What Is a CD (Certificate of Deposit)?

A CD is a type of savings account with a fixed term. CDs can have higher rates than regular savings accounts.
Spencer Tierney
By Spencer Tierney 
Updated
Edited by Sara Clarke Reviewed by Kathleen Burns Kingsbury
What Is a CD (Certificate of Deposit)?

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Key takeaways about certificates of deposit:

  • A CD is a type of savings account with a fixed time period and interest rate.

  • CDs tend to have higher rates than regular savings accounts but don’t allow access to your money until a term ends.

  • Consider a CD to have guaranteed returns without much risk and to have a safe place for savings earmarked for future use.

CD definition: What is a CD?

A CD, or certificate of deposit, is a type of savings account with a fixed interest rate that’s usually higher than a regular savings account. It also has a fixed term length and a fixed date of withdrawal, known as the maturity date. You lock funds in a CD for a term generally ranging from three months to five years. Flipping the traditional trend of longer terms having higher rates, rates on one-year CDs have been higher than on five-year CDs as of late. CDs don’t have monthly fees, but most have an early withdrawal penalty and don’t let you add funds after the initial deposit.

» COMPARE: Best CD rates

Like regular savings accounts, certificates of deposit are insured, so you get your money back in the unlikely event your bank goes bankrupt. CDs at banks are insured by the Federal Deposit Insurance Corp.

Federal Deposit Insurance Corporation. Are My Deposit Accounts Insured by the FDIC?. Accessed Oct 11, 2023.

Share certificates are the name for CDs at credit unions, the not-for-profit equivalent of banks. Certificates at credit unions are insured by the National Credit Union Administration

National Credit Union Administration. Share Insurance Fund Overview. Accessed Oct 11, 2023.
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🤓Nerdy Tip

Some banks have started lowering CD yields, though overall rates remain high. With a CD, you can lock in high rates while they’re still around.

CD rates are high largely thanks to Fed rate increases in 2022 and 2023, which can impact when banks change CD rates. See more details about what to expect in 2024 in our CD rates forecast.

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When to choose a CD

  • You want to protect designated savings. If you have money set aside for a large future purchase such as a car or down payment, a certificate of deposit can be a good way to keep it safely out of reach and let it earn interest.

  • You want returns without much risk. Investing in CDs can make sense if you want to avoid the volatility of the stock market and earn a return that’s typically better than other savings accounts. The national average rate for a regular savings account is 0.46%, far below the average rate for a five-year CD of 1.40% annual percentage yield, according to the FDIC. You can estimate returns using a CD calculator.

Beside the five-year CD, another route is to go for high-yield three-month, six-month or one-year CDs, which might be better if you’d rather wait months instead of years for access to your funds. If you want to know whether a savings account is better, skip ahead.

» Want returns and funds access? Consider the best high-yield savings accounts

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How to choose a CD

Consider each part of a CD to help break down your decision:

  1. CD term: Most terms at a bank or credit union range from three months to five years. Traditionally, longer-term CDs have higher rates than shorter-term CDs. Learn how to choose your CD term.

  2. CD type: Some CDs have an unusual feature, such as a no-penalty CD that doesn’t charge for early withdrawals or a bump-up CD that allows for a rate increase during a term. High-yield CDs work like standard CDs but have the best rates and are often at online banks. Skip down to see types of CDs.

  3. CD rate: Once you’ve narrowed down the term and type of CD, you can compare banks and credit unions to find a competitive rate. You may decide to go with a bank you already have accounts at or choose a new institution, depending on whether convenience matters to you, but aiming for a high rate is ideal. See current CD rates.

  4. CD deposit: The amount you put into a CD depends on your savings goals, but you want to aim for more than a CD’s opening minimum requirement. You usually can’t add more money after the initial deposit. And, if you’re worried about the risk of a bank failing, keep less than the FDIC insurance limit of $250,000 in your accounts to keep your money protected. Learn how to choose your CD deposit.

» Not sure how to open a CD? Here's a step-by-step guide to opening a CD account

Frequently asked questions

CD refers to certificate of deposit, which was historically a paper document that showed proof that your funds were held in a bank at a certain rate.

These days, CDs don’t usually come on paper, but your funds are still held and federally insured up to at least $250,000 per account at banks and credit unions. Learn more about what a deposit is.

Opening a CD with one of the best rates might mean joining a bank or credit union outside of your primary financial institution, such as an online bank. That move can be worth it, especially to get far better rates than you’d get at traditional banks. See our guide to how to open a CD.

Focus on the reasons you want a CD. Do you have a lump sum of money to save for a big purchase in a few years? Or do you have some savings earmarked for investing down the road? CDs provide a place to lock away a sum. Learn more about whether CDs are worth it.

You don’t want to base your decision solely on what rates are available, but it’s helpful to know where rates are going. When the Federal Reserve raises its rate, for instance, banks and credit unions often respond by raising their CD rates. Learn more about how the Fed affects CD rates.

Yes, CDs are federally insured by every bank and credit union that has deposit insurance. Up to $250,000 is guaranteed to be returned to you if a bank goes bankrupt. For more information, see this explainer on FDIC insurance for CDs.

The process for opening a certificate of deposit starts the same way as for other bank accounts: Apply online or in person at a financial institution. The key difference is that your initial deposit into a CD will almost always be the only deposit you can make. In other words, you can’t add contributions over time like you can with a regular savings or checking account. Learn more about how CDs work.

