A certificate of deposit is a savings account where you lock up your 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 to leave it untouched for a specific period — typically three months to five years. In return, the institution pays you a fixed interest rate that is almost always higher than what you would earn in a regular savings account. When the time period ends, you get your original deposit back plus the interest you earned.

The trade-off is simple: you give up access to your money for a defined period, and the bank or credit union rewards you with better interest. If you withdraw the money before the term ends, you pay a penalty — usually a few months' worth of interest. CDs are one of the safest places to keep money because they are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per account holder per institution.

Key Takeaways

  • You deposit a lump sum and agree not to touch it for a set term, ranging from a few months to several years, in exchange for a may provide interest rate.
  • The interest rate on a CD is fixed when you open it and does not change, even if market rates rise or fall during your term.
  • Withdrawing money before the term ends triggers a penalty, typically equal to a few months of the interest you would have earned.
  • CDs are FDIC-insured up to $250,000, making them one of the lowest-risk places to store money.
  • You can open a CD at most banks and credit unions, and rates vary by institution and term length.

How the interest rate and term length work together

When you open a CD, you choose both the term and the amount you deposit. The bank or credit union then locks in an interest rate for that specific term. A three-month CD might pay 4.5 percent annually, while a five-year CD at the same institution might pay 4.8 percent. The longer you commit your money, the higher the rate typically is — though this is not a rule, and rates depend on what the financial institution decides and what the broader economy is doing.

The interest is calculated on your deposit and paid to you when the term ends. Some CDs allow you to add interest to the account automatically so it compounds, meaning you earn interest on your interest. Others pay the interest into a linked checking or savings account. When your term is up, you have a grace period — usually seven to ten days — to decide whether to withdraw the money or roll it into a new CD at whatever the current rate is at that time.

What happens if you need the money early

Breaking a CD before maturity costs you. The penalty is set when you open the account and is usually expressed as a number of months of interest. If you have a one-year CD earning $200 in interest and the penalty is three months of interest, you would lose $50 when you withdraw early. Some CDs have smaller penalties for early withdrawal; others have larger ones. A few banks offer no-penalty CDs, but they pay lower interest rates to offset that flexibility.

The penalty comes out of your interest earnings first. If you do not have enough interest accumulated to cover the full penalty, the bank deducts the remainder from your principal — the money you originally deposited. This is rare with short-term CDs but can happen if you withdraw very early from a longer-term account.

CDs versus regular savings accounts and money market accounts

A regular savings account lets you deposit and withdraw money whenever you want, but the interest rate is usually much lower — often less than 1 percent annually at many large banks. A CD locks your money away but pays significantly more interest. A money market account sits in the middle: it offers higher interest than a savings account but lower than a CD, and it usually allows a limited number of withdrawals per month without penalty.

The choice depends on whether you have money you know you will not need for several months or years. If you have an emergency fund, it should stay in a savings account or money market account where you can access it quickly. If you have money set aside for a goal that is years away — a down payment on a home, a child's education — a CD can help that money grow faster while keeping it safe.

Where to open a CD and what to compare

You can open a CD at any bank or credit union. Rates and terms vary widely, so it pays to shop around. Online banks often offer higher CD rates than brick-and-mortar branches because they have lower overhead costs. Credit unions sometimes offer competitive rates to their members. Before you open a CD, confirm that the institution is FDIC-insured (for banks) or NCUA-insured (for credit unions), which protects your deposit up to $250,000.

When comparing CDs, look at the annual percentage yield (APY), which tells you the actual return you will earn over a year when interest compounds. Compare the same term length across different institutions — a three-month CD at one bank to a three-month CD at another — because rates change frequently and vary by term. Also check the early withdrawal penalty so you understand the cost if your situation changes.

How CDs fit into a savings strategy

CDs work best as part of a layered approach to saving. You might keep three to six months of expenses in a high-yield savings account for emergencies, then put money you will not need for one to three years into CDs with staggered maturity dates. This way, a portion of your CDs matures every few months, giving you access to some money without forcing you to break a CD early and pay a penalty.

Some people use a CD ladder — opening multiple CDs with different term lengths so they mature at different times. For example, you might open a one-year, two-year, and three-year CD all at once. When the one-year CD matures, you roll it into a new three-year CD, and the cycle continues. This strategy lets you take advantage of higher long-term rates while still having regular access to portions of your money.

Frequently Asked Questions

Can I add money to a CD after I open it?

No. A CD requires a lump-sum deposit at the beginning. Once the account is open, you cannot add more money to it. If you want to deposit additional funds, you would need to open a separate CD.

What happens to my CD if the bank fails?

Your CD is protected by FDIC insurance up to $250,000. If the bank fails, the FDIC steps in and pays you the full value of your CD, including any interest earned up to the date of failure. This protection is one reason CDs are considered very safe.

Do I pay taxes on CD interest?

Yes. CD interest is taxable income in the year it is earned or credited to your account, depending on how the CD is structured. The bank will send you a 1099-INT form at tax time showing how much interest you earned. This is true even if you do not withdraw the money.

Can I move a CD to a different bank?

You can withdraw the money when the CD matures and open a new one at a different bank, but you cannot transfer an active CD before maturity without paying the early withdrawal penalty. Some banks allow you to move a CD to another account at the same institution without penalty, but policies vary.

What is the difference between a CD and a savings bond?

A CD is issued by a bank or credit union and insured by the FDIC. A savings bond is issued by the U.S. Treasury and backed by the federal government. Both are safe, but savings bonds have different tax treatment and maturity terms. CDs typically offer higher interest rates for shorter time periods.