A term deposit is a savings product that holds your money at a bank or credit union for a fixed period in exchange for a guaranteed interest rate. In the United States, it is almost always sold as a Certificate of Deposit, or CD. You agree not to touch the money until a set maturity date, and in return the bank pays a rate that is usually higher than a regular savings account and that will not change no matter what happens to interest rates in the wider economy.
How the Lock-In Works
Two things define a term deposit: the length of time your money stays put, and the rate you are paid for leaving it there. The length is called the term. It can run as short as seven days or as long as ten years, though most people pick something between six months and five years. Federal rules define a time deposit as one with a maturity of at least seven days, and if you pull money out during those first six days the bank must charge you at least seven days’ simple interest.1eCFR. 12 CFR Part 1030 – Truth in Savings (Regulation DD)
The rate is locked the moment you open the account. Interest is usually calculated daily. Depending on the bank, it may be credited to your balance monthly, quarterly, annually, or all at once at maturity. The maturity date is the day the bank releases your principal plus the interest it has earned.
Longer terms typically pay more than shorter ones because you are committing your money for longer. That is a tendency, not a rule. When the rate environment is unusual, a one-year CD can out-yield a five-year CD.
What You Need to Open One
Most CDs require a minimum deposit somewhere between $500 and $2,500, though some institutions have no minimum at all.2Federal Deposit Insurance Corporation. Understanding Deposit Insurance You fund the account with a single lump sum. You cannot add money later; if you want to deposit more, you open another CD.
Common Variations
The standard CD is what most people mean when they say CD: a fixed rate, a fixed term, and a penalty if you break it. A few variants are worth knowing by name.
A jumbo CD usually requires a minimum deposit of $100,000 and sometimes pays a slightly higher rate in return. The bump is not always dramatic, so compare against the best standard rates before committing that much cash.
A no-penalty CD lets you withdraw the full balance early without forfeiting the interest you have earned. The rate is lower than a standard CD of the same term. It suits money you want to lock in but might need to touch.
A brokered CD is bought through a brokerage rather than directly from a bank. The underlying deposit is still held at an FDIC-insured bank, and insurance still applies up to $250,000 per depositor at each issuing bank.3Charles Schwab. Bank CDs vs. Brokered CDs – Whats the Difference If you need out early, you sell the CD on the secondary market instead of paying a penalty, which means the price depends on where rates have moved and whether a buyer is available at all.4E*TRADE. Understanding Brokered CDs
An IRA CD is a CD held inside a retirement account. The CD itself works the same, but the IRA wrapper changes the tax picture: traditional IRA interest grows tax-deferred, and qualified Roth distributions are tax-free. An early withdrawal from a traditional IRA CD before age 59½ can trigger the bank’s penalty, a separate 10% federal tax penalty, and ordinary income tax on the amount taken out. The IRS penalty and the bank penalty stack.
What Happens at Maturity
Most banks give you a grace period of roughly ten days after the maturity date to decide what to do with the money.5PNC Insights. What Happens When a CD Matures During that window you can withdraw, move the funds to another account, or roll everything into a new CD.
If you do nothing, most banks automatically renew the CD into a new term of the same length at whatever rate they are offering that day.5PNC Insights. What Happens When a CD Matures If rates have dropped, that renewal locks you into a worse deal. Put the maturity date on a calendar and set a reminder about a week before.
The Cost of Withdrawing Early
Take money out before maturity and you pay a penalty. Federal law sets only a floor, not a ceiling. The minimum is seven days’ simple interest for withdrawals in the first six days.6HelpWithMyBank.gov. What Are the Penalties for Withdrawing Money Early From a Certificate of Deposit (CD) Beyond that, each bank writes its own schedule. A common structure charges three months’ interest on terms under a year and six months’ interest on longer terms, but some banks charge a year or more on long-dated CDs. Read the account agreement before you sign.
The penalty comes out of accrued interest first. If you have not earned enough interest to cover it, the bank pulls the rest from your principal. Breaking a brand-new CD can leave you with less than you deposited.
Federal rules recognize a handful of situations where the penalty is not required:
- Death of any owner of the time deposit.
- A court determination that an owner is legally incompetent.
- Withdrawals made within ten days after an automatic renewal date.
These exemptions come from Regulation D.7eCFR. 12 CFR 204.2 – Definitions Financial hardship, a surprise expense, or finding a better investment do not qualify.
Deposit Insurance
Money in a CD at an FDIC-insured bank is protected up to $250,000 per depositor, per insured bank, for each ownership category.8Federal Deposit Insurance Corporation. Deposit Insurance Each co-owner of a joint account gets separate coverage, which effectively doubles the limit for a two-person account. Credit unions offer an equivalent product, often called a share certificate, insured by the NCUA up to the same $250,000.
Insurance covers you if the bank fails. It does not cover early withdrawal penalties, and it does not cover losses on brokered CDs sold on the secondary market.9FDIC. Deposit Insurance FAQs If you break a CD at a healthy bank, your principal comes back minus the penalty because the bank is solvent, not because FDIC stepped in.
How the Interest Is Taxed
CD interest is taxable as ordinary income in the year it becomes available to you, even if you leave it in the account.10Internal Revenue Service. Topic No. 403, Interest Received If your CD credits interest annually, you owe tax on each year’s interest as it is credited, not just at maturity. For a multi-year CD that pays everything at the end, ask the bank whether it will report the interest as accrued each year or only at maturity.
Any institution that pays you $10 or more in interest during the year must send you a Form 1099-INT.10Internal Revenue Service. Topic No. 403, Interest Received Smaller amounts are still taxable; the bank just is not required to issue the form.
If you do pay an early withdrawal penalty, you can deduct it as an adjustment to income on Schedule 1 of Form 1040. You do not need to itemize to claim it.11Internal Revenue Service. Adjustments to Income Workout – Penalty on Early Withdrawal of Savings
Term Deposit vs. Savings Account vs. Money Market
A high-yield savings account gives you full access to your money at any time, but the rate floats. When the Federal Reserve cuts rates, your yield drops with it. A CD locks the rate in and protects you from that decline. If rates rise instead, you are stuck earning the older rate until maturity.
A money market account sits between the two, usually offering check-writing, a variable rate that competes with high-yield savings, and no rate certainty. Neither a savings account nor a money market account will preserve your yield if rates fall, which is the specific thing a term deposit does.
The practical split: money you might need on short notice belongs in a savings or money market account. Money you are confident you can leave alone for a defined stretch is a candidate for a CD.