A certificate of deposit is a savings account that pays a fixed interest rate in exchange for your promise to leave a lump sum on deposit for a set period. Certificates of deposit are offered by banks and credit unions with terms that run from a few months to five years or more, and the funds are federally insured up to $250,000 per depositor, per institution, for each ownership category. The rate is typically higher than a regular savings account pays, and the trade-off is simple: you give up access to the cash for the term, and the bank rewards you for the certainty.
How a CD Works
You deposit a lump sum, called the principal, and agree to leave it in the account for a specific term. In return, the bank locks in an interest rate for the life of that term. A 12-month CD opened at 4.5% pays that rate regardless of what happens to market rates over the next year. The date your term ends is the maturity date, and that’s when you get your principal back along with all the interest you’ve earned.
Interest compounds on a schedule the bank sets. Federal rules require the bank to disclose the annual percentage yield, or APY, before you commit, so the return is knowable up front.1eCFR. 12 CFR Part 1030 – Truth in Savings (Regulation DD) The bank benefits because it can count on having your money for the entire term to fund loans and other investments. You benefit because your return is not affected by whatever markets do in the meantime.
The Cost of Withdrawing Early
Pulling money out of a CD before maturity triggers a penalty, and the amount can vary widely. Federal regulations set a floor but no ceiling: within the first six days after deposit, the minimum penalty is seven days’ worth of simple interest.2HelpWithMyBank.gov. What Are the Penalties for Withdrawing Money Early From a Certificate of Deposit (CD)? After that, banks charge whatever they disclose in the account agreement.
Penalties generally scale with the term. Short-term CDs under a year commonly charge 60 to 90 days of interest. One- to two-year terms tend to cost 90 to 180 days of interest. Three- to five-year CDs can cost six months to a full year of interest, and some banks charge more. A handful of institutions will dip into principal if you haven’t earned enough interest to cover the penalty, meaning you’d actually get back less than you put in.
The bank has to tell you exactly how the penalty works before you open the account. Read that disclosure carefully, and compare penalties across banks if there’s any chance you’ll need the money early.
Types of CDs
Not every CD works the same way. Several variations tweak the basic formula.
Standard and Jumbo CDs
A standard CD is what most people picture: fixed rate, fixed term, early withdrawal penalty. Minimum deposits vary but often start between $500 and $1,000. Jumbo CDs require a larger deposit, typically $100,000 or more, and sometimes pay slightly higher rates to attract the bigger commitment. The mechanics are identical, just at a higher dollar threshold.
Bump-Up and No-Penalty CDs
A bump-up CD lets you request a rate increase if your bank raises its rates during your term. You usually get one or two chances to use it. The starting rate on a bump-up tends to be lower than a comparable standard CD, so you’re betting rates will rise enough to make up the difference.
No-penalty CDs, sometimes called liquid CDs, let you withdraw your full balance before maturity without forfeiting interest. The rates are typically the lowest of any CD type. You’re paying for the option to walk away.
Brokered CDs
Brokered CDs are sold through brokerage firms rather than directly by a bank. Instead of paying an early withdrawal penalty, you can sell a brokered CD on a secondary market before it matures. The sale price fluctuates with interest rates, though. If rates have risen since you bought the CD, its market value drops, and you could sell at a loss. Longer maturities carry more of this risk, and liquidity on the secondary market isn’t guaranteed.
Brokered CDs still qualify for FDIC insurance, but the coverage passes through to you as the actual owner only if certain recordkeeping requirements are met. The broker’s records must identify you by name and show your ownership interest. If those requirements aren’t satisfied, the FDIC treats the deposit as belonging to the broker, and your coverage could be significantly reduced.3FDIC. Pass-Through Deposit Insurance Coverage
IRA CDs
An IRA CD is a certificate of deposit held inside an Individual Retirement Account. The CD itself works the same way, but the IRA wrapper changes the tax treatment. In a traditional IRA, interest grows tax-deferred, and you pay tax when you eventually withdraw in retirement. In a Roth IRA, qualified withdrawals are tax-free.
