A fixed deposit is a savings account with a fixed term and a guaranteed interest rate: you agree to leave a lump sum with a bank for a set period, and in return the bank pays you a higher rate than an ordinary savings account. 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 It Works
The defining feature is the commitment. When you open the account, you pick a term, hand over your deposit, and agree not to touch the money until the maturity date. Terms run from as short as seven days to as long as ten years, though most people land somewhere between three months and five years. In exchange for that commitment, the bank locks in an interest rate at the moment you open the deposit, and that rate holds for the full term no matter what happens to rates in the wider market.
Your return comes from compounding. Interest is calculated periodically and added back to the principal, so you start earning interest on your interest. Banks compound at different frequencies, with daily, monthly, and quarterly all common, and more frequent compounding produces a slightly higher effective yield. That’s why banks advertise an annual percentage yield (APY) alongside the stated interest rate. The APY reflects the actual return after compounding, and it’s the better number to use when comparing offers.
Choosing a Term and How You Get Paid
The term is the biggest decision. Longer commitments sometimes pay more, but not always. In certain rate environments shorter CDs actually offer higher yields. The real trade-off is liquidity: a five-year CD earns interest for longer, but the money is genuinely unavailable without penalty for that entire stretch. If there’s any realistic chance you’ll need the funds within a year, a shorter term is worth the potentially lower rate.
The second decision is how you want the interest paid. Most CDs default to a cumulative structure. Interest compounds inside the account, and you receive the whole balance, principal plus everything accumulated, at maturity. This produces the highest total return because every interest payment earns more interest in the next cycle.
Some banks also offer periodic payouts, sometimes labeled the non-cumulative option. The bank sends your interest to a separate account on a set schedule, monthly or quarterly or semi-annually, and the principal stays locked until maturity. You get steady cash flow along the way, which suits retirees and anyone using the deposit for income. The total return is lower, though, because interest that leaves the account can’t compound.
Opening the Account
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 for tax reporting. An SSN is not strictly required; many banks accept an ITIN instead, and non-resident account holders may complete IRS Form W-8 BEN in place of either.
Minimum deposits vary widely. Some online banks let you open a CD with no minimum at all, while others require $500 to $5,000. Larger deposits, typically $100,000 or more, sometimes qualify for jumbo CD rates. Once your documentation clears and the initial deposit is funded, the bank locks in your rate and issues a confirmation showing the principal, term, interest rate, APY, and maturity date. Keep that confirmation. It’s the record of the entire arrangement.
Deposit Insurance
Fixed deposits at US banks are insured by the Federal Deposit Insurance Corporation up to $250,000 per depositor, per bank, per ownership category. CDs are explicitly listed as a covered deposit type, and coverage includes both principal and accrued interest as long as the combined balance stays within the limit.1FDIC. Understanding Deposit Insurance At a credit union, the National Credit Union Administration provides equivalent protection through its Share Insurance Fund, also $250,000 per member, per ownership category.2NCUA. Share Insurance Coverage If you need to place more than the insured limit, you can spread the money across multiple institutions or ownership categories.
Getting Your Money Out Early
Pulling money out before maturity triggers an early withdrawal penalty. US banks almost always calculate this as a number of months’ worth of interest rather than a flat fee. A bank 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 early enough that your accrued interest doesn’t cover the penalty, the bank can deduct the difference from your principal, meaning you could get back less than you deposited.
There are two ways to avoid that outcome. A no-penalty CD lets you withdraw the full balance without a fee, usually starting about a week after funding. The trade-off is a slightly lower APY and shorter available terms, usually around one year, and most no-penalty CDs don’t allow partial withdrawals. Alternatively, you can borrow against the CD. In a CD-secured loan the deposit stays intact and keeps earning at its locked rate, while you take out a loan collateralized by it. Because the bank’s risk is essentially zero, the loan rate is typically lower than an unsecured personal loan. This makes sense when the borrowing cost is less than the penalty you’d otherwise pay.
If you do pay a penalty, you can deduct it on your federal return as an adjustment to gross income on Schedule 1 of Form 1040, Line 18. It’s an above-the-line deduction, available whether or not you itemize, and the penalty amount appears in Box 2 of the Form 1099-INT your bank sends at tax time.
How the Interest Is Taxed
Interest earned on a fixed deposit is ordinary income, taxed at your marginal federal rate. Banks report interest payments of $10 or more to both you and the IRS on Form 1099-INT.3Internal Revenue Service. About Form 1099-INT, Interest Income Even if the amount falls below the reporting threshold and no 1099-INT arrives, you’re still required to report the interest.4Internal Revenue Service. Topic No. 403, Interest Received If your total taxable interest for the year exceeds $1,500, you’ll also need to file Schedule B with your return.5Internal Revenue Service. About Schedule B (Form 1040), Interest and Ordinary Dividends
One detail catches people off guard. On a cumulative CD that spans multiple tax years, you may owe tax on the interest as it accrues each year, not only when the bank pays it out at maturity. The IRS treats the annually accruing interest on certain long-term CDs as original issue discount, which must be included in income for each year it accrues.6Internal Revenue Service. Publication 1212, Guide to Original Issue Discount (OID) In practice, you might owe tax on interest you haven’t yet received. Your bank should issue either a 1099-INT or a 1099-OID showing what to report each year.
If you’re a US taxpayer earning interest on a fixed deposit held overseas, that 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.7Internal Revenue Service. Foreign Tax Credit
What Happens at Maturity
When the CD reaches its maturity date 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 happens to be offering for that term, which may be well below what you originally earned.
Federal regulations require your bank to send notice before an automatic renewal takes effect for CDs with terms longer than a month.8Consumer Financial Protection Bureau. 1030.5 Subsequent Disclosures The point is to give you time to decide, so the notice is worth reading rather than tossing with routine bank mail. If you miss the window and the CD auto-renews, most banks offer a brief grace period, often seven to ten days, during which you can still pull out without a penalty. Once that window closes, you’re locked into the new term and any early withdrawal starts a fresh penalty. A calendar reminder a week or two before maturity is one of the simplest ways to protect the return you earned.
CD Laddering
One of the most practical ways to use fixed deposits without giving up all flexibility is a CD ladder. Instead of putting everything into one long-term CD, you split the money across several 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 reinvest it into a new five-year CD. The next year, the original two-year CD matures and you do the same. After the initial setup, a CD comes due every year while all your money earns longer-term rates.
The ladder solves two problems at once. You always have a CD maturing relatively soon, so cash is accessible without penalties. And if rates rise, each maturing rung lets you reinvest at the new higher rate; if rates fall, your longer-term rungs are still locked in at yesterday’s better rates. It isn’t a way to beat the market. It’s a way to stop worrying about timing it.