A fixed deposit is a savings account with a locked term: you hand the bank a sum of money, agree not to touch it for a set period, and in return the bank pays you a guaranteed interest rate that’s higher than what a regular savings account would offer. In the United States, this product is almost always called a certificate of deposit, or CD. The two names describe the same thing. As of early 2026, competitive one-year CDs offer annual percentage yields around 4.00%, with longer terms varying based on the rate environment.
How a Fixed Deposit Works
The defining feature is the lock-up. Unlike a checking or savings account, you commit to leaving the money in place until a specific maturity date. Terms run from as short as seven days to as long as ten years, though most people pick something between three months and five years. In exchange for giving up easy access, the bank fixes your interest rate at the moment you open the deposit, and that rate holds for the entire term no matter what the broader market does afterward.
Your return comes from compounding. Interest is calculated periodically and added back to the principal, so the next round of interest is figured on a slightly larger balance. Banks compound at different frequencies, with daily, monthly, and quarterly all common. More frequent compounding produces a slightly higher effective yield, which is why banks quote an annual percentage yield (APY) alongside the stated interest rate. The APY reflects the actual return after compounding, so it’s the number to compare when shopping between institutions.
Choosing Your Term and Payout Method
The term is the biggest decision. Longer commitments sometimes pay more, but not always. In certain rate environments, shorter CDs actually offer higher yields than longer ones. The real trade-off is liquidity: a five-year CD earns for longer, but the money is genuinely off-limits without penalty for that stretch. If there’s any realistic chance you’ll need the funds within a year, a shorter term is worth the possibly lower rate.
The second choice is how the interest reaches you. Most CDs default to the cumulative approach, where interest compounds inside the account and you receive everything, principal plus accumulated interest, at maturity. This produces the highest total return because every interest payment earns interest of its own in the next cycle.
Some banks also offer a periodic payout, sometimes called the non-cumulative option. The bank sends interest to a separate account on a set schedule (monthly, quarterly, or semi-annually), while the principal stays locked until maturity. Retirees and others who want a steady income stream often prefer this structure. The total return is lower, though, because the paid-out interest never gets a chance to compound.
What You Need to Open One
You can open a CD online or at a branch. The bank will ask for government-issued identification such as a driver’s license or passport, proof of your current address, and either a Social Security number or an Individual Taxpayer Identification Number (ITIN) for tax reporting. An SSN isn’t strictly required; many banks accept an ITIN, and non-resident account holders can submit IRS Form W-8 BEN instead.
Minimum deposits vary widely. Some online banks let you open a CD with no minimum at all, while others require anywhere from $500 to $5,000. Once your documents clear and the initial deposit is transferred, the bank locks in your rate and issues a confirmation showing the principal, term, interest rate, APY, and maturity date. Hold onto that confirmation; it’s your receipt for the entire arrangement.
Getting Your Money Out Early
Pulling funds out before the maturity date triggers an early withdrawal penalty. US banks almost always calculate it as a number of months of interest rather than a flat fee. A typical structure might charge three months of interest on a one-year CD, six months on a two- or three-year CD, and twelve months or more on longer terms. If you withdraw so early that your accrued interest doesn’t cover the penalty, the bank can deduct the shortfall from your principal, meaning you could actually get back less than you put in.
Two options exist if you want the CD structure but need more flexibility. A no-penalty CD lets you withdraw your full balance, typically starting about a week after funding, without any fee. The trade-off is a slightly lower APY and shorter available terms, usually around one year. Most no-penalty CDs don’t allow partial withdrawals, so it’s all or nothing.
The other route is a CD-secured loan. You borrow against the deposit as collateral, and the original CD keeps earning at its locked-in rate. Because the bank’s risk is minimal, the loan rate is usually lower than an unsecured personal loan. This makes sense when the cost of borrowing would be less than the penalty for breaking the CD, especially on a larger or longer-term deposit.
