To buy a certificate of deposit, choose a bank or credit union, pick a term length and deposit amount, provide identification and funding details, review the disclosures, and sign. Online, the whole thing can take under an hour; at a branch, a single visit. What deserves more of your attention than the mechanics is what you’re locking into: a CD ties up your money for a fixed period, penalizes early withdrawal, and generally holds its interest rate for the full term. Your principal is federally insured up to $250,000.
What You Need to Open the Account
Federal anti-money-laundering rules require every bank and credit union to run a Customer Identification Program before opening a new account. At minimum, the institution must collect your full legal name, date of birth, residential street address, and an identification number.1eCFR. 31 CFR 1020.220 – Customer Identification Program Requirements for Banks For U.S. persons, that number is your Social Security Number or Individual Taxpayer Identification Number. Non-U.S. persons can use a passport number, alien identification card number, or another government-issued document showing nationality.
Bring a government-issued photo ID so the bank can verify you are who you claim to be. This is used both for identity verification and to satisfy the institution’s broader obligations under the Bank Secrecy Act.2Office of the Law Revision Counsel. 31 USC 5318 – Compliance, Exemptions, and Summons Authority
Most institutions also ask for an email address and phone number. And you’ll need the routing and account numbers of the bank account you plan to fund from. Opening the CD at a bank where you already have checking or savings is simpler, because the bank can pull the money internally.
Decisions to Make Before You Apply
Three choices shape the deal: how long to lock up your money, how much to deposit, and what kind of rate structure you want.
Term Length and Deposit Amount
Terms commonly run from three months to five years, with some banks offering as short as one month or as long as ten years. Longer terms generally pay higher rates because you’re giving the bank use of your money for longer. The tradeoff is straightforward: the longer the term, the longer you can’t touch the funds without paying a penalty.
Minimum deposits often fall between $500 and $2,500, though some online banks have dropped minimums to $0 or $1 to attract depositors. Federal rules require the bank to disclose both the minimum balance to open the account and the minimum needed to earn the advertised annual percentage yield.3eCFR. 12 CFR 1030.4 – Account Disclosures
Fixed, Variable, or Specialty
Most CD buyers choose a fixed rate, which locks in a specific APY for the entire term. This is the main appeal over a savings account: your rate won’t drop if the market shifts. Variable-rate CDs exist but are uncommon, and when offered, the bank must tell you how the rate is determined, how often it can change, and any caps on movement.3eCFR. 12 CFR 1030.4 – Account Disclosures
A few specialty options are worth knowing. A bump-up CD lets you request a rate increase, usually once, if the bank raises its rates during your term. A step-up CD raises your rate automatically on a preset schedule such as every six months, regardless of market conditions. A no-penalty CD lets you withdraw the full balance before maturity without forfeiting interest, but rates are generally lower and most versions require you to withdraw the entire balance and close the account rather than take out part of it.
A CD ladder is less a product than a strategy. You split your money across several CDs with staggered maturity dates, for example one-year, two-year, three-year, four-year, and five-year terms. As each matures, you reinvest into a new long-term CD. That gives you regular access to a portion of your money while still capturing the higher rates on long terms.
Completing the Purchase
Once you’ve settled the terms, the purchase itself is quick. Online, you fill out the application, enter your personal information and funding details, review the disclosures, and submit. At a branch, you’ll sign a deposit agreement spelling out the same terms and can usually fund the CD on the spot from an existing account or a check.
Before the account opens, the bank must give you a written disclosure covering the interest rate, APY, compounding frequency, maturity date, early withdrawal penalty, and renewal policy.3eCFR. 12 CFR 1030.4 – Account Disclosures Read it. The early withdrawal section is the one most people skip and later regret.
Funding typically runs through an electronic transfer from your existing bank account. If the funds come from an external institution, the transfer usually takes one to three business days to clear. Some banks also accept a mailed paper check or a wire. Once the money settles, interest begins accruing no later than the next business day.4eCFR. 12 CFR Part 1030 – Truth in Savings, Regulation DD
The Early Withdrawal Penalty
Pulling money out of a CD before maturity triggers a penalty, and this is the single biggest risk of CD investing. The penalty varies by institution and term, but it’s typically calculated as a set number of months of interest. A bank might charge three months’ interest on a one-year CD or twelve months’ interest on a five-year CD. Federal law sets only a floor: if you withdraw within the first six days after deposit, the penalty must be at least seven days of simple interest.5HelpWithMyBank.gov. What Are the Penalties for Withdrawing Money Early From a CD There is no federal cap. Banks can and do set penalties that exceed the interest earned, meaning you could get back less than you deposited.
