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A certificate of deposit (CD) is an account that allows you to earn interest for a set amount of time. When the term ends, you'll get back your initial deposit—plus interest. One of the biggest draws is that CD interest rates tend to be higher than traditional savings accounts. That can help your money grow faster, but you can expect a penalty for early withdrawals. Consider this your comprehensive CD guide.
How Does a CD Work?
A CD is a savings account you can open at a bank, credit union or brokerage. If you're torn between a regular savings account and a CD, the latter will likely pay a higher annual percentage yield (APY).
Another key difference is that you'll be expected to leave your money in the account while the CD is active. Rates are typically fixed, and most CDs don't allow you to contribute beyond the opening deposit.
Below are some important CD terms to know before you invest:
- Term: How long it takes for a CD to mature, which can be anywhere from one month to 10 years.
- Maturity date: When the CD term ends and the account matures.
- Interest rate: How much your deposit will earn during the term length. CD rates are typically higher than rates on traditional savings accounts.
- Compounding: CDs generally earn compound interest. The compounding frequency, or how often yields from interest are added to your principal, can vary from one CD to the next.
- Opening deposit: How much money you put in to fund a CD, which could range from $500 to $2,500 or more.
- Early withdrawal penalty: The fee you'll pay for pulling money out of a CD early. Fees vary but may equal 60 to 540 days' worth of interest.
- Interest rate risk: The risk that you'll miss out on rising interest rates after you're already locked into a CD.
Find High-Yield CDs
Pros and Cons of a CD
CDs serve a solid purpose when you're looking for a safe investment but want to earn more on your money. They're not right for every situation, however. Here are some benefits and drawbacks.
| Pros | Cons |
|---|---|
| Considered safe, low-risk investments that provide guaranteed returns | Returns can be modest when compared to high-risk investments |
| Can help diversify your portfolio and offset overall investment risk | May require a minimum opening deposit; in some cases, the best rates may be reserved for larger deposits |
| Interest rates are usually higher than regular savings accounts | You'll have to leave your money in the account until it matures to avoid early withdrawal fees |
How Much Interest Will I Earn With a CD?
CD interest rates can vary from one financial institution to the next. As of August 2024, some APYs were as high as 5.65%. The amount of interest you ultimately earn will depend on your rate, maturity length and how much you invest. Let's see how far $10,000 could go with CDs of varying rates and terms:
| Interest Earnings on a $10,000 CD | ||
|---|---|---|
| APY | Term Length | Interest Earned at End of Term |
| 5.25% | 5 months | $215.49 |
| 5.00% | 12 months | $500 |
| 4.40% | 18 months | $667.21 |
| 4.20% | 60 months | $2,283.97 |
Tip: Keep in mind that the interest you earn is taxable.
Learn More >> How Much Interest Do CDs Pay?
How Are CD Rates Determined?
CD rates are largely determined by the federal funds rate, which is a benchmark rate set by the Federal Reserve. Financial institutions use it when setting their own lending rates and APYs. When the federal funds rate goes up, interest rates on CD accounts often increase, while the opposite is also true.
Regardless of the Federal Reserve's current rate, it's always smart to shop around and compare APYs with different CD providers before opening an account.
Learn more >> What Causes CD Rates to Change?
Types of CDs
There are many types of CDs to choose from. Below are some popular options you may come across.
Traditional CD
This is a standard CD account that has a fixed interest rate and set term.
- You probably won't be able to add funds after making your initial deposit.
- Your interest rate probably won't change throughout the term.
- You'll likely be hit with an early withdrawal penalty for tapping your funds before the CD matures.
High-Yield CD
As the name implies, a high-yield CD offers better returns than other CDs and savings accounts. That's certainly a good thing, but you may be limited to a shorter term length. Investing in multiple CDs with different rates and terms can help your money work even harder. (We'll explain this strategy in greater detail shortly.)
Bump-Up CD
A bump-up CD is unique because it allows you to request an interest rate increase, usually as a one-time benefit. Traditional CDs typically have fixed rates. The one downside is that starting APYs tend to be lower. But a bump-up CD can make sense if you want the ability to earn more if rates increase down the road.
Step-Up CD
With this type of CD, your rate may automatically increase at predetermined intervals. Some step-up CDs have a variable rate structure, so rates can move up or down throughout the term. You'll likely start with a lower interest rate than a fixed-rate CD—and it could dip even further, depending on interest rate trends. The opposite is also true.
No-Penalty CD
No-penalty CDs allow you to withdraw money before the maturity date without incurring a fee. That makes it more like a regular savings account—which might come in handy if you encounter a financial emergency or want to move your money to a new CD with a better rate. Just keep in mind that interest rates on liquid CDs are often lower than their traditional counterparts.
Jumbo CD
This type of CD usually pays a higher-than-average yield in exchange for a larger opening deposit. If you've got at least $100,000 to invest, a jumbo CD could be a safe place to park your money and earn a return.
IRA CD
This is a special kind of CD that's held within an individual retirement account (IRA). With this structure, you could take advantage of high interest rates and certain tax perks—like tax-deferred or tax-free growth, depending on the type of IRA you have. Just try not to touch the money you have in an IRA CD until the term ends and you're in retirement; otherwise, you could face two early withdrawal fees; one for the CD and another for the IRA.
Is It a Good Time to Get a CD?
Ideally, the best time to open a CD is when interest rates are high. While that makes loans and credit card debt more expensive, it can also help you earn more with CDs and savings accounts.
