What a Certificate of Deposit Is

A certificate of deposit (CD) is a savings product offered by banks and credit unions. You give the bank a sum of money—usually $500 to $100,000, though minimums vary—and agree to leave it there for a set period. In exchange, the bank pays you a fixed interest rate, which is almost always higher than what a regular savings account pays.

The key difference from a regular savings account is the lock-in period. When you open a CD, you choose how long to keep your money there: typically 3 months, 6 months, 1 year, 2 years, 3 years, or 5 years. If you withdraw the money before that time is up, you pay an early withdrawal penalty—usually a few months' worth of interest, though the exact amount depends on the bank and the CD term.

CDs are insured by the Federal Deposit Insurance Corporation (FDIC) if held at a bank, or by the National Credit Union Administration (NCUA) if held at a credit union. This means if the bank fails, your money up to $250,000 is protected by the government.

Key Takeaways

  • A CD locks your money away for a set term—usually 3 months to 5 years—in exchange for a higher interest rate than a savings account.
  • Interest rates on CDs vary by bank, by term length, and by how much money you deposit, so comparing offers across institutions makes a real difference in what you earn.
  • Withdrawing money before the term ends triggers an early withdrawal penalty, typically equal to a few months of interest.
  • Your CD balance is insured up to $250,000 by the FDIC (at banks) or NCUA (at credit unions), so your principal is protected if the institution fails.
  • When your CD matures, the bank will either automatically renew it at the current rate or return your money plus interest to your account, depending on what you choose beforehand.

How Interest Rates and Terms Work

The interest rate a bank offers on a CD depends on three main things: the current interest rate environment (set largely by the Federal Reserve), how long you lock your money away, and how much you deposit.

Longer terms usually pay higher rates. A 5-year CD will typically pay more than a 1-year CD at the same bank. Larger deposits sometimes may have access to for higher rates too—a $50,000 CD might pay more than a $1,000 CD. The exact rates change constantly. When rates are rising, new CDs pay more than old ones. When rates are falling, banks lower what they offer on new CDs.

You can find current CD rates by visiting bank websites, using rate-comparison sites, or calling credit unions directly. Rates vary widely: one bank might offer 4.5% on a 1-year CD while another offers 3.8% for the same term. Over a year, that difference adds up.

What Happens When Your CD Matures

When your CD term ends, the bank sends you a notice—usually 7 to 10 days before maturity. At that point, you have choices. You can let the bank automatically renew the CD for another term at whatever rate they're currently offering. You can withdraw the money and interest. Or you can move the money to a different product or bank.

If you do nothing and the bank auto-renews, you're locked in again for the new term at the new rate. If rates have dropped, you might be earning less. If rates have risen, you might be earning more. Some banks make auto-renewal the default; others require you to opt in. Check your CD agreement to know what your bank does.

The interest you earn is taxable income. The bank will send you a 1099-INT form at tax time if you earned $10 or more in interest during the year. You report this on your tax return.

Early Withdrawal Penalties and When They Apply

If you need your money before the CD matures, you can withdraw it, but you'll pay a penalty. The penalty is usually expressed as a number of months of interest. A CD with a 6-month interest penalty means you lose 6 months' worth of the interest you would have earned. If you earned $100 in interest but the penalty is $100, you break even. If you earned $50, you lose $50 from your principal.

Some banks calculate the penalty differently—as a percentage of the deposit or a flat fee. Always ask the bank what the penalty is before you open the CD. It's printed in the disclosure they give you, but it's worth confirming by phone.

The penalty applies only if you withdraw before maturity. Once the CD matures, you can withdraw without penalty. Some banks allow penalty-free withdrawals during a short "grace period" after maturity—usually 7 to 10 days—before they auto-renew.

CDs Versus Savings Accounts and Money Market Accounts

A regular savings account has no lock-in period. You can withdraw whenever you want without penalty. But the interest rate is much lower—often under 0.5% when CD rates are 4% or higher. You're paying for flexibility with lower earnings.

A money market account sits between the two. It typically pays more than a savings account but less than a CD. You can usually write checks or make a limited number of withdrawals per month without penalty, but there's no may provide rate and no lock-in period.

Choose a CD if you know you won't need the money for several months or years and want the highest rate. Choose a savings account if you need quick access. Choose a money market account if you want something in the middle.

How to Open a CD

You can open a CD at any bank or credit union. Start by comparing rates across several institutions—rates differ significantly, and you're not locked into your current bank. You can open a CD at a bank where you don't have a checking account.

To open a CD, you'll need to provide your name, address, Social Security number, and proof of identity (a driver's license or passport). You'll also need to fund the CD with your initial deposit. Most banks let you do this online, by phone, or in person. Some online banks have no minimum deposit; others require $500 or $1,000 to start.

When you open the CD, you'll choose the term length and confirm the interest rate. The bank will give you a disclosure document showing the rate, the term, the maturity date, the early withdrawal penalty, and what happens at maturity. Read this carefully before you commit.

Special CD Types and Strategies

Some banks offer variations on the standard CD. A no-penalty CD lets you withdraw your money early without losing interest, though the rate is usually lower than a standard CD. A bump-up CD lets you increase your rate once if rates rise during your term. A step-up CD automatically increases your rate at set intervals.

Some people use a CD ladder strategy: they open multiple CDs with different maturity dates—one maturing in 1 year, one in 2 years, one in 3 years, and so on. As each CD matures, they open a new one at the longest term. This way, they always have money maturing soon if they need it, but most of their money is locked in at longer-term rates.

If you have more than $250,000 to save, you can open CDs at multiple banks to keep all your money insured. Each bank's FDIC coverage is separate, so $250,000 at Bank A and $250,000 at Bank B are both fully protected.

Frequently Asked Questions

Can I withdraw money from a CD before it matures?

Yes, but you'll pay an early withdrawal penalty. The penalty is usually a few months of interest. Once you pay it, you get the rest of your money. Some CDs have no-penalty options, though they pay lower rates. Check your CD agreement for the exact penalty amount.

What's the difference between a CD and a savings account?

A CD locks your money for a set term and pays a higher rate in exchange. A savings account has no lock-in period and lets you withdraw anytime, but pays much less interest. Choose a CD if you won't need the money for months or years. Choose a savings account if you need quick access.

Is my money safe in a CD?

Yes, up to $250,000. The FDIC (at banks) and NCUA (at credit unions) insure CD balances. If the bank fails, the government protects your money. If you have more than $250,000, open CDs at multiple institutions to keep all of it insured.

Do I have to pay taxes on CD interest?

Yes. Interest earned on a CD is taxable income. The bank sends you a 1099-INT form at tax time if you earned $10 or more. You report this on your tax return as interest income.

What happens when my CD matures?

The bank notifies you before maturity. You can let it auto-renew at the current rate, withdraw your money and interest, or move it elsewhere. If you do nothing, most banks auto-renew automatically. Check your CD agreement to see what your bank's default is.