What Is a Certificate of Deposit (CD)?

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What Is a Certificate of Deposit (CD)?

Let me explain what a certificate of deposit, or CD, really is. It's a type of savings account where you deposit money and earn a fixed interest rate for a specific period, known as the term. You agree to leave the money untouched during that time. The best CD rates can beat those of traditional savings accounts, but you sacrifice flexibility—if you pull out funds early, expect a penalty. CDs come in terms from 3 months to 10 years, and I'll cover how they work along with their pros and cons.

Daily Rankings of the Best CDs and Savings Accounts

I update these rankings every business day to show you the top deposit rates available. Check out the best 3-month CD rates, best 6-month CD rates, best 1-year CD rates, best 18-month CD rates, best 2-year CD rates, best 3-year CD rates, best 4-year CD rates, best 5-year CD rates, best high-yield savings accounts, and best money market accounts.

Key Takeaways

The best CDs can pay higher interest than savings or money market accounts. They're safer and more conservative than stocks or bonds, though with less growth potential. You can get them from banks, credit unions, or brokerages. Many institutions offer low rates, but the top ones can be three to four times the national average.

How Certificates of Deposit Work

Opening a CD is like starting any bank deposit account, but you need to shop around and consider key factors. The interest rate is usually fixed, so you know your earnings upfront—great for locking in high APY if rates might drop, but you could miss out if they rise. Some variable-rate CDs exist, but they often yield less overall. The term is how long you commit your funds, ending on the maturity date when you can withdraw without penalty. Your principal is the initial deposit, and the institution sets rules like early withdrawal penalties and auto-reinvestment at maturity. You'll get statements monthly or quarterly, with interest compounding daily or monthly and added to your balance.

Pros and Cons of CDs

CDs make sense if you have cash you won't need soon, like saving for a vacation, home, or car. They keep some savings conservative, reducing risk compared to stocks or bonds. The main drawback is your money is locked in, but that can help if you're tempted to spend. The best rates beat savings or money market accounts, with guaranteed returns that are less volatile than investments. They're federally insured at FDIC or NCUA institutions. On the flip side, early withdrawal penalties apply, they earn less long-term than stocks or bonds, fixed rates hurt if rates rise, and many CDs have low rates.

What Happens to My CD at Maturity?

As your CD approaches maturity, the bank or credit union will notify you and give instructions. You typically have three options: roll over into a new CD matching the original term, transfer to another account like savings or checking, or withdraw the funds via transfer or check. If you do nothing, it often auto-rolls into a new CD, possibly at a lower rate.

Which CD Term Should I Choose?

Once you decide on funds you can set aside, pick a term based on your plans—if it's for a goal, match the term to when you'll need the money. For general savings, go longer for higher rates. Consider the Fed's rate outlook: if rates will rise, choose short or mid-term CDs or high-yield savings to avoid locking in low rates. If rates will fall, opt for long-term to secure high rates. Variable-rate or bump-up CDs can help in rising-rate environments, but they usually start with lower rates, so weigh that carefully.

How Much Do I Need to Open a CD?

Institutions set minimum deposits, sometimes as low as $100, with tiers for higher APYs on larger amounts. But top rates often come with modest deposits like $500 or $1,000, and $10,000 usually gets you the best. Jumbo CDs requiring $50,000 or more might pay more, but not always.

Where Can I Get a CD With the Best Rate?

Banks, credit unions, and brokerages offer CDs, but rates vary widely—many are low. I publish daily lists of the best rates from 3 months to 5 years. Shop everywhere, not just your current bank, and watch the Fed's rate—if it's falling, lock in now with long-term; if rising, go short-term or use savings accounts.

Are CDs Safe?

CDs are among the safest investments with fixed, guaranteed rates and federal insurance up to $250,000 via FDIC for banks or NCUA for credit unions. Ensure the institution is insured—all on my best rates list are.

CDs vs. Savings and Money Market Accounts

Like savings or money market accounts, CDs earn interest on set-aside money for goals or general savings. But unlike those, CDs don't allow additional deposits or easy withdrawals—you commit one deposit until maturity for potentially higher rates.

What If I Need to Withdraw My Money Early?

You agree to the term, but if plans change, most charge an early withdrawal penalty based on months of interest—check policies beforehand. Some penalties are harsh, potentially eating into principal, so avoid those. Always review the EWP; milder ones or similar-rate alternatives are better.

CD Ladders: Why Should I Build One?

A CD ladder lets you access funds periodically while earning high yields from longer terms. For a 5-year ladder with $25,000, divide into five parts: invest in 1-year through 5-year CDs. When the 1-year matures, roll into a new 5-year, and repeat annually. Eventually, you'll have all 5-year CDs, one maturing yearly for liquidity.

How Are CD Rates Determined?

The Fed's benchmark rate influences deposit rates—when it rises, CD rates often follow. The FOMC sets the federal funds rate, affecting what institutions pay. Higher fed rates mean better CD yields, so monitor outlooks before committing, especially long-term.

Frequently Asked Questions

CD earnings are taxed as income when applied to your account, reported annually regardless of withdrawal. You can't lose money on CDs due to guarantees and insurance up to $250,000. Don't let CDs auto-roll over, as rates are often lower—shop around. You usually can't add funds mid-term, but some allow during grace periods. Early withdrawals typically incur penalties, though no-penalty CDs exist with lower rates.

The Bottom Line

CDs let you earn more safely than stocks or bonds with fixed rates, but check penalties and rate changes. Understand limitations and benefits, and consider professional advice for your situation.

What Is a Certificate of Deposit (CD)?