A certificate of deposit in banking works like this: you hand the bank a lump sum, agree to leave it alone for a fixed term, and the bank pays you a guaranteed interest rate until that term ends. The rate is locked on day one, so you know at the outset exactly what the account will be worth at maturity. The tradeoff is access. Pull the money out early and you owe a penalty. CDs are federally insured up to $250,000 per depositor at each bank, which puts them among the lowest-risk places to hold cash you won’t need for a while.
The Mechanics: Term, Rate, and APY
Terms typically run from one month to five years or longer. You pick the length when you open the account. The bank uses your deposit to fund its lending, and the interest it pays you is effectively what it costs the bank to borrow your money for that period.
Two numbers show up on every CD offer: the interest rate and the annual percentage yield. The APY reflects the effect of compounding over a year. Daily compounding folds each day’s interest back into the balance so it starts earning its own interest the next day; monthly or quarterly compounding does the same at longer intervals and produces slightly less growth. Banks must disclose both figures along with the compounding frequency before you open the account, which lets you compare offers on the same footing.1eCFR. 12 CFR Part 1030 – Truth in Savings (Regulation DD)
Most CDs pay a fixed rate. That predictability is the point. Whatever happens to market rates during your term, your yield doesn’t move.
What Sets the Rate You Get
CD rates track the federal funds rate set by the Federal Reserve. When the Fed raises rates, banks can charge more for loans and pass some of that margin along as higher CD yields. When the Fed cuts, CD yields follow down. As of late 2025, the federal funds rate target range sat at 3.75% to 4.00%, with further cuts projected into 2026, and CD rates have been drifting lower from their recent highs.
Longer terms don’t always pay more. In a normal environment, a five-year CD out-yields a one-year because you’re tying up your money longer. But when the market expects rates to fall, short-term CDs sometimes pay as much as or more than long-term ones, since banks don’t want to lock themselves into paying high rates for years.
Where you shop matters as much as which term you pick. Online banks routinely post APYs roughly double the national average because they have lower overhead and compete harder for deposits. In early 2026, the national average one-year CD rate hovered near 1.9%, while the best online offers for the same term exceeded 4%.
Common Types of CDs
The plain fixed-rate CD is the standard. Several variations exist for savers with different priorities:
- A bump-up CD lets you request a rate increase once or twice during the term if the bank raises its rates on new CDs. The starting rate is usually a bit lower than a comparable traditional CD.
- A step-up CD raises the rate on a preset schedule instead of at your request.
- A no-penalty CD lets you withdraw the full balance before maturity without any penalty. The tradeoff is a lower rate, recently running about 0.2 to 0.5 percentage points below traditional CDs for the same term.
- An add-on CD lets you make additional deposits after opening, all earning the same fixed rate for the remaining term.
- A jumbo CD requires a minimum deposit of $100,000 and sometimes pays a slightly higher rate in return.
- A callable CD gives the bank the right to end the CD early and return your principal. Only the bank can call it. Banks typically do so when rates fall and they no longer want to pay you the higher locked-in rate. Advertised yields on callables often look attractive, but the call feature means you may never earn them for the full term.
Opening a CD
Federal law requires banks to verify your identity on any new account. You’ll provide your name, address, date of birth, and a taxpayer identification number (a Social Security number, for most people), plus a government-issued photo ID such as a driver’s license or passport.2eCFR. 31 CFR 1020.220 – Customer Identification Program Requirements for Banks
Minimum deposits vary. At major banks, standard CDs typically start at $500 to $1,000. Some online banks have no minimum. When you open the account, you’ll pick the term and decide what happens to the interest. Most savers reinvest interest back into the CD so it compounds over the full term, but you can usually route the payments to a linked checking or savings account if you want periodic income instead.
Early Withdrawal Penalties
Taking money out before the CD matures costs you. Federal rules set a floor: any withdrawal within the first six days of the deposit triggers a penalty of at least seven days’ simple interest.3eCFR. 12 CFR 204.2 – Definitions Banks almost always charge more than that minimum. A common structure is 90 days of interest for terms of one year or less and 180 days of interest for longer terms, with some banks charging even more on CDs of three years or longer.
The penalty comes out of your interest first. If it exceeds the interest you’ve earned, the bank takes the rest from your principal, meaning you get back less than you deposited. That’s where short holding periods hurt most. Withdrawing from a five-year CD after only a few months could easily eat into your original deposit.
