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.