Normal IRA contribution limits apply. For 2026, the annual IRA contribution limit is $7,500, or $8,600 if you’re 50 or older (the extra $1,100 is the catch-up contribution).4Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500 One important wrinkle: if you withdraw from a traditional IRA before age 59½, you’ll owe a 10% additional tax on top of regular income tax, separate from any CD early withdrawal penalty the bank charges.5Office of the Law Revision Counsel. 26 U.S. Code 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
How CD Interest Is Taxed
Interest earned on a CD held outside a tax-advantaged account is taxable as ordinary income in the year it’s credited to your account, even if you don’t withdraw it.6Internal Revenue Service. Topic No. 403, Interest Received A multi-year CD that credits interest annually generates a tax bill each year, not just when the CD matures. This surprises people who assume they won’t owe anything until they get their money back.
Your bank or credit union will send you IRS Form 1099-INT for any account that earns $10 or more in interest during the year.7Internal Revenue Service. Instructions for Forms 1099-INT and 1099-OID Even if you earn less than $10 and don’t receive the form, you’re still required to report the interest. State income taxes may apply as well, depending on where you live.
Deposit Insurance
CDs at banks are insured by the Federal Deposit Insurance Corporation, and CDs at credit unions are insured by the National Credit Union Share Insurance Fund, administered by the NCUA.8Office of the Law Revision Counsel. 12 USC 1811 – Federal Deposit Insurance Corporation Both programs cover up to $250,000 per depositor, per insured institution, for each ownership category, and coverage includes both principal and any interest that has posted to the account.9FDIC. Understanding Deposit Insurance
Ownership categories matter. A single-owner account, a joint account, and an IRA are each insured separately. A married couple could each hold a single-owner CD and share a joint CD at the same bank, with each account insured up to $250,000 independently.10National Credit Union Administration. Share Insurance Coverage If you’re parking large sums, keep total deposits at any single institution within the limits, or spread them across multiple insured institutions.
Opening a CD
Most banks let you apply online, though a branch visit works too. During the application you choose your term and deposit amount, and decide how interest is handled. The two standard options are reinvesting interest back into the CD, which lets it compound, or transferring earned interest to a separate account on a schedule. Reinvesting maximizes your total return; transferring gives you periodic income.
After you submit the application, the bank pulls the funds from your linked checking or savings account, typically within one to three business days. Once the money arrives, the term begins. You’ll receive a confirmation and a set of disclosures spelling out your APY, maturity date, and early withdrawal penalty. Federal regulations require these disclosures, so if you don’t get them, ask.
What Happens at Maturity
Your bank has to notify you in writing before your CD matures.11Consumer Financial Protection Bureau. What Is a Certificate of Deposit (CD) Rollover or Renewal? For CDs longer than a month that auto-renew, federal rules require at least 30 days’ advance notice, or at least 20 days before the end of a grace period if the bank provides one of at least five days.12eCFR. 12 CFR 1030.5 – Subsequent Disclosures
After the maturity date, you get a short grace period to decide what to do. That window is typically seven to ten calendar days, though some banks offer longer. You can withdraw the funds, roll them into a new CD at a different term, or let the bank auto-renew at the rate it’s currently offering. Do nothing, and the CD renews for another term, locked in with a fresh early withdrawal penalty and whatever rate is available that day, which could be higher or lower than what you had. Mark the maturity date on your calendar. Missing the grace period on a large CD can tie up your money at an unfavorable rate for another full term.
Building a CD Ladder
A CD ladder splits your money across several CDs with staggered maturity dates. Instead of putting $10,000 into a single five-year CD, you might spread it across five CDs maturing in one, two, three, four, and five years. Each year, as one CD matures, you either use the cash or reinvest it into a new five-year CD at whatever rate is available.
The appeal is regular access to part of your money without early withdrawal penalties, while still capturing the higher rates that longer terms usually pay. If rates rise, your next reinvestment benefits. If rates fall, the CDs that haven’t matured yet keep paying their locked-in rates. It’s a straightforward way to balance predictability with flexibility, and it works especially well when the direction of interest rates is uncertain.