11 Types of CDs and How They Work

1. Traditional CD

A traditional certificate of deposit is a type of savings account that allows you to earn interest over a specific term, typically a few months to five years. Interest rates are often up to 10 times higher than what you'll find with a standard savings account.

To earn this higher rate, however, you must agree to leave your funds in the account for a specified period of time. If you need to withdraw money early, you'll likely face a penalty equal to several months' worth of interest, depending on the term length.

Still, traditional CDs are generally a safe investment and are insured by the Federal Deposit Insurance Corp. (FDIC). Expect predictable returns if you keep your money in place until the CD matures.

2. No-Penalty CD

Unlike traditional CDs, no-penalty CDs let you make early withdrawals without penalty. These accounts, which are also referred to as liquid CDs, work like savings accounts but come with a fixed interest rate.

You might prefer a no-penalty CD if you think you may need to withdraw funds from your account early—but understand this flexibility comes at a cost, even if there's no fee. That's because the annual percentage yields (APYs) on no-penalty CDs are generally lower than those of traditional CDs.

3. Jumbo CD

Jumbo CDs offer higher yields than traditional CDs, but you may need to deposit a substantial amount, such as $100,000 or more, to qualify for those rates. And like other types of CDs, you'll incur an early withdrawal penalty if you take out funds before the maturity date.

A jumbo CD may be a good option if you have substantial savings and want a safe place to earn interest. They're insured by the FDIC up to $250,000 per account holder, per bank. That means large deposits over that amount may only be partially insured.

4. Bump-Up CD

CDs allow you to lock in a higher interest rate through the CD's term, which helps you earn more if CD rates drop during that time. But the opposite is also true. If rates climb, your money could be stuck earning less than what newer CDs are offering.

Enter bump-up CDs, which allow you to change your interest rate during the CD's term. As its name suggests, you can "bump up" your rate if the CD issuer raises the rate on the same term CD after you've opened your account. This is usually a one-time option, but some longer term accounts may let you do it more than once during the life of the CD.

5. Step-Up CD

Step-up CDs are similar to bump-up CDs in that your rate may rise during the term. But instead of requesting a bump-up when the rate rises, the increase with step-up CDs happens automatically at scheduled intervals, such as every six months or annually.

You might explore step-up CDs if you believe interest rates will rise during your CD's term. That way, you're guaranteed to earn a top rate on your savings. Be aware, however, that the starting interest rate may be lower than with a traditional CD. In that case, you could earn less from your CD if rates don't rise during its term.

6. Brokered CD

Brokered CDs are unique because you buy them through a broker or brokerage firm, not a bank or credit union. They come with numerous benefits, such as higher yields than standard CDs and the ability to hold multiple CDs in one brokerage account. That's more convenient than opening several CDs at different financial institutions. And if you need your money early, you can even withdraw funds early without a penalty by selling the CD on the secondary market.

Tip: Before opening a brokered CD, confirm with the brokerage that your savings are insured by the FDIC. Also ask whether the CD is callable, which means the company can end the CD before it matures. If that happens, you'd still receive your deposit back plus any accrued interest to date, but you would miss out on full-term earnings

7. IRA CD

IRA CDs are held within individual retirement accounts (IRAs), which means your interest grows tax-deferred or tax-free like other investments inside an IRA. That also means IRS contribution limits apply, as they do with traditional and Roth IRAs. So if you're opening an account with new funds, you can only place $7,000 in the account for 2025, or $8,000 if you're 50 or older. But there's no limit if you roll over funds from another IRA.

An IRA CD can help you grow your retirement savings with tax-advantaged interest, but you should only open one if you're confident you won't need the money before retirement. If you're not yet age 59½ and you take money out before the CD matures, you could face a 10% early distribution tax from the IRS on top of the CD's early withdrawal penalty.

8. Callable CDs

Callable CDs work much like traditional CDs but differ in that the CD issuer can end the term early. If that happens, you'll get back your original deposit and any interest earned up to that point. But you might consider a callable CD because they generally provide higher yields than standard savings accounts. They're also considered low risk since they're federally insured up to their limits.

While callable CDs typically offer a safe place to stash your cash while earning a decent interest rate on your savings, they're not completely without risk. The interest rate isn't guaranteed for the full term. So if your CD issuer calls back the CD when interest rates fall, your account will stop earning interest immediately. This could affect your returns and cause you to adjust your investment plans.

9. Zero-Coupon CD

With a zero-coupon CD, all the interest is paid out at the end. You buy one at a discount and receive the full face value, including interest, when it matures. This type of CD often comes with higher returns than you'll find with other CDs, so it may be a safe and profitable place to park your cash if you don't need access to the funds right away.

Still, these CDs aren't for everyone. One notable disadvantage is that you'll owe taxes on the interest as it builds each year, even though you won't receive it until the term ends. Consequently, you should probably only consider opening a zero-coupon CD if you're certain you can leave the money in the account until maturity.

10. High-Yield CD

High-yield CDs offer just that—a higher APY than traditional CDs so you can grow your money faster. They work like traditional CDs, locking you into a term in exchange for the higher rate. Rates vary by issuer, and many top CDs offer rates above 4%. Minimum deposit amounts also vary, and some financial institutions don't have a minimum at all.

If you put $5,000 into a three-year traditional CD at a brick-and-mortar bank at the average rate of 1.35%, you'd earn about $203 in interest. But with a top high-yield CD offering 4.5%, that potential earnings climb to $675. That's nearly $475 more just for choosing a higher-yield option.

11. Add-On CD

Unlike other CD types, an add-on CD lets you make additional deposits after opening the account. You open your account with an initial deposit and can continue adding funds during the CD's term depending on the bank's rules. For example, you may be able to add funds every 12 months or three years.

Note that these CDs may come with lower rates than other kinds of CDs, and they aren't as widely available as traditional CDs. Still, if you're looking for a way to grow your savings with the option to make additional deposits over time, an add-on CD may be a good fit.

Frequently Asked Questions

The Bottom Line

If you have money you don't need right away and want a steady return, a CD might be a good option. You'll almost certainly earn more than you would in a regular savings account and funds at FDIC- or NCUA-insured institutions protect your money up to their limits. A traditional CD is a fine choice for most savers, though you might explore all the types of CDs above to find an account that best aligns with your needs.

If you think you may need your funds early, locking up funds in a CD may not make sense. If you want access to your funds while still earning a competitive rate, opening a high-yield savings account may be a smarter choice.