CDs Explained: How Certificates of Deposit Work
A certificate of deposit (CD) pays a fixed interest rate in exchange for leaving your money untouched for a set time. This guide covers how CDs work, how they compare with high-yield savings, the different types, early withdrawal penalties, what happens at maturity, taxes and how to build a CD ladder.
By Pond.com editors Updated 5 min read
Quick answer
- A CD pays a fixed interest rate for a set term, such as 6 months, 1 year or 5 years.
- You usually pay a penalty, often several months of interest, if you withdraw before the term ends.
- CDs at FDIC-insured banks and NCUA-insured credit unions are protected up to $250,000 per depositor, per institution, per ownership category.
- CDs suit money you won't need until a known date and want to earn a guaranteed rate on, not your emergency fund.
- A CD ladder spreads money across CDs that end at different times, so some cash becomes available regularly.
If you have savings you won't need for a while, a certificate of deposit (CD) can earn a guaranteed rate with very little risk. CDs are simple, but the terms, penalties and renewal rules make a real difference to what you earn.
This guide is general information, not financial advice.
The highest no-strings CD rate we found for each common term, from banks and credit unions anyone can use.
How we chose these
For each common term, we list the highest-rate CD we found that's open to customers in every state, from an FDIC-insured bank or an NCUA-insured credit union that anyone can join, with a minimum deposit of $2,500 or less. We left out CDs limited to certain ages or groups, jumbo CDs, short-term specials capped at small amounts, brokered CDs and uninsured branches of foreign banks. We start from independent surveys of nationally available CDs that include institutions that don't pay for listings, then confirm on the institution's own website where the rate is shown. Rows are ordered by term, shortest first. Pond.com isn't paid by any bank or credit union listed here.
APY = annual percentage yield, fixed for the CD's term. Early withdrawal penalties apply to all of these; check the penalty before you open one. Bank CDs are FDIC-insured and credit union certificates NCUA-insured, up to $250,000 per depositor, per institution, per ownership category.
For information only, not a recommendation. Rates and terms change often and may depend on where you live; check the details with the provider before you apply. Pond.com isn't paid by any provider listed here.
How CDs work
- Deposit a lump sum, often with a minimum such as $500 or $1,000, though some banks have no minimum.
- Choose a term, usually from 3 months to 5 years.
- Earn a fixed rate for the whole term. The rate is shown as APY (annual percentage yield), which includes compounding.
- Get your money back with interest when the CD matures.
Longer terms often pay higher rates, but not always. When rates are expected to fall, banks sometimes pay more on shorter CDs. Online banks and credit unions usually pay more than large branch banks. See online banks vs traditional banks.
CDs vs other places to keep savings
| CD | High-yield savings | Treasury bills | |
|---|---|---|---|
| Rate | Fixed for the term | Can change any time | Fixed for the term |
| Access | Penalty for early withdrawal | Withdraw any time | Hold to maturity or sell |
| Insurance or backing | FDIC or NCUA | FDIC or NCUA | US government |
| State income tax on interest | Yes | Yes | No |
| Best for | Money with a known future date | Emergency fund, flexible savings | Short-term savings in high-tax states |
See high-yield savings accounts explained and Treasury bills and I bonds explained.
Types of CDs
| Type | How it works | Good for |
|---|---|---|
| Traditional CD | Fixed rate and term | Most savers |
| No-penalty CD | Withdraw early without a penalty, usually at a lower rate | Savers who might need the money |
| Bump-up CD | Lets you raise your rate once or twice if rates rise | When rates may go up |
| Add-on CD | Lets you add money after opening | Building savings over time |
| Jumbo CD | For large deposits, often $100,000 or more | Large balances, within insurance limits |
| Brokered CD | Bought through a brokerage; can be sold before maturity | Investors who want to buy CDs from many banks |
| IRA CD | A CD held inside an IRA | Low-risk retirement savings |
Brokered CDs are FDIC-insured at the issuing bank, but if you sell one before it matures, the price depends on current rates and may be lower than you paid. Some are callable, meaning the bank can end them early, often when rates fall.
Early withdrawal penalties
If you take money out before the term ends, you'll usually lose some interest. Penalties vary by bank and term, but common examples are around three months of interest for shorter CDs and six months to a year or more for longer ones. On a CD you've held only briefly, the penalty can eat into your original deposit.
Before you open a CD, check:
- The penalty for your term
- Whether partial withdrawals are allowed
- How the penalty is worked out: some banks use simple interest, others compounded
When a CD matures
Your bank should notify you before the maturity date. You'll then usually have a grace period, often 7 to 10 days, to:
- Withdraw the money
- Move it to a different CD or account
- Let it renew automatically, usually into a CD of the same length at the bank's current rate, which may be lower than you could get elsewhere
Building a CD ladder
A CD ladder spreads your money across CDs that mature at different times. For example, you could split $5,000 into five CDs of 1, 2, 3, 4 and 5 years. When the 1-year CD matures, you reinvest it in a new 5-year CD, and so on. After the first few years, one CD matures every year, and all your money is earning longer-term rates.
Ladders give you regular access to part of your money and reduce the risk of locking everything in just before rates rise.
Taxes on CD interest
- Interest is taxable as ordinary income each year, even if it stays in the CD.
- Your bank sends Form 1099-INT if you earn $10 or more.
- Early withdrawal penalties are reported on the same form and can be deducted on your federal return.
- CDs in an IRA grow tax-deferred, or tax-free in a Roth IRA. See retirement accounts explained.
Is a CD right for you?
CDs work well for:
- A down payment you'll need in a year or two. See how to save for a down payment.
- A known future bill, like tuition or a planned car purchase
- Part of your savings you want to keep safe from market swings, especially in or near retirement
They're not a good fit for your emergency fund, which needs to be easy to reach. See how to build an emergency fund.
How much do you need to save each month? Enter your goal and deadline to get a monthly target. Open calculatorCommon questions
It depends. CDs lock in a rate, which helps if rates are expected to fall, but you can't easily reach the money. High-yield savings accounts let you withdraw any time, but their rates can change. Many people use savings for emergencies and CDs for money with a known future use.
You'll usually have a grace period, often 7 to 10 days, to withdraw the money or move it. If you do nothing, many banks automatically renew it into a new CD of the same length at the current rate. Set a reminder before the maturity date.
Yes. CD interest is taxed as ordinary income in the year it's earned, even if you don't withdraw it, including on CDs longer than a year. Your bank sends a Form 1099-INT if you earn $10 or more. CDs held inside an IRA follow IRA tax rules instead.
Not from a bank or credit union CD held to maturity within insurance limits. You can lose some interest, and occasionally part of your deposit, if you withdraw early. Brokered CDs sold before maturity can be worth less than you paid if rates have risen.
Only money you're confident you won't need before the term ends. Build your emergency fund in an easy-to-reach account first, then consider CDs for savings set aside for a specific date, like a down payment or tuition bill.