If your CD allows partial withdrawals, the remaining balance must stay subject to the same penalty structure. If the bank doesn’t enforce that, the account technically stops qualifying as a time deposit under federal rules.3eCFR. 12 CFR 204.2 – Definitions
When Penalties Are Waived
Federal regulations carve out a few situations in which the bank can release the funds without an early withdrawal penalty:
- Death of an account owner. The estate or beneficiaries can access the funds penalty-free.
- Legal incompetency. If a court determines an account owner is legally incompetent, funds can be released without penalty.
- IRA, Keogh, or 401(k) CDs, once the account holder reaches age 59½ or becomes disabled.
These exceptions only address the bank’s obligation under Regulation D. They do not waive separate IRS penalties for early retirement distributions, which are a different matter.4eCFR. 12 CFR Part 204 – Reserve Requirements of Depository Institutions (Regulation D)
Taxes on CD Interest
CD interest is ordinary taxable income. The IRS treats it like interest on any other bank account: you owe federal income tax in the year the interest becomes available to you, even if you don’t withdraw it.5Internal Revenue Service. Topic No. 403, Interest Received For a CD that credits interest annually, you owe tax each year on the credited amount, not just at maturity.
If your CD earns $10 or more in interest during the year, the bank will send you a Form 1099-INT. You must report all taxable interest on your federal return whether or not you receive the form.5Internal Revenue Service. Topic No. 403, Interest Received
If you pay an early withdrawal penalty, you can deduct it. The penalty appears in Box 2 of your 1099-INT, and you claim the deduction on Schedule 1 (Form 1040), line 18. This is an above-the-line deduction, so you don’t need to itemize. You report the full interest earned and then subtract the penalty separately as an adjustment to income.6Internal Revenue Service. Publication 550, Investment Income and Expenses
What Happens at Maturity
When the term ends, the bank must notify you at least 30 calendar days before the maturity date. Alternatively, it can send notice at least 20 days before the end of a grace period, as long as that grace period lasts at least five calendar days.7Consumer Financial Protection Bureau. 12 CFR Part 1030 (Regulation DD) – 1030.5 Subsequent Disclosures The notice spells out your options: withdraw the funds, change the term, or let the bank renew the CD automatically.
The grace period is your window to act without penalty. During those days after maturity, you can withdraw, move the money, or shop for a better rate. The length varies by bank, but the federal minimum is five days.7Consumer Financial Protection Bureau. 12 CFR Part 1030 (Regulation DD) – 1030.5 Subsequent Disclosures
Do nothing during the grace period and most banks roll the balance into a new CD with a similar term at whatever rate the bank is currently offering. That new rate could be well below what you were earning, and you’re locked in for another full term with early withdrawal penalties reattached. It’s one of the easiest CD mistakes to make. Set a calendar reminder at least 30 days before maturity so you have time to compare.
Deposit Insurance Limits
CDs at banks are insured by the Federal Deposit Insurance Corporation; CDs at credit unions, known as share certificates, are insured by the National Credit Union Administration. Both programs cover up to $250,000 per depositor, per institution, per ownership category.8eCFR. 12 CFR 330.1 – Definitions9eCFR. 12 CFR Part 745 – Share Insurance and Appendix If the bank fails, the federal government covers your deposit up to that limit.
Joint accounts get their own coverage. The FDIC insures each co-owner up to $250,000 for the combined total of all joint accounts at the same bank, so a joint CD held by two people can carry up to $500,000 in protection.10FDIC. Joint Accounts Trust accounts are a separate ownership category with their own limits, and the FDIC does not require banks to hold copies of your trust agreement on file, though it may request one if the bank fails.11FDIC. Trust Accounts Two individually owned CDs at the same bank share one $250,000 cap, so tracking the categories matters if you’re insuring larger sums at a single institution.
A Note on Brokered CDs
A brokered CD is bought through a brokerage rather than directly from a bank, and the exit works differently. Instead of paying an early withdrawal penalty, you sell the CD on a secondary market if you need out before maturity. The sale price depends on current rates: if rates have risen, buyers will pay less for your lower-yielding certificate and you could lose part of your deposit; if rates have dropped, your CD becomes more valuable and you could sell at a profit.12Investor.gov. Brokered CDs: Investor Bulletin That’s a different risk from a bank CD, where the cost of leaving early is a known, fixed penalty.