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor per bank. If the bank fails, the FDIC pays you back. At a credit union, the same protection comes from the National Credit Union Administration (NCUA).
This means your principal is safe no matter what happens to the institution. The insurance does not cover losses from early withdrawal penalties or market risk—it only protects against the bank or credit union going under. If you are depositing more than $250,000, split it across multiple banks to stay within the insurance limit per institution.
Frequently Asked Questions
Can I add more money to my CD after I open it?
No. A CD is a fixed deposit. Once you open it, you cannot add funds to that CD. If you want to deposit more money, you must open a separate CD at the same bank or a different one.
What is the difference between a CD and a savings account?
A savings account lets you deposit and withdraw money anytime with no penalty, but it pays a much lower interest rate. A CD locks your money for a set term and pays higher interest, but you pay a penalty if you withdraw early. Choose a CD if you have money you will not need for months or years; choose a savings account if you might need it sooner.
Do I have to pay taxes on CD interest?
Yes. The interest you earn on a CD is taxable income. The bank sends you a 1099-INT form showing the interest amount, and you report it on your federal tax return. You owe taxes on the interest even if you withdraw early and lose some of it to a penalty.
What happens if I need my money before the CD matures?
You can withdraw it, but the bank deducts an early withdrawal penalty from your balance. The penalty amount depends on the bank and the term—read your CD agreement to see what it is. Some banks offer a grace period of 7 to 10 days after opening where you can withdraw without penalty.
Should I buy a CD ladder or just one long-term CD?
A CD ladder means opening multiple CDs with different maturity dates so that one matures every few months or years, giving you regular access to your money. This works if you want some liquidity without sacrificing all your interest. A single long-term CD is simpler but locks your money away longer. Choose based on whether you think you might need access to part of your money before the full term ends.