What Is a CD? How Certificate of Deposit Accounts Work

A certificate of deposit (CD) is a type of savings account offered by banks and credit unions (credit unions often call them share certificates). You deposit a lump sum for a fixed term — anywhere from a few months to five years or more — and the bank pays you a fixed interest rate for that whole time. In exchange, you agree not to touch the money until the CD matures.

How a CD works, step by step

1. You choose a term and deposit money. Common terms are 3, 6, 9, 12, 18 and 24 months, and 3 and 5 years. Many CDs have a minimum deposit, from $0 to a few thousand dollars.
2. Your rate is locked. A standard CD’s rate doesn’t change during the term, even if market rates rise or fall.
3. Interest compounds. Interest is typically compounded daily or monthly and added to your balance (or paid out to another account, if you choose).
4. At maturity, you decide what’s next. You get your deposit plus interest, usually with a short grace period to withdraw it or roll it into a new CD.

Want to see the numbers? The CD calculator shows exactly what a CD earns for any deposit, rate and term.

APY vs. interest rate

Banks usually quote two numbers. The interest rate is the base annual rate. The APY (annual percentage yield) includes the effect of compounding, so it shows what you actually earn in a year. Because banks in the US must disclose APY, it’s the best number for comparing CDs side by side.

Deposit	APY	Term	Interest earned
$5,000	4.00%	12 months	$200
$10,000	4.00%	12 months	$400
$10,000	4.00%	24 months	$816
$25,000	4.00%	12 months	$1,000

Illustrative rates, not current offers.

Early withdrawal penalties

The trade-off for a fixed rate is limited access. If you withdraw before maturity, most CDs charge a penalty, usually expressed as a number of months of interest — for example, three months of interest on a one-year CD, or six to twelve months on longer terms. Penalties vary a lot between banks, so read the terms before you open one. If you withdraw very early, the penalty can exceed the interest you’ve earned and dip into your principal.

Are CDs safe?

CDs from banks insured by the FDIC (or credit unions insured by the NCUA) are protected up to $250,000 per depositor, per insured institution, per ownership category. That means individual accounts, joint accounts and certain retirement accounts are each insured separately. If you have more than that to deposit, you can spread it across institutions or ownership categories.

Types of CDs

• Traditional CD — fixed rate, fixed term, penalty for early withdrawal.
• No-penalty (liquid) CD — lets you withdraw early without a penalty, usually after the first few days, in exchange for a somewhat lower rate.
• Bump-up CD — lets you raise your rate (usually once) if the bank’s rates go up during your term.
• Add-on CD — allows additional deposits after opening.
• Jumbo CD — requires a large minimum deposit, often $100,000 or more.
• Brokered CD — bought through a brokerage account rather than directly from a bank. They can be sold before maturity on a secondary market, but the price you get depends on current rates, so you could receive less than you paid. Some are callable, meaning the issuing bank can end them early.
• IRA CD — a CD held inside an IRA, combining a fixed rate with the IRA’s tax treatment.

How CD interest is taxed

In a regular (non-retirement) account, CD interest is taxed as ordinary income, generally in the year it’s credited to your account — even if you don’t withdraw it until the CD matures. Your bank reports it on Form 1099-INT. Interest earned on a CD inside an IRA follows the IRA’s rules instead.

CDs vs. other safe places for cash

Feature	CD	High-yield savings	Treasury bills
Rate	Fixed for the term	Variable	Fixed until maturity
Access	Penalty to withdraw early	Withdraw any time	Hold to maturity or sell
Protection	FDIC/NCUA up to limits	FDIC/NCUA up to limits	Backed by the US government
State income tax	Taxable	Taxable	Exempt from state and local tax

If you might need the money soon, a high-yield savings account is usually more practical. If you know you won’t need it for a set period and want a guaranteed rate, a CD fits well.

Building a CD ladder

A CD ladder spreads your money across several CDs with staggered maturity dates — say, 6, 12, 18 and 24 months. Every six months one CD matures, giving you access to part of your cash; you can then reinvest it at the longest term. Ladders balance higher long-term rates with regular access, and reduce the risk of locking everything in right before rates rise.

How to choose a CD

• Compare APYs for the term you want, including online banks and credit unions.
• Check the early withdrawal penalty — a slightly lower rate with a smaller penalty can be the better deal.
• Look at the minimum deposit and whether the CD is FDIC- or NCUA-insured.
• Know the renewal policy and put the maturity date in your calendar so you can act during the grace period.
• Match the term to your goal — don’t lock up money you might need for emergencies.