The federal funds rate has been on an uptick in recent years. It increased almost a dozen times from March 2022 to July 2023, largely in an attempt to cool inflation. Since August 2023, the rate has held steady at 5.33%, though there are expectations that decreases could be on the horizon. Time will tell how things pan out. In the meantime, now might be a good time to invest—especially if interest rates do start declining.
Learn more >> When Is the Best Time to Open a CD?
Who Should Get a CD?
A CD could be a good choice if you want a low-risk way to save while earning more interest than you might in a savings account. Before you decide to invest in CDs, consider your financial situation and short- and long-term goals.
When a CD Might Make Sense
A CD could be a good idea if you're:
- OK with temporarily giving up access to your money
- Expecting interest rates to drop and want to lock in a strong APY
- Looking to diversify your investment portfolio
- Searching for a safe, stable investment
When a CD May Not Be the Right Fit
Investing in CDs isn't always the best financial move. You might reconsider if:
- You have high-interest debt, especially if it's costing you more money than you'd earn with a CD
- Interest rates are expected to rise soon
- Investing in a CD would deplete your emergency fund
- You're looking for a high-return investment
Learn more >> Are CDs Worth It?
How to Open a CD
You can open a CD by following the steps below.
1. Consider Different Types of CDs
Again, CDs can be structured in various ways. Review the different types of CDs mentioned above to decide which one is most compatible with your financial goals. For example, you might go with an IRA CD if you're hoping to work CD investments into your retirement savings plan.
2. Figure Out How Much Money You Can Invest
Draining your savings account to invest in CDs is a risky plan. If a financial emergency comes along and you need to take those funds back, you'll likely face an early withdrawal penalty. Think about how much you can reasonably invest in a CD. The right amount will depend on how much spare cash you have—and how long you're comfortable losing access to it.
Learn more >> How Much Money Should I Put Into a CD?
3. Shop Around
Check out offers from various banks and credit unions. You can also purchase CDs from brokerage firms. Brokered CDs tend to offer higher interest rates—and you can pull your money out before the maturity date and sell the CD on the secondary market without a penalty—but these types of CDs are usually callable. That means the CD issuer can end the term early if they want to.
Consider the following before choosing a CD provider:
- The APY
- The term length
- Whether there's a minimum opening deposit
- If there are any fees
Learn more >> How to Choose the Best CD Account
4. Open and Fund Your CD
You can open a CD online, in person or over the phone. You should receive a disclosure statement that spells out the details of the CD, including how interest is paid and whether the CD is callable. The final step is to make your initial deposit and start earning interest.
What Is the CD Ladder Method?
CD laddering is an investment strategy that could help maximize your CD returns. The idea is to invest in multiple CDs that have different term lengths. That staggers out your maturity dates—and could create a steady stream of interest payments. As each CD expires, you can reinvest in a new CD or use your money in another way—like to fund a financial goal or cover a surprise expense.
When a CD matures, you'll have a short window of time to decide your next move. You might choose to add more money to the CD before renewing it. Just be aware that time is of the essence—some financial institutions will automatically renew your CD within seven to 10 days.
Example of a CD Ladder
Let's say you opt for a 15-month CD ladder. Here's a look at how that might shake out if you invested $2,000 in each one:
| Term | APY | Interest Earned |
|---|---|---|
| 3 months | 5.25% | $25.75 |
| 6 months | 5.10% | $50.37 |
| 10 months | 5.20% | $86.30 |
| 15 months | 5.30% | $133.37 |
| Total Interest Earned | $295.79 | |
Learn More >> Top Strategies for CD Savers
CD Alternatives
If a CD doesn't feel like the right fit, consider these other low-risk investments.
- High-yield savings account : These accounts tend to offer much higher yields than traditional savings accounts. And unlike a CD, it's much easier to withdraw funds without incurring penalties.
- Money market account: With a money market account, you'll have the interest-earning power of a savings account but with more liquidity. Most come with a debit card or checkbook.
- Savings bonds: The U.S. Treasury offers EE bonds and I bonds, which both serve as loans to the government. EE bonds have a fixed interest rate, while I bonds use a composite rate that includes a fixed rate and a fluctuating rate that's linked to inflation.
- Treasury securities: You can also buy bonds, bills and notes from the U.S. Treasury. These investments are backed by the federal government, so they're considered extremely safe.
It's also possible to invest in stocks without assuming too much risk. Instead of investing in individual stocks, you could consider mutual funds and exchange-traded funds (ETFs), which allow you to buy and sell baskets of investments. That can provide diversification and spread out investment risk. These investments are best if you won't need your money for some time.
Learn more >> Best Low-Risk Investments
Frequently Asked Questions
A CD matures when the term length ends. When this happens, you'll likely have seven to 10 days to do one of the following:
- Add money to your CD before renewing it
- Take your money out and reinvest it in a new CD
- Use your money for something else, like covering an emergency expense or funding a financial goal
If you take no action, some CDs will automatically renew.
Learn more >> What to Do When Your CD Matures
CDs are generally considered safe investments. CDs purchased from federally insured banks and credit unions are insured for up to $250,000 per owner. However, CD returns typically lag behind high-risk investments like stocks. Average annual returns for the stock market have historically been around 10%, as measured by the S&P 500.
Interest earned from a CD is considered taxable income (unless you have a tax-advantaged account like an IRA CD). Your bank or credit union should issue you a 1099-INT statement for you to include in your tax return.
The Bottom Line
A certificate of deposit is a low-risk investment that can provide stable returns while diversifying your portfolio. You'll temporarily trade liquidity for an investment return, but that may not be an issue for you. Before buying a CD, ask yourself how it fits into your overarching financial plan.