A certificate of deposit is a savings account where you lock away money for a set time in exchange for a higher interest rate

A certificate of deposit (CD) is an account at a bank or credit union where you deposit money and agree not to touch it until a specific date. In return, the institution pays you a fixed interest rate — usually higher than what a regular savings account offers. When the CD reaches its maturity date, you get back your original deposit plus the interest earned.

The trade-off is simple: you give up access to your money for a defined period (called the term), and the bank or credit union rewards you with better interest. If you withdraw the money before the maturity date, you typically pay an early withdrawal penalty, which is a fee that reduces your earnings or principal.

CDs come in different term lengths — commonly 3 months, 6 months, 1 year, 3 years, or 5 years — and the interest rate usually increases with the length of the term. A 5-year CD will pay more than a 1-year CD because you are committing your money for longer.

Key Takeaways

  • You deposit a lump sum and cannot withdraw it without penalty until the maturity date arrives.
  • Interest rates on CDs are fixed and typically higher than regular savings accounts, especially for longer terms.
  • Early withdrawal penalties vary by institution and can eat into your interest earnings or principal balance.
  • CDs are insured by the FDIC (at banks) or NCUA (at credit unions) up to $250,000 per account.
  • You can open a CD with as little as $500 at many institutions, though some require higher minimums.

How the interest rate and term length work together

The interest rate you receive depends on two things: the current interest rate environment and how long you lock your money away. When overall interest rates are high, CD rates are high. When rates fall, new CDs pay less — but your existing CD keeps paying the rate you locked in when you opened it.

Longer terms almost always pay more than shorter ones. A 5-year CD might pay 4.5% while a 6-month CD pays 3.8%, for example. The bank is paying you extra because you are giving up access to your money for five years instead of six months. However, this also means you are taking on more risk: if you need the money before five years pass, you lose money to the penalty.

Some banks offer CD ladders — a strategy where you open multiple CDs with different maturity dates so that money becomes available at regular intervals. For example, you might open five 1-year CDs, each maturing in consecutive years. This way you get some of the higher rates that longer terms offer while still having access to portions of your money regularly.

What happens when your CD matures

On the maturity date, your CD stops earning interest. At that point, the bank or credit union sends you a notice — usually 10 to 30 days before maturity — asking what you want to do. You have three main options: withdraw the money, open a new CD with the proceeds, or let the bank automatically renew the CD for another term at the current rate.

If you do nothing, most institutions will automatically renew your CD into a new term at whatever rate they are currently offering. This is called auto-renewal. The problem is that the new rate might be much lower than what you had, and you will not know until after the renewal happens. To avoid this, mark your calendar and contact your bank before the maturity date to decide what you actually want to do.

Some banks offer no-penalty CDs, which let you withdraw your money without a fee before maturity. These are less common and typically pay lower interest rates than standard CDs because the bank is taking on more risk.

Early withdrawal penalties and how they work

If you need your money before the maturity date, you will pay a penalty. The size of the penalty varies widely — some banks charge three months of interest, others charge six months, and some charge a percentage of your principal. A few charge a flat fee. Always check the CD's terms before you open it, because the penalty structure is not standardized.

Here is how a penalty might work in practice: you open a $10,000 CD paying 4% annual interest with a penalty of three months of interest. Three months of interest on $10,000 at 4% is $100. If you withdraw after six months, you get your $10,000 back plus $200 in interest earned, minus the $100 penalty, for a total of $10,100. You still came out ahead, but you earned less than you would have if you left the money alone.

The longer the CD term, the larger the penalty is usually. A 5-year CD might have a penalty of one year's interest, while a 1-year CD might have a penalty of three months. This is another reason to think carefully about whether you can actually leave the money untouched for the full term.

FDIC and NCUA insurance protection

Money in a CD at a bank is insured by the FDIC (Federal Deposit Insurance Corporation) up to $250,000 per depositor, per bank. If the bank fails, you get your money back up to that limit. Money in a CD at a credit union is insured by the NCUA (National Credit Union Administration) with the same $250,000 limit.

If you have more than $250,000 to deposit, you can open CDs at multiple banks or credit unions to keep all your money insured. Each institution's $250,000 limit is separate. Some people also open CDs in different ownership categories — for example, one in their own name and one in joint ownership with a spouse — because each category has its own $250,000 limit at the same institution.

This insurance applies regardless of what happens to interest rates or the economy. Your CD is one of the safest places to keep money because you are may provide to get back at least your principal, and the government backs that may provide.

When a CD makes sense for your money

A CD works well if you have money you know you will not need for a specific period. Common situations include saving for a down payment on a house in two years, setting aside money for a known expense in three years, or simply parking cash you do not want to risk in the stock market. The fixed rate means you know exactly how much you will have when the CD matures.

CDs are less useful if you might need the money unexpectedly, because the early withdrawal penalty will cost you. They are also less attractive when interest rates are falling, because your CD will lock you into a rate that may soon look low. Conversely, when rates are rising, a short-term CD lets you reinvest at higher rates sooner.

Compare CD rates across banks and credit unions before you open one — rates vary significantly, and online banks often pay more than brick-and-mortar branches. A difference of 0.5% on a $10,000 CD over one year means $50 in extra interest, which is worth a few minutes of shopping.

Frequently Asked Questions

Can I withdraw money from a CD before it matures?

Yes, but you will pay an early withdrawal penalty. The penalty amount depends on the bank and the CD term — it might be three to twelve months of interest, or a percentage of your principal. Check your CD's terms before opening it so you know what the penalty is.

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 away for a set term and pays higher interest, but you lose money if you withdraw early. Choose a savings account if you need access to your money; choose a CD if you can leave it alone.

Do I have to pay taxes on CD interest?

Yes. The interest you earn on a CD is taxable income. Your bank will send you a 1099-INT form at tax time showing how much interest you earned. You report this on your tax return just like any other interest income.

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

The FDIC or NCUA will protect your money up to $250,000. You will get back your principal plus any interest earned up to the maturity date, even if the bank goes out of business. Your CD is one of the safest places to keep money.

Can I move my CD to a different bank?

You can withdraw your money and open a new CD elsewhere, but you will pay the early withdrawal penalty on the original CD. Some banks offer to waive or reduce the penalty if you move your account, so it is worth asking before you withdraw.