A certificate of deposit, or CD, works like a timed contract with a bank or credit union: you hand over a lump sum for a set period, the bank pays you a guaranteed interest rate for the full term, and at the end you get your original deposit back with all the interest it earned. The rate is fixed the day you open the account, so neither side can change it once the clock starts. In exchange for that guaranteed return, you agree not to touch the money until the term ends. Pull it out early and you pay a penalty.
Deposits at an FDIC-insured bank are protected up to $250,000 per depositor, per institution, for each ownership category.1Federal Deposit Insurance Corporation. Understanding Deposit Insurance Credit unions offer the same $250,000 coverage through the National Credit Union Share Insurance Fund.2National Credit Union Administration. Share Insurance Coverage One detail worth knowing before you deposit near the limit: accrued interest counts toward that cap, not just your original principal.3Federal Deposit Insurance Corporation. Shopping for a Certificate of Deposit? If you already hold significant balances at the same bank, a new CD could push your total above what’s insured.
Terms, Rates, and What You Actually Earn
CD terms commonly run from three months to five years. Shorter terms usually pay lower rates but return your cash sooner. Longer terms tend to pay more because you’re committing your money for longer. As of March 2026, national average rates sit around 1.52% for a 12-month CD, 1.31% for a 36-month term, and 1.34% for a 60-month term.4Federal Deposit Insurance Corporation. National Rates and Rate Caps Those are averages. Online banks and credit unions often pay well above them, so it pays to compare.
When comparing offers, look at the annual percentage yield rather than the stated interest rate. The APY reflects how compounding affects your actual return. Banks may compound interest daily, monthly, or quarterly, and more frequent compounding means the interest you’ve already earned starts earning interest of its own sooner. Two CDs with the same stated rate but different compounding schedules will end up paying different amounts, and the APY captures that gap. On a three-month CD the difference is small. On a five-year CD it’s real money.
Opening a CD and Funding It
Opening a CD means choosing a term, a deposit amount, and optionally a beneficiary. The bank has to verify your name, date of birth, address, and a tax identification number such as a Social Security or ITIN.5HelpWithMyBank.gov. Required Identification You’ll also need a photo ID like a driver’s license or passport.6Consumer Financial Protection Bureau. Checklist for Opening a Bank or Credit Union Account
Minimums vary. Some online banks require nothing at all; others set floors of $500 or $2,500. Jumbo CDs, aimed at larger balances, typically require at least $100,000 and may pay a slightly higher rate. Once your money lands, the bank locks in the rate and the term begins.
With a standard CD, the opening deposit is the only deposit. You can’t add more later. If you want to keep contributing, you’d need a specialty product called an add-on CD, which allows further deposits during the term at the original rate.
Early Withdrawal Penalties
Taking money out before maturity triggers a penalty. Federal regulation sets a floor of seven days’ interest for any early withdrawal on a time deposit.7eCFR. 12 CFR Part 1030 – Truth in Savings (Regulation DD) Most banks charge far more than that in practice. A typical penalty on a one-year CD is three months of interest. On a five-year CD, you might forfeit six months to a full year of interest.
The penalty normally comes out of what you’ve earned. But if you withdraw so early that you haven’t accrued enough interest to cover it, the bank can take the rest from your principal. You’d walk away with less than you deposited. That’s the worst-case outcome and the main reason to match the term to a date you’re confident about.
Two situations let the bank waive the penalty entirely: the death of an account owner, or a court finding that an owner is legally incompetent.8eCFR. 12 CFR Part 204 – Reserve Requirements of Depository Institutions Outside those, waiving a penalty is up to the bank. Asking during a hardship sometimes works, but you have no legal right to it.
What Happens When the CD Matures
At the end of the term, most banks give you a short grace period to decide what to do with the money. Regulation requires banks to disclose whether one exists and how long it runs, without mandating a specific length beyond a five-day minimum in certain disclosure scenarios.7eCFR. 12 CFR Part 1030 – Truth in Savings (Regulation DD) In practice, grace periods typically run about 10 calendar days.9Citizens Bank. Frequently Asked Questions: CDs
During that window you can withdraw everything without penalty, move it elsewhere, or open a new CD. If you do nothing, the bank will automatically roll the balance into a new CD of the same length at whatever rate it’s currently offering. That rollover rate is almost never the best available. Banks count on inertia, and the automatic renewal rate can be significantly lower than what you’d find shopping around. This is where the most money quietly gets left behind.
