A certificate of deposit is known as a CD and is used by consumers to save money for longer periods of time. A CD is a safe method to save money because up to $250,000 of the money allocated into the account is backed by the federal government.
A CD is a kind of savings account, but unlike traditional savings accounts, it has a fixed interest rate and fixed date of withdrawal. The maturity date is when money from the CD can be withdrawn. Monthly fees usually are not charged for owning a CD. If you withdraw money from a CD before the term is up, you will pay a penalty.
Once you open a CD, you typically cannot make additional deposits into the account. Instead, you need to open a second CD with the additional funds. Consumers often have several CDs with different maturity dates for different purposes, such as saving money for a down payment for a mortgage or buying a new piece of furniture or electronics. It is also common to have CDs at more than one bank or credit union, depending on what is being offered.
The terms for a CD generally range from one month to five years, but the most common ones are one year, 18 months or two years. The majority of CDs will automatically renew after the maturity date. For instance, if you choose a 12-month CD and take no action when it matures, the bank will roll it over into another 12-month CD.
Any interest that is earned in a CD will be taxed by the IRS at the ordinary income tax rate, similar to interest earned in a savings or money market account. However, if you open a traditional individual retirement account CD, the contributions are tax-deductible, but withdrawals are still taxed.
When your CD reaches maturity, you have a choice: Use the funds, transfer them or roll them over into another CD. Compare the rates at your bank and other financial institutions before the maturity date to see which one is offering the most competitive rates. Most banks offer a grace period, such as 10 days starting on your maturity date, to make a decision. If your financial goals change, a different term could be better for you.
How Do CD Rates Work?
The longer it takes for your CD to mature, the higher the annual percentage yield will be.
The interest in CDs is compounded either daily or monthly. Banks will note when the interest is compounded, which you can check when you are comparing CD options. CDs that compound their interest daily will earn a little bit more than CDs that compound monthly. What the compounded interest earns is already factored into the APY.
One reason consumers choose to invest their money into a CD is because banks, especially online-only banks, offer competitive rates.
“Most CDs yield higher rates than savings accounts, however, you cannot withdraw your money until the end of the set term, otherwise you may incur a penalty,” says Evan Kulak, co-founder of Polaris Portfolios, a robo advisor.
As of December 18, 2023, the national average rate for a 12-month CD was 1.86%, according to the FDIC. The national average rate for a 36-month CD was 1.41% and the national average rate for a 60-month CD was 1.40%. The best online banks typically offer higher APYs.
Benefits of a CD Account
Benefits
- Earn interest. CDs allow you to earn interest on your money. The interest rates are locked in, and they are generally higher than the rates for a savings account.
- Variety of term lengths. Most banks offer an array of term lengths for CDs, ranging from one month to five or six years.
- Safe investment. The amount money you hold in CDs won’t decrease.
- No monthly fees. CD accounts do not have monthly maintenance fees.
Drawbacks
- Cannot withdraw until end of term. CDs have set terms and you usually cannot withdraw early without penalty.
- Limits on deposits. The majority of CDs only allow one initial deposit. Some banks have add-on CDs, which allow you to add more to the CD in future, but they are not as common.
How to Choose the Right CD for You
When you choose a CD, there are a number things to consider:
- Annual percentage yield. What are the interest rates? Generally, CDs with longer terms or larger initial deposits have higher APYs.
- Term lengths. What is the term length? CDs have a variety of term lengths ranging from a few months to five or six years. Your desired length will depend on when you would like to withdraw your money.
- Penalties. Are there any penalties? Most CDs have penalties for withdrawing before maturity, which can cause you to lose some of the interest.
- Minimums. What is the minimum balance and initial deposit? CD account minimums vary and often affect APY.
Find the Banking Product That’s Right for You
How to Withdraw Money From a CD Account
If your CD has reached maturity and you want to take all the money out, you have a few options: You can transfer the funds to another account at your same bank, like a savings or checking account; transfer the funds to another bank; or request your bank mail you a paper check.
If your CD hasn’t reached maturity yet, you may have the option of withdrawing the accrued interest without triggering early withdrawal fees. When you open a CD, you can designate whether you want the interest you earn to stay in the CD or be paid out. If the interest is paid out, your annual APY will be lower, but you’ll get regular cash deposits.
What Happens if You Withdraw From a CD Early?
If you need to withdraw all or some of the money in a CD early, banks and credit unions typically charge a penalty. The penalties are usually a portion of the interest you would have accrued in the account, such as a minimum of 60 days of interest. Check the terms of the CD because, in some cases, the penalty will include a portion of the principal, or the original amount of money you put into the CD.
You can open a CD account through your current bank or credit union. Some banks will require that you have an existing checking or savings account to open a CD online.
