What Is a Certificate of Deposit (CD)?
In plain English
A certificate of deposit is a time-based deposit account offered by banks and credit unions that pays a fixed interest rate in exchange for keeping your money deposited for a specific term — typically ranging from three months to five years. CDs generally pay higher rates than regular savings accounts because you agree not to withdraw early.
How Does a CD Work?
You deposit a lump sum for a fixed term at a guaranteed interest rate. When the term ends (maturity), you receive your principal plus all accrued interest. During the term, your money is locked in. Most CDs charge an early withdrawal penalty if you pull funds before maturity, typically equal to several months of interest. At maturity, most CDs automatically renew unless you opt out.
What Is a CD Ladder and Why Would You Build One?
A CD ladder is a strategy where you divide your savings across multiple CDs with staggered maturity dates — for example, one-year, two-year, and three-year terms. As each CD matures, you reinvest at the longest term. This gives you regular access to a portion of your funds while still capturing higher long-term rates. It balances liquidity with yield.
When Does a CD Make More Sense Than a Savings Account?
CDs may make sense for money that will not be needed for a known period when a guaranteed rate is desirable. They are especially attractive when interest rates are high or expected to fall, since a CD locks in today's rate. Those who need flexible access to funds often find a [high-yield savings account](/glossary/high-yield-savings-account) to be a more suitable option despite potentially lower rates.
Frequently asked questions
Are CDs safe investments?
Yes. CDs at FDIC-insured banks are protected up to $250,000 per depositor. Your principal and the agreed-upon interest are guaranteed, making CDs one of the lowest-risk places to put money.
What happens if I need my money before the CD matures?
You can withdraw early, but you will typically pay a penalty equal to several months of interest. Some banks offer no-penalty CDs with slightly lower rates that allow early withdrawal without a fee.
Do I pay taxes on CD interest?
Yes. CD interest is taxable income in the year it is earned, even if you do not withdraw it until the CD matures. Your bank will issue a 1099-INT for the interest credited each year.
Keep exploring
Related terms
APY
APY (Annual Percentage Yield) measures the total interest you earn on a deposit account over one year, including the effect of compounding.
Savings Account
A savings account is a deposit account that earns interest on your balance while keeping your money accessible for withdrawals.
High-Yield Savings Account
A high-yield savings account offers significantly higher interest rates than traditional savings accounts, typically available through online banks.
FDIC Insurance
FDIC insurance protects your bank deposits up to $250,000 per depositor, per bank, if the bank fails. It is backed by the full faith of the U.S. government.