The bank must disclose the penalty calculation and the conditions that trigger it before you open the account.3eCFR. 12 CFR 1030.4 – Account Disclosures Compare those penalties across banks before you buy, especially on longer terms where they get steep. If there’s any real chance you’ll need the money early, a no-penalty CD or a shorter term is a better fit.
One partial offset: the early withdrawal penalty is tax-deductible. You report the full interest earned on your return and then deduct the penalty separately on Schedule 1 (Form 1040), line 18.6Internal Revenue Service. Publication 550 – Investment Income and Expenses
How the Interest Is Taxed
CD interest is taxed as ordinary income in the year it’s earned, which is not always the year you receive it. For CDs that mature in one year or less, interest is generally taxable when you receive it or become entitled to it. For CDs longer than one year, the IRS treats the interest as original issue discount, so you owe tax on a portion of the interest each year as it accrues, even though the cash stays in the CD.6Internal Revenue Service. Publication 550 – Investment Income and Expenses
Your bank will send you Form 1099-INT for any year it pays or credits you at least $10 in interest.7Internal Revenue Service. About Form 1099-INT, Interest Income Give the bank your correct taxpayer identification number when you open the account. If you don’t, you may face backup withholding, where the bank holds back a percentage of your interest and sends it to the IRS.8Internal Revenue Service. Topic No. 403, Interest Received
The annual accrual on multi-year CDs catches people off guard. Plan for tax on that accrued interest each year, especially on larger deposits where the annual bill can be meaningful.
Federal Insurance on Your Deposit
Your CD principal and any posted interest are federally insured up to $250,000 per depositor, per institution, for each ownership category. At a bank, that coverage comes from the FDIC.9FDIC.gov. Understanding Deposit Insurance At a credit union, the National Credit Union Share Insurance Fund provides the same $250,000 limit per member.10National Credit Union Administration. Share Insurance Coverage
The limit applies to all deposits in the same ownership category at the same institution combined, not to each account individually. If you have $200,000 in a savings account and buy a $100,000 CD at the same bank, both under single ownership, you have $300,000 in one category and $50,000 sits uninsured.9FDIC.gov. Understanding Deposit Insurance You can work around this by using different ownership categories, such as joint accounts or retirement accounts, or by spreading deposits across institutions.
What Happens at Maturity
Your bank must notify you before the CD matures.4eCFR. 12 CFR Part 1030 – Truth in Savings, Regulation DD After maturity, most banks give you a grace period between five and ten days (the federal minimum is five) during which you can withdraw your principal and earned interest without penalty. Do nothing during that window and the bank will typically roll your money into a new CD with a similar term at whatever rate it’s currently offering, which may be well below your old rate.
At maturity, you can withdraw the full balance to your bank account, roll the funds into a new CD at the same institution at a different term or rate, or move the money elsewhere. You can usually handle this through the bank’s online portal, by phone, or at a branch. Put the maturity date on a calendar. Once the grace period closes, your money is locked into the renewal, and getting it out means paying an early withdrawal penalty on the new CD.
A Note on Brokered CDs
Not every CD comes directly from a bank. Brokered CDs are sold through brokerage firms, which buy large CDs from banks and resell portions to individual investors. They’re still FDIC-insured as long as the underlying bank is FDIC-insured and your total deposits at that bank stay under $250,000.11SEC. High-Yield CDs – Protect Your Money by Checking the Fine Print
The mechanics differ in ways that matter. Getting out of a brokered CD early usually means selling it on the secondary market rather than paying the bank a penalty. If rates have risen since you bought, you’ll sell at a discount and could lose principal. Some brokered CDs also carry call features, meaning the issuing bank can end the CD early if rates drop; only the bank can call it, not you.11SEC. High-Yield CDs – Protect Your Money by Checking the Fine Print For a predictable, straightforward experience, a CD purchased directly from a bank or credit union is the simpler path.