A certificate of deposit is a savings account where you agree to leave money untouched for a set time in exchange for a fixed interest rate

When you open a certificate of deposit (CD), you give a bank or credit union a lump sum of money. The institution promises to pay you a specific interest rate for keeping that money there. In return, you agree not to withdraw it until a date you choose at the start — typically anywhere from three months to five years, though some CDs run longer.

The interest rate on a CD is locked in when you open the account. It does not change, even if interest rates in the broader economy rise or fall. You know exactly how much money you will have when the CD reaches its maturity date — the day your term ends and you can withdraw without penalty.

CDs are offered by banks, credit unions, and some investment firms. The terms, interest rates, and minimum deposit amounts vary by institution. A CD from one bank will not look identical to a CD from another, so comparing what different places offer is part of deciding whether a CD fits your situation.

Key Takeaways

  • You deposit a fixed amount of money and agree to leave it untouched until a maturity date you select when opening the account.
  • The interest rate is locked in at the time you open the CD and remains the same for the entire term, regardless of market changes.
  • If you withdraw money before the maturity date, you typically pay an early withdrawal penalty that reduces your earnings or principal.
  • CDs are insured by the FDIC (at banks) or NCUA (at credit unions) up to $250,000 per depositor per institution, making them low-risk savings vehicles.
  • Interest rates on CDs are generally higher than regular savings accounts but lower than what you might earn from stocks or bonds.

How the interest rate and maturity date work together

The maturity date is the end of your CD term. On that date, your CD "matures," meaning the contract is complete. You can then withdraw your money without penalty. The bank will have paid you interest throughout the term, either monthly, quarterly, or at maturity — the schedule depends on the CD.

The interest rate is expressed as an annual percentage yield (APY). This rate is fixed when you open the account. If you open a one-year CD at 4.5% APY with a $10,000 deposit, you will earn $450 in interest over that year (before any taxes). The rate does not move up if the Federal Reserve raises rates, and it does not move down if rates fall.

Longer-term CDs often pay higher rates than shorter ones, though this is not may provide. A five-year CD might pay 4.8% while a one-year CD pays 4.5%, or the rates could be reversed. Each bank sets its own rates based on market conditions and how much money it needs to attract.

What happens if you need the money before maturity

If you withdraw money from a CD before the maturity date, you will almost always pay an early withdrawal penalty. The penalty amount varies by institution and by how long the CD term is. A typical penalty might be three to six months of interest, though some banks charge more or less.

The penalty comes out of your earnings first. If you have earned $450 in interest and the penalty is $200, you receive $250 in interest plus your original $10,000. If the penalty is larger than your interest earned, it reduces your principal — you get back less than you deposited.

Some banks offer "no-penalty CDs" that let you withdraw early without a penalty, but these almost always pay lower interest rates than standard CDs. The lower rate is how the bank compensates for the flexibility you gain.

FDIC and NCUA insurance on CD accounts

Money in a CD at a bank is insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor per bank. Money in a CD at a credit union is insured by the National Credit Union Administration (NCUA) up to the same amount. This insurance protects you if the institution fails.

The $250,000 limit applies to your total deposits at that one institution across all account types. If you have a CD, a savings account, and a checking account all at the same bank, the FDIC covers up to $250,000 of your combined balance. If you have $300,000 in CDs at one bank, only $250,000 is protected.

If you want to insure more than $250,000, you can open CDs at different banks. Each institution's insurance is separate. A $150,000 CD at Bank A and a $150,000 CD at Bank B are both fully insured.

CD laddering and how people use multiple CDs

Some people open several CDs with different maturity dates instead of one large CD. This strategy is called CD laddering. For example, you might open five $10,000 CDs with maturity dates one year apart. Each year, one CD matures and you can access that money without penalty, while the others continue earning interest.

CD laddering lets you balance two competing goals: locking in a higher rate for a longer time, and having regular access to portions of your money. It also spreads your deposits across multiple maturity dates so you are not stuck waiting years to touch any of your savings.

Another approach is opening CDs at different institutions to stay within FDIC insurance limits while holding a larger total amount. This requires tracking multiple accounts and maturity dates, but it protects your full balance.

How CD rates compare to other savings options

CDs typically pay more interest than a regular savings account at the same bank. A savings account might pay 0.01% APY while a CD pays 4.5% APY. The difference is that you can withdraw from savings anytime, while a CD locks your money away.

CDs pay less than stocks, bonds, or mutual funds typically do over long periods, but they also carry much less risk. The stock market can fall, wiping out gains. A CD rate is may provide — you will not lose money to market swings.

High-yield savings accounts offered by online banks sometimes pay rates close to CDs, and they keep your money accessible. The trade-off is that savings account rates can change at any time, while CD rates are locked in. If rates fall, your savings account rate falls with them, but your CD rate stays the same.

Taxes on CD interest earnings

Interest you earn on a CD is taxable income in the year you earn it. If your CD pays interest monthly or quarterly, you owe taxes on that interest each year, even if you do not withdraw it. If your CD pays interest only at maturity, you owe taxes when it matures.

The bank will send you a Form 1099-INT at the end of the tax year showing how much interest you earned. You report this on your tax return. The tax rate depends on your overall income and tax bracket.

If you hold a CD in a tax-advantaged retirement account like an IRA or 401(k), the interest is not taxed until you withdraw from the account. This is one reason some people use CDs inside retirement accounts — the tax deferral can help savings grow faster.

Frequently Asked Questions

Can I withdraw money from a CD before it matures?

Yes, but you will pay an early withdrawal penalty. The penalty is typically three to six months of interest, though it varies by bank and CD term. The penalty reduces your earnings or principal, so you receive less than you would have if you waited until maturity.

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

A savings account lets you withdraw anytime and usually pays a lower interest rate. A CD locks your money for a set term and pays a higher, fixed rate. You can access CD money early only by paying a penalty.

Do I have to pay taxes on CD interest?

Yes. CD interest is taxable income in the year you earn it. Your bank sends you a Form 1099-INT at tax time showing your interest earnings. The exception is CDs held inside retirement accounts like IRAs, where taxes are deferred until you withdraw.

What happens when my CD reaches maturity?

When your CD matures, you can withdraw your money without penalty. You can also roll the money into a new CD at the same bank or move it elsewhere. If you do nothing, some banks automatically renew your CD into a new term at the current rate.

Is my money safe in a CD?

Yes, up to $250,000 per depositor per institution. Bank CDs are insured by the FDIC, and credit union CDs are insured by the NCUA. If the institution fails, your CD is protected. You will not lose money to market risk because the rate is locked in and may provide.