A term deposit is a savings product that holds a fixed sum of your money at a bank or credit union for an agreed length of time, paying a guaranteed interest rate until the term ends. In the United States, the familiar version is the Certificate of Deposit, or CD. You give up access to the cash for the chosen period, and in return the institution pays a higher rate than a standard savings account. Top-yielding CDs offered rates between roughly 3.80% and 4.20% APY in early 2026, depending on the term and the institution.
How a Term Deposit Works
Three things get fixed the moment you open the account: the amount you deposit, the length of time it stays there, and the interest rate you’ll earn. The length, called the term, can run as short as seven days or as long as ten years. Most people pick somewhere between six months and five years. Whatever happens to rates in the broader economy during that stretch, your rate doesn’t move.
Interest is usually calculated daily and credited to your balance on a schedule set out in the account agreement. Some banks credit monthly, some quarterly, some annually, and some pay the whole lot at maturity. The maturity date is when the term ends and the institution releases your principal along with accumulated interest. At that point the money is yours to take, move, or reinvest.
Federal regulation defines a time deposit as one with a maturity of at least seven days, and withdrawals during the first six days trigger a penalty of at least seven days’ simple interest.1eCFR. 12 CFR Part 1030 – Truth in Savings (Regulation DD) That floor is what legally separates a time deposit from an ordinary savings account.
Is Your Money Safe?
A CD at an FDIC-insured bank is protected up to $250,000 per depositor, per insured bank, for each ownership category.2Federal Deposit Insurance Corporation. Deposit Insurance On a joint account, each co-owner’s share counts separately, which effectively doubles the coverage for two people. Credit unions offer an equivalent product, usually called a share certificate, insured by the National Credit Union Administration up to the same $250,000 limit.
One point confuses people. FDIC insurance kicks in only if your bank fails. It doesn’t protect you from an early withdrawal penalty, and it doesn’t shield you from losses if you sell a brokered CD on the secondary market.3FDIC. Deposit Insurance FAQs If you break a CD at a healthy bank, you get your principal back minus whatever the contract says; the principal is intact because the bank is solvent, not because insurance stepped in.
Common Types of CDs
The rate you’re offered mostly tracks the length of the term. Longer commitments usually pay more, but not always. When the rate environment is unusual, a one-year CD can out-yield a five-year one. In early 2026, top one-year CDs paid around 4.10% while some five-year rates sat slightly below 4.00%. Minimum deposits for a standard CD commonly land between $500 and $2,500, and some institutions have no minimum at all.4Federal Deposit Insurance Corporation. Understanding Deposit Insurance
A jumbo CD typically requires at least $100,000 and sometimes pays a slightly higher rate than a standard CD of the same term. The premium isn’t always big, so compare before committing. Insurance coverage still caps at $250,000 per depositor at a single bank, so anything above that is uninsured if you keep it all in one place.
A no-penalty CD lets you take out the full balance before maturity without forfeiting earned interest. The rate is lower than a comparable standard CD. It’s a reasonable middle ground when you want to lock in today’s rate but aren’t sure you can leave the money alone the whole term.
A brokered CD is bought through a brokerage rather than directly from a bank. The deposit still sits at an FDIC-insured institution and the $250,000 cap still applies per issuing bank.5Charles Schwab. Bank CDs vs. Brokered CDs – Whats the Difference If you need the money early, there’s no bank penalty; instead you sell on the secondary market. If rates have risen, your CD looks less attractive to buyers and may sell at a loss. If rates have fallen, you could sell at a premium. There’s also no guarantee a buyer shows up, which can leave you holding the CD to maturity.6E*TRADE. Understanding Brokered CDs
An IRA CD is a CD held inside an Individual Retirement Account. Inside a traditional IRA, the interest grows tax-deferred until distribution. Inside a Roth IRA, qualified distributions are tax-free. The catch is a second layer of penalties: pulling money from a traditional IRA CD before age 59½ triggers the bank’s early withdrawal penalty, a separate 10% federal tax penalty, and ordinary income tax on the distribution. A handful of IRS exceptions exist for the 10% penalty, including up to $10,000 for a first-time home purchase and certain medical expenses, but the bank penalty still applies.
