What Is a Certificate of Deposit (CD)?

When you open a CD, you agree to deposit a specific amount of money for a fixed period — the term.

In exchange, the bank or credit union pays a stated annual percentage yield (APY) for the full term.

Unlike a savings account, the rate is typically locked in at the time of opening, regardless of what happens to interest rates afterward.

At the end of the term (the maturity date), you have several choices: withdraw the full balance, roll it over into a new CD, or transfer it to another account.

Most institutions automatically renew CDs into a new term if you take no action within a short grace period — typically 7 to 10 days after maturity.

CD rates generally track the Federal Reserve's federal funds rate. When the Fed raises rates, newly issued CD rates tend to rise; when the Fed cuts rates, new CD rates typically fall. This means the timing of when you open a CD can significantly affect the yield you lock in.

FDIC Insurance and Safety

Early Withdrawal Penalties

Common CD terms include 3-month, 6-month, 1-year, 2-year, and 5-year maturities. Generally, longer-term CDs offer higher rates in a normal yield curve environment, though this relationship sometimes inverts when short-term rates are elevated relative to long-term expectations.

According to the Federal Reserve's H.15 statistical release, certificate of deposit rates are tracked as part of selected interest rates for various maturities. Monitoring this data may help you identify favorable rate environments before committing to a term.

Not all CDs work the same way. Understanding the variations may help you choose the structure that fits your needs.

• Standard CD: Fixed rate, fixed term, penalty for early withdrawal. The most common type offered by banks and credit unions.
• High-Yield CD: Typically offered by online banks with lower overhead, these CDs often pay significantly higher APYs than traditional brick-and-mortar institutions.
• No-Penalty CD: Allows you to withdraw funds before maturity without a penalty. Rates are typically slightly lower than standard CDs of the same term, but you retain more flexibility.
• Bump-Up CD: Allows you to request a one-time rate increase if the bank's rates rise during your term. Useful if you expect rates to increase but want some protection against being locked into a lower yield.
• Brokered CD: Purchased through a brokerage firm rather than directly from a bank. These may offer competitive rates and can be sold on the secondary market before maturity, though selling early may result in a loss if rates have risen since purchase. Brokered CDs may have different coverage and protection structures.
• Jumbo CD: Typically requires a minimum deposit of $100,000 or more. May offer a slightly higher rate than standard CDs, though the difference has narrowed at many institutions.

According to Investor.gov, consumers should carefully review the terms of any CD, including how interest is calculated, the maturity date, and any automatic renewal provisions.

A CD ladder is a strategy for spreading deposits across CDs with different maturity dates.

Instead of putting all funds into a single 5-year CD, for example, you might split an equal amount among 1-year, 2-year, 3-year, 4-year, and 5-year CDs.

As each CD matures, you reinvest the proceeds into a new 5-year CD (or whatever long-term option is most attractive at that time).

The primary advantage is that a portion of your money becomes available each year, preserving some liquidity while still accessing higher rates typically associated with longer terms.

A CD ladder also reduces reinvestment risk — if rates fall, you are only rolling over a portion of your funds at the lower rate rather than the entire balance.

This strategy requires some planning and bookkeeping but may be well suited to individuals who want predictable returns without completely sacrificing access to funds.

Pairing a CD ladder with a liquid high-yield savings account for your emergency reserves is a common approach to balancing yield and accessibility.

Interest earned on a CD is generally taxable as ordinary income in the year it is earned — even if you do not receive it until the CD matures.

For multi-year CDs, the IRS requires that you report interest accrued each year, not just in the year the CD matures.

Your bank will issue a Form 1099-INT reflecting the interest credited to your account for each calendar year.

According to the IRS Topic No. 403, interest income is generally taxable unless specifically excluded by law. This includes bank CD interest, savings account interest, and U.S. Treasury interest.

If you hold a CD inside a tax-advantaged account such as a Traditional IRA or Roth IRA, the tax treatment follows those account rules instead. Interest in a Traditional IRA grows tax-deferred; interest in a Roth IRA grows tax-free on qualified withdrawals.

Both CDs and high-yield savings accounts (HYSAs) are FDIC-insured and offer returns above a traditional savings account. The key difference is flexibility versus predictability.

If you anticipate needing the funds within a few months, a no-penalty CD or a high-yield savings account may be more appropriate.

If you have a specific goal with a defined timeline — such as saving for a home purchase in two years — a standard CD that matures near that date may provide better rate certainty.