What Is a Certificate of Deposit (CD)?

A certificate of deposit is one of the safest ways to earn a guaranteed return on your savings. Here is how CDs work, what they pay right now, and whether one belongs in your savings strategy.

How Does a CD Work?

A CD works like a deal between you and your bank: you agree to deposit a fixed amount of money for a specific period of time (the "term"), and in return, the bank pays you a fixed interest rate that is typically higher than a regular savings account. The rate is locked in for the entire term, regardless of what happens to interest rates in the broader economy.

Terms range from as short as 3 months to as long as 5 years or more. Generally, longer terms come with higher APYs because you are giving the bank access to your money for a longer period. However, this is not always the case — sometimes short-term CDs pay more than long-term ones when the yield curve is inverted.

When your CD matures (reaches the end of its term), you can withdraw the full balance — your original deposit plus all the interest earned — with no penalty. If you need the money before the term ends, you will pay an early withdrawal penalty, which is usually a few months of interest.

Current CD Rates by Term

CD rates vary by term and by bank. Here are the best available rates across popular CD terms right now:

Term	Best APY	Bank	Min. Deposit
3-Month	4.00%	Brilliant Bank	$1
6-Month	4.20%	United Fidelity Bank, fsb	$0
1-Year	4.23%	GECU	$50
2-Year	4.20%	Mountain America Credit Union	$500
4-Year	4.10%	CoVantage Credit Union	$1
5-Year	4.15%	United Fidelity Bank, fsb	$0

Rates updated daily. See all available rates on our CD rates comparison page.

Pros and Cons of CDs

Advantages

•Guaranteed fixed rate — Your APY is locked in for the full term. If rates drop tomorrow, your CD keeps earning the same amount.
•FDIC insured — CDs are insured up to $250,000 per depositor per bank, just like savings accounts. Your principal is safe.
•Higher rates than savings — CDs often pay more than high-yield savings accounts because you commit to a fixed term.
•Predictable returns — You know exactly how much interest you will earn before you open the CD. No surprises.
•Discourages impulse spending — The early withdrawal penalty creates a natural barrier against dipping into savings for non-essentials.

Disadvantages

•Money is locked up — You cannot access your funds before maturity without paying a penalty. This makes CDs a poor choice for emergency savings.
•Early withdrawal penalties — Cashing out early typically costs 3 to 12 months of interest depending on the term and the bank.
•Opportunity cost if rates rise — If interest rates increase after you open a CD, your money is stuck earning the old, lower rate.
•Inflation risk on long terms — A 5-year CD at a fixed rate could lose purchasing power if inflation rises significantly during the term.
•Interest is fully taxable — Unlike Treasury bills, CD interest is subject to federal, state, and local income tax.

CDs vs. Savings Accounts: Key Differences

Both CDs and high-yield savings accounts are FDIC insured and low-risk. The right choice depends on when you need the money and how you feel about rate changes.

Feature	CD	High-Yield Savings
Interest Rate	Fixed for the full term	Variable — can change anytime
Best Rate Today	4.23% (12-month)	4.50%
Liquidity	Locked until maturity	Withdraw anytime
Early Access Penalty	Yes — months of interest	None
FDIC Insured	Yes — $250K per depositor	Yes — $250K per depositor
Best For	Money you can set aside 6+ months	Emergency fund, flexible savings

For a deeper comparison, see our HYSA vs CD guide. Compare savings account rates on our HYSA page.

Types of CDs

Traditional CD

The standard CD with a fixed rate and fixed term. You deposit money, earn a guaranteed APY, and get your principal plus interest at maturity. Early withdrawal triggers a penalty. This is what most people mean when they say "CD."

No-Penalty CD

A CD that lets you withdraw your full balance before maturity without any fee. The trade-off is a lower APY than a traditional CD of the same term. No-penalty CDs are a good middle ground between a CD and a savings account. Learn more about no-penalty CDs.

Bump-Up CD

A CD that lets you request a rate increase (usually once) during the term if the bank raises its rates. Bump-up CDs start at a lower APY than traditional CDs but offer protection against rising rates. They work best for longer terms where rate changes are more likely.

Jumbo CD

A CD that requires a large minimum deposit, typically $100,000 or more. Jumbo CDs sometimes offer slightly higher APYs than standard CDs, though the rate premium has shrunk in recent years as online banks offer competitive rates with low minimums.