The majority of banks allow people to open an account online, over the phone, by mail or in person at a branch. If you are opening a new account, a bank will require identification, such as a driver’s license, Social Security card or passport. You will need to provide other basic information like your address, date of birth and contact information, such as your phone number and email.
Each bank or credit union has a different minimum deposit for a CD.
You can open a CD for a minor, such as a child or grandchild. These are called custodial CD accounts. Since you have custody of the account, you retain all the control and can prevent cashing out of one before the maturity date.
A CD can also be opened as a joint account, depending on the terms of the bank.
A CD ladder is a strategy in which you invest in CDs with different maturity dates so they come due at staggered intervals.
“This provides two main benefits,” says Kulak. “It reduces interest rate risk and provides greater liquidity as you have access to your money at specific intervals.”
A CD ladder means you will more often be liquid – every six months or each year a CD could mature, for example, giving you access to your savings at regular intervals.
There are many kinds of CDs available through a bank, credit union or brokerage. Depending on your goals, you could benefit from having more than one type of CD.
- Bump-up CD. This CD gives you the option to request a higher rate if your bank or credit union increases its annual percentage yields, but these CDs typically have lower rates than a similar CD without a bump-up option.
- Step-up CD. With this CD, you can increase your rate at certain intervals.
- Liquid CD. If you hold such a CD, you’re permitted to make withdrawals at any time without a penalty, but you’ll receive a lower rate than a traditional CD of the same term.
- Jumbo CD. This type of CD typically requires a minimum balance of $100,000 and has a slightly higher interest rate than a regular CD.
- IRA CD. A regular CD can be held in a traditional IRA or Roth IRA.
- Zero coupon CD. This kind of CD is sold at a deep discount to its face value. There are no interest payments and upon maturity, you receive the face value of the CD.
- Callable CD. A callable CD has a higher interest rate, but it provides the bank or credit union with an option to return your funds and interest to date before it matures.
- Brokered CD. Sold through a brokerage firm, brokered CDs do not require you to open an account at a bank, and they can be traded on secondary markets.
A major drawback to CDs is you pay a penalty if you access your money before the account’s maturity date. your With a no-penalty CD, you can withdraw all of your money at any time and not lose anything. Though features and rules may differ by bank, no-penalty CDs generally offer lower interest rates than traditional CDs and don’t allow anything other than a full withdrawal.
A CD is one of the safest ways to save money because up to $250,000 of the money allocated into the account is backed by the federal government, either via the Federal Deposit Insurance Corp. or the National Credit Union Administration.
“CD rates are widely considered as true risk-free rates in two ways,” says K.C. Ma, a chartered financial analyst and professor of finance at the University of West Florida. “First, it has less default risk than the U.S. Treasury Bill rate since CDs are insured by FDIC. T-bills are often sold in a large minimum denomination ranging from $1,000 to $10,000 or $100,000, so it is often not directly investable to retail investors.”
The Federal Reserve has raised interest rates multiple times in 2022 to tame inflation, and it plans to continue raising rates into 2023. Banks will follow by raising rates on their CD products.
One drawback is that if CD rates rise and you are locked into a one-year or longer maturity, the only way to get a higher rate is to open another CD or pay a penalty to withdraw money from your current CD to move into one with a higher rate.
CDs can be part of a well-rounded investing plan. They have clear upsides (a guaranteed rate of return for a set period of time) and equally clear downsides (your money isn’t very accessible). In today’s financial climate, where the stock market has been volatile and CDs are paying much better APYs than they have historically, opening a CD might be worth it for you. Make sure you shop around to find the best rate for a length of time you’re comfortable putting your money away.
Bonds. Bonds pay a certain interest rate for a certain amount of time. There are different types of bonds with different levels of risk, including U.S. Treasury bonds, municipal bonds, corporate bonds and high-risk, high-reward junk bonds.
Dividend stocks. Some companies make regular payments to shareholders, called dividends. You’ll know the dividend yield when you buy the stock, similar to knowing the annual percentage yield for a CD. The risk with buying a dividend stock is the overall share price can go down, or the company can cut its dividend.
High-yield savings accounts. CDs typically have higher APYs than savings accounts, but some high-yield accounts come close. The benefit is you can withdraw you money at any time for no penalty.
Unlike with some checking or savings accounts, you won’t get charged a monthly maintenance fee on your CD account. Many CD accounts charge early withdrawal fees, but you’ll only see that fee if you cash out your CD before its maturity date.
A certificate of deposit can help you get a better yield on your savings if you don’t mind leaving it untouched for a specified period. We score more than 200 CD accounts based on factors such as annual percentage yield, deposit requirements and customer complaints to determine our Best CD Accounts. See our full methodology.