Banks with auto-renewing CDs must send a maturity notice in advance. For terms longer than one month, the notice has to go out at least 30 days before maturity, or at least 20 days before the grace period ends.7eCFR. 12 CFR Part 1030 – Truth in Savings (Regulation DD) Set your own calendar reminder anyway. Once the grace period closes, you’re locked back in.
How CD Interest Is Taxed
All interest earned on a CD is taxable as ordinary income. You owe tax on it the year it’s credited to your account, even if you leave it inside the CD to compound and don’t touch a dollar of it.10Internal Revenue Service. Topic No. 403, Interest Received For a multi-year CD, that means owing income tax each year on money you can’t withdraw without a penalty.
Banks send Form 1099-INT if they paid you $10 or more in interest during the year.11Internal Revenue Service. About Form 1099-INT, Interest Income Even if the form doesn’t arrive, you still have to report the full amount on your federal return.10Internal Revenue Service. Topic No. 403, Interest Received
Variations on the Standard CD
The basic CD has several cousins that adjust the trade-off between rate and flexibility.
No-Penalty CDs
A no-penalty CD lets you withdraw your full balance and earned interest without any forfeiture, usually after the first six or seven days. The rate is lower than a standard CD of the same length. These sit between a high-yield savings account and a traditional CD.
Bump-Up CDs
A bump-up CD gives you the right to request a higher rate if the bank’s rates rise during your term. Most limit you to one increase over the life of the CD; some longer terms allow two. The starting rate is lower than a fixed-rate CD of the same length, which is what you’re paying for the option.
Add-On CDs
An add-on CD lets you keep depositing during the term at the rate locked in on day one. Useful if you’re saving toward a specific goal and don’t want to open new CDs every time you add money.
Callable CDs
A callable CD pays a higher rate, but the bank can end the CD early and return your principal after a set call protection window, typically six months to five years. If rates fall, the bank has every reason to call the CD and stop paying you the higher rate. You’d get your principal and accrued interest back and have to reinvest at whatever’s available. The higher starting rate compensates for that risk shifting onto you.
Brokered CDs
Brokered CDs are bought through a brokerage rather than directly from a bank. FDIC insurance of $250,000 per depositor at the issuing bank still applies, but certain conditions must be met for coverage to pass through from the broker to you.12Federal Deposit Insurance Corporation. Pass-Through Deposit Insurance Coverage Exiting early works differently too. Instead of paying a bank penalty, you sell the CD on a secondary market. If rates have risen since you bought in, buyers will pay less for your lower-yielding certificate and you could lose principal. If rates have fallen, you might sell for a gain.13Charles Schwab. Bank CDs vs. Brokered CDs: What’s the Difference? There’s also no guarantee a buyer shows up when you want to sell.
Holding a CD Inside an IRA
You can hold a CD inside a traditional or Roth IRA, sometimes called an IRA CD. The contribution goes into the IRA first, and you direct it into a CD offered by the institution acting as your IRA custodian. For 2026, the annual IRA contribution limit is $7,500 if you’re under 50, or $8,600 if you’re 50 or older.14Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500
Tax treatment follows the IRA. In a traditional IRA, interest grows tax-deferred and is taxed as ordinary income when you take it out in retirement. In a Roth IRA, qualified withdrawals come out tax-free. Either way, you skip the annual tax bill on interest you can’t yet spend.
Early withdrawals are where this gets expensive. Breaking the CD before maturity triggers the bank’s usual penalty. On top of that, pulling money out of the IRA before age 59½ generally adds a 10% additional tax from the IRS.15Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions You’d be paying two penalties on the same withdrawal. Match the CD’s maturity to when you’ll actually need the funds, or keep the term short enough that you have regular access.
One last piece worth setting up while you open the account: most banks let you add a payable-on-death beneficiary, so the funds transfer directly to that person on your death and bypass probate. Institutions generally waive the early withdrawal penalty in that case, though some require the beneficiary to wait until the original maturity date. It’s worth reading the CD agreement to see which one applies.