One consolation if you do pay a penalty: it’s deductible on your federal return as an adjustment to gross income on Schedule 1 of Form 1040, Line 18. This is an above-the-line deduction, so you get it whether or not you itemize. The penalty appears in Box 2 of the Form 1099-INT your bank sends at tax time. You still report the full interest as income; the deduction offsets part of it.
Taxes on the Interest
Interest earned on a fixed deposit is ordinary income, taxed at your marginal federal rate. Banks report interest payments of $10 or more to you and to the IRS on Form 1099-INT.1Internal Revenue Service. About Form 1099-INT, Interest Income Even if the amount was below the reporting threshold and you don’t receive a 1099-INT, you’re still required to report the interest.2Internal Revenue Service. Topic No. 403, Interest Received
If your total taxable interest for the year is more than $1,500, you’ll need to fill out Schedule B (Form 1040) and attach it to your return.3Internal Revenue Service. About Schedule B (Form 1040), Interest and Ordinary Dividends Below that threshold, you simply include the interest on your Form 1040.
One quirk catches people off guard. If you hold a cumulative CD that spans multiple tax years, you may owe tax on the interest as it accrues each year, not just when the bank pays it all out at maturity. The IRS treats annually accruing interest on certain long-term CDs as original issue discount (OID), which must be included in income for each year it accrues.4Internal Revenue Service. Publication 1212, Guide to Original Issue Discount (OID) So you might owe tax on interest you haven’t actually received yet. Your bank should issue either a 1099-INT or a 1099-OID showing the amount to report each year.
If you’re a US taxpayer with a fixed deposit held overseas, the interest is still fully taxable on your US return; report the gross amount regardless of whether the foreign country withheld tax at the source. To avoid double taxation, you can claim a Foreign Tax Credit by filing Form 1116, which reduces your US tax bill by the amount already paid abroad.5Internal Revenue Service. Foreign Tax Credit
When the Term Ends
At maturity you generally have three choices: withdraw the money, move it into a different product, or renew it into a new CD. The catch is that many banks automatically renew the CD if you don’t act. The new CD locks in whatever rate the bank is currently offering for that term, which may be well below what you originally earned.
Federal rules require the bank to warn you before an automatic renewal kicks in. For CDs with terms longer than one month, the bank must deliver renewal disclosures at least 30 calendar days before the current CD matures.6Consumer Financial Protection Bureau. 1030.5 Subsequent Disclosures The trick is actually reading the notice rather than treating it as routine bank mail.
If you miss the window and the CD auto-renews, most banks give you a brief grace period, often seven to ten days, when you can still pull out penalty-free. Once that closes, you’re locked into the new term and any early withdrawal triggers a fresh penalty. A calendar reminder a week or two before your maturity date is one of the cheapest ways to protect your return.
Deposit Insurance
Fixed deposits at US banks are insured by the Federal Deposit Insurance Corporation up to $250,000 per depositor, per bank, for each ownership category. CDs are explicitly listed as a covered deposit type.7FDIC. Understanding Deposit Insurance Coverage includes both principal and any accrued interest, as long as the combined balance stays within the limit.
Credit unions carry equivalent protection through the National Credit Union Administration’s Share Insurance Fund, also $250,000 per member, per ownership category.8NCUA. Share Insurance Coverage If you have more than $250,000 to deposit, you can spread it across multiple institutions or ownership categories to keep every dollar insured.
Building a CD Ladder
One of the more practical ways to use fixed deposits without surrendering all flexibility is a CD ladder. Instead of parking your entire savings in a single long-term CD, you split the money across several CDs with staggered maturity dates. A classic setup: divide $10,000 into five equal CDs with one-, two-, three-, four-, and five-year terms. When the one-year CD matures, you roll it into a new five-year CD. Next year, the original two-year CD matures and you do the same. After the initial setup period, one CD comes due every year while all your money earns longer-term rates.
The ladder handles two problems at once. You always have a CD maturing soon, which keeps some liquidity in reach. And if rates rise, your maturing CDs let you reinvest at the higher levels; if rates fall, the longer CDs you already opened are still locked at yesterday’s better rates. It isn’t a way to beat the market. It’s a way to stop worrying about timing it.