» Curious about CD returns? See our CD comparison calculator

Once a CD’s term ends, a bank will typically renew your CD at a new rate, which tends to match that of new CDs for the same or similar term. This might not be in your best interest, since it’s better to compare the best CD rates each time you open a new CD. (See our article for more details on when CDs mature.)

CD rates are in terms of annual percentage yield, or APY. This is the annual interest rate after compounding. And compounding is when your account earns money off both the original deposit and the increasing interest.

The interest earned in a CD is usually compounded and paid to the account, generally daily or monthly, and you receive it all when the CD term ends. (Or you can choose to receive regular interest payments if the bank allows it.) Interest might be credited at a different frequency than the compounding.

» Stuck in a lower-rate CD? Here's a guide to when breaking a CD early pays

Yes, but not as much as in 2022. For more context on recent rates, see current CD rates. If you want a broader understanding of CD yields over decades, take a look at historical CD rates.

Yes, interest you earn on a CD is generally taxed at the same rate as your regular income. And that interest is taxed the year that you earn it, whether you receive that interest as payments from your bank or keep the interest in the CD.

What types of CDs are there?

CDs typically come with a fixed term and a fixed rate of return. But depending on where you bank, you may have access to a few other varieties. (For a more exhaustive list of each type, see the nine types of CDs.)

  • No-penalty CD: This CD, also known as a “liquid CD,” lets you withdraw early without an early withdrawal penalty in exchange for typically lower rates than other CDs. (See our list of the best no-penalty CDs.)

  • High-yield CD: This CD has higher-than-average CD rates. Online banks and credit unions typically offer better rates than traditional brick-and-mortar banks. (Learn more about high-yield CDs.)

  • Jumbo CD: This is essentially the same as a regular CD, but with a high minimum balance requirement — historically $100,000 — as a trade-off for traditionally higher rates. (See more details about jumbo CDs.)

  • IRA CD: This is a regular certificate that is held in a tax-advantaged individual retirement account. (See our list of the best IRA CD rates.)

  • Bump-up or step-up CD: These CDs usually have a jump to a higher interest rate during the CD term. Bump-up CDs require you to ask for that rate jump, if available, while step-up CDs work on a fixed schedule of rate increases. Both types typically have lower interest rates than fixed-rate CDs, and some carry steeper minimum deposit requirements. In some cases, you can request only one rate increase, although long-term CDs may let you do so more than once. (Learn more about bump-up and step-up CDs.)

  • Brokered CD: This is a CD offered at a third party, or broker, such as a brokerage firm. (Learn more about types of brokered CDs, including callable CDs, in our brokered CDs explainer.)

What happens when a CD matures?

When a CD matures, or expires, there’s a grace period of about a week in which you can withdraw funds. After that period, many CDs automatically renew for the same or similar term they had previously, but the rate will likely be based on the rate for new CDs of that term, not your CD's original rate. Withdrawals before the next maturity date are subject to a penalty. Learn more about your options when CDs mature.

If you withdraw before a CD matures, however, you tend to pay a penalty that consists of several months to a year’s worth of interest. See our calculator with a list of various banks’ CD early withdrawal penalties.

What is a CD ladder?

A CD ladder is a type of saving strategy that involves opening both short- and long-term CDs. This provides more flexibility than putting cash in one CD, so you can go for the higher rates of a three- to five-year CD and still have regular access to some of your money over time.

» Learn more about three types of CD strategies

Here’s how it works: You invest proportionally in a variety of term lengths. Then, as each shorter certificate matures, you reinvest the proceeds in a new long-term CD.

Let’s say you have $10,000 for CDs. You invest $2,000 apiece in one-, two-, three-, four- and five-year CDs. When the one-year CD matures, you put that money into a new five-year CD. The next year, you reinvest funds from the matured two-year CD in another five-year CD. You can repeat the process until you have a five-year CD maturing every year, or opt to withdraw penalty-free from whatever CD is maturing a given year if you need some cash.

CDs vs. savings accounts

A CD is different from a traditional savings account in several ways.

  • CDs tend to have higher rates than regular savings accounts. These rates are higher in exchange for no access to that money during a CD's term. The combination of CDs’ low risk and high rates compared to other bank accounts can make them an attractive investment. That said, check out the best high-yield savings accounts if you want the flexibility of adding funds over time or taking advantage of higher rates.

  • Savings account rates change over time; CD rates stay fixed once you open a CD (with the rare exception of a step-up or bump-up CD). This can be an advantage: CDs have guaranteed returns, and if you open a CD when interest rates are high, you can enjoy that rate even if banks drop rates on savings accounts and new CDs.

  • Savings accounts give regular access to your money; CDs don’t. You can deposit and withdraw from a savings account relatively freely, but the only time you can withdraw from most CDs penalty-free is during a short period of days after a term ends. (The only exception is a no-penalty CD.)

When to stick with a savings account

  • For savings you might need in a pinch, including your emergency fund. Breaking into a CD early and paying a penalty can be a blow to your savings.

  • When you’re building up savings. A CD requires a lump sum upfront and most don’t let you add contributions after the initial deposit. A savings account is better suited for growing your wealth bit by bit.

Not sure about CDs? Take a quiz

CDs can let you earn a solid return on your money, all while having your savings backed by the federal government. However, they’re not always the right fit.

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