What Happens When the Term Ends
Most banks offer a grace period after maturity, typically about ten days, in which you decide what to do with the money.7PNC Insights. What Happens When a CD Matures You can withdraw it, send it to another account, or roll it into a new CD.
If you do nothing, most banks automatically renew the CD for another term of the same length at whatever rate they’re currently offering.7PNC Insights. What Happens When a CD Matures This is where people get caught. If rates have dropped, your money ends up locked into a worse deal because you missed the window. Put the maturity date on a calendar and set a reminder a week ahead.
Taking Money Out Early
Breaking a CD before maturity usually costs you. Federal law sets a floor, not a ceiling: at least seven days’ simple interest for withdrawals in the first six days.8HelpWithMyBank.gov. What Are the Penalties for Withdrawing Money Early From a Certificate of Deposit (CD) Past that, each bank writes its own schedule. A common one charges three months’ interest on terms under a year and six months’ interest on longer ones, with some banks taking a full year or more on long-duration CDs. The account agreement is where you’ll find the real number.
The penalty comes out of accrued interest first. If you haven’t earned enough interest to cover it, the bank takes the rest from your principal. Break a brand-new CD and you can get back less than you deposited.
Regulation D lists narrow situations where the penalty isn’t required:9eCFR. 12 CFR 204.2 – Definitions
- 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.
Financial hardship, a surprise bill, or a better opportunity elsewhere do not qualify.
How CD Interest Is Taxed
CD interest counts 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 the CD credits interest annually, you owe tax each year as the interest posts, not just at maturity. On multi-year CDs that pay everything at the end, check whether the bank reports interest as it accrues or only when the term closes.
Any institution that pays you $10 or more in interest during the year sends a Form 1099-INT.10Internal Revenue Service. Topic No. 403, Interest Received Smaller amounts are still taxable; the bank just isn’t required to file the form.
One consolation if you do pay an early withdrawal penalty: it’s deductible as an adjustment to income on Schedule 1 of Form 1040, so you don’t need to itemize to claim it.11Internal Revenue Service. Adjustments to Income Workout – Penalty on Early Withdrawal of Savings The deduction lowers your adjusted gross income.
When a Term Deposit Makes Sense
A high-yield savings account gives you full access to your money, but the rate floats. When the Federal Reserve cuts, your savings rate drops with it. A CD locks the rate in and protects you from that decline. The flip side: if rates climb, you’re stuck at the old rate until maturity.
Money market accounts fall between the two, usually offering check-writing and a variable rate competitive with high-yield savings. They give more flexibility than a CD but no rate certainty. Neither a savings nor a money market account protects your yield if rates fall, which is the specific job a term deposit does.
A workable rule of thumb: money you might need on short notice belongs somewhere liquid. Money you’re confident you won’t touch for a defined stretch, whether six months or five years, is a candidate for a CD. Plenty of people use both, keeping liquid accounts for emergencies and CDs for goals with a known timeline.
Building a CD Ladder
A CD ladder tackles the central trade-off of term deposits: longer terms pay more, but tying up all your cash for years feels risky. Instead of putting $10,000 into a single five-year CD, you split it into five equal pieces and buy CDs maturing in one, two, three, four, and five years. When the one-year CD matures, you reinvest it into a new five-year CD. A year later, the original two-year CD matures and you do the same.
Once the ladder is built out, you have a CD maturing every twelve months, so a portion of your money is always coming due. Meanwhile every dollar is earning the longer-term rate. If rates rise, each maturing CD gets reinvested at the new rate. If rates fall, four of your CDs are still locked in at the older, higher rate. The same approach works with other spacings and other numbers of rungs.