Brokered CD

A CD purchased through a brokerage account rather than directly from a bank. Brokered CDs can be sold on the secondary market before maturity (avoiding the early withdrawal penalty), but you may sell at a loss if rates have risen since you bought it. They are still FDIC insured.

CD Strategies to Maximize Your Returns

•CD laddering — split your money across multiple CDs with staggered maturity dates. This gives you periodic access to your money while earning higher long-term rates. See our full CD ladder guide or model your own with our CD ladder calculator.
•Shop around for every term — different banks lead on different terms. The best 6-month CD may be at a different bank than the best 12-month CD. Our CD rate comparison makes it easy to find the top rate for each term.
•Avoid auto-renewal at maturity — when your CD matures, most banks auto-renew at their current rate, which may be significantly lower. Set a calendar reminder to shop for the best rate before the grace period ends.
•Consider tax implications — if you live in a state with high income tax, compare CDs against Treasury bills, which are exempt from state and local taxes.
•Know the penalty before you commit — early withdrawal penalties vary widely between banks. Understand how penalties work so you can pick a CD with a reasonable fee structure.

Who Should Open a CD?

CDs work best for people who have savings beyond their emergency fund that they will not need for a specific period of time. Common use cases include:

•Saving for a known future expense — a home down payment in 2 years, a wedding in 18 months, or tuition due next fall
•Locking in high rates — when rates are elevated and expected to drop, a CD preserves today's rate for the full term. Check our CD rates forecast to see where rates may be heading.
•Conservative investors — retirees or risk-averse savers who want guaranteed returns without market exposure
•Protecting against impulse spending — the withdrawal penalty acts as a psychological and financial barrier against dipping into savings

Not sure if a CD is right for you? Keep your emergency fund in a high-yield savings account first, then consider CDs for the money you have beyond that.

How Much Interest Will a CD Earn?

The interest you earn depends on three factors: the APY, the deposit amount, and the term length. For example, a $10,000 deposit in a 12-month CD at 4.23% APY would earn approximately $423 in interest over the year.

Most CDs compound interest daily or monthly, which means you earn a small amount of interest on your accumulated interest throughout the term. The APY (Annual Percentage Yield) already accounts for compounding, so it is the most accurate number to use for comparing CDs.

For detailed calculations, see our how to calculate CD interest guide or use the compound interest calculator to model different scenarios.

Frequently Asked Questions

What is a certificate of deposit (CD)?

A certificate of deposit (CD) is a type of savings account offered by banks and credit unions that pays a fixed interest rate in exchange for keeping your money deposited for a set period of time, called the term. Terms typically range from 3 months to 5 years. CDs are FDIC insured up to $250,000 per depositor per bank, making them one of the safest places to save money.

How much money do you need to open a CD?

Many online banks and credit unions let you open a CD with as little as $0 to $1. Traditional banks may require higher minimum deposits, sometimes $500 or $1,000. The minimum deposit varies by bank and sometimes by the CD term, so it pays to shop around if you are starting with a smaller amount.

Can you lose money in a CD?

You cannot lose your principal in a CD as long as you stay within FDIC insurance limits ($250,000 per depositor per bank). However, if you withdraw money before the CD matures, you will pay an early withdrawal penalty that typically equals several months of interest. In rare cases with very short holding periods, the penalty could slightly exceed the interest earned.

Are CDs better than savings accounts?

CDs and savings accounts serve different purposes. CDs typically offer a fixed rate that is guaranteed for the full term, which protects you if rates drop. Savings accounts offer variable rates but give you instant access to your money. CDs are better for money you will not need for a set period. Savings accounts are better for emergency funds and money you may need at any time.

What happens when a CD matures?

When a CD matures, you typically have a grace period (usually 7 to 14 days) to decide what to do with the money. You can withdraw the full balance with no penalty, renew into a new CD at the current rate, or let it roll over automatically. If you do nothing, most banks auto-renew the CD at whatever rate they are currently offering, which may be lower than your original rate.

Are CD earnings taxable?

Yes. Interest earned on CDs is subject to federal, state, and local income tax. Your bank will send you a 1099-INT form each year for any CD interest of $10 or more. The interest is taxable in the year it is earned, even if you do not withdraw it. This is one area where Treasury bills have an advantage — T-bill interest is exempt from state and local taxes.

Is now a good time to open a CD?

When rates are high or expected to fall, locking in a CD rate can be a smart move because you guarantee today's rate for the full term. When rates are rising, shorter-term CDs or a CD ladder strategy lets you capture higher rates as they become available. Check current CD rates to see where things stand right now.