A certificate of deposit (CD) is one of the simplest ways to earn a known return on cash you will not need for a while. You hand a bank or credit union a lump sum for a set term, the institution pays you interest, and at the end of the term you get your money back plus the interest you earned. The trade-off is flexibility: take the money out early and you will usually pay a penalty.
Below: how CD terms, rates and penalties work, how deposit insurance applies, how CD interest is taxed, the UK equivalent, and the fine print that catches people out.
This article is for general education only. It is not personalized financial, tax or investment advice. Rates, terms and penalties vary by institution, so always read the account disclosures and, if needed, speak with a qualified professional.
Key takeaways
- A CD is a type of savings account that holds a fixed amount of money for a fixed period, such as six months, one year or five years, in exchange for interest, as described by the SEC’s Investor.gov.
- Withdrawing before the maturity date generally means paying an early withdrawal penalty, according to the Consumer Financial Protection Bureau (CFPB).
- CDs at FDIC-insured banks are covered by FDIC deposit insurance, and CDs at federally insured credit unions are covered by the NCUA, each up to the standard $250,000 limit per depositor, per institution, per ownership category.
- CD interest is generally taxable in the US, and penalties for early withdrawal are reported separately on Form 1099-INT.
- The main risk for a plain CD is inflation outpacing your rate, or being locked in when better rates appear.
What is a certificate of deposit?
A certificate of deposit is a time deposit. Unlike a regular savings account, where you can add and withdraw money freely and the rate can change at any time, a CD asks you to commit a specific amount for a specific term. In return, most CDs pay a fixed interest rate for the whole term, so you know in advance what you will earn if you leave the money alone.
CDs are offered by banks and credit unions (which sometimes call them “share certificates”). You choose a term, fund the CD, and wait until the maturity date, when you can withdraw, move or roll over the money.
The SEC notes that CDs are considered one of the safest savings options, which is why people use them for money with a clear purpose and timeline.
How CDs work: term, rate and maturity
Choosing a term
CD terms commonly range from a few months to several years. The CFPB suggests matching the maturity date to when you expect to need the money: if you plan to spend your savings in five years, look at five-year CDs.
Interest rate and APY
CD offers usually show an interest rate and an annual percentage yield (APY). The APY reflects both the rate and how often interest compounds, which makes it the better number for comparing accounts side by side. Your account disclosure should state whether the rate is fixed or variable, how often interest is paid (for example monthly or at maturity), and how it is paid out.
Rates move with the wider rate environment and differ between institutions, so check current offers directly. The FDIC also publishes national average rates for deposit products, which is a useful benchmark for judging whether an offer is competitive.
What happens at maturity
Many CDs renew automatically. Under the Truth in Savings rules (Regulation DD), banks must send a notice before an automatically renewing CD with a term longer than one month matures—generally at least 30 calendar days before maturity, or at least 20 days before the end of a grace period of at least five days, per 12 CFR 1030.5. A grace period, if offered, is your window to withdraw without a penalty.
The FDIC advises checking whether a renewal uses the old rate or the current one, so put the maturity date in your calendar.
Early withdrawal penalties
The CFPB lists the early withdrawal penalty as one of the three things to compare when shopping for a CD, alongside the term and the rate. Penalties are set by each institution and are often expressed as a certain amount of interest. On some accounts, a penalty can exceed the interest you have earned so far and reduce your original deposit, so read the disclosure before you open the account.
- Ask about partial withdrawals. Some CDs only allow you to close the whole account, not take part of it.
- Consider a “no-penalty” CD if you are unsure about timing. These exist at some institutions, usually in exchange for a lower rate than a comparable fixed-term CD.
Is a CD safe? FDIC and NCUA insurance
CDs are deposits, so they are covered by federal deposit insurance when held at an insured institution. The FDIC lists time deposits such as CDs among covered products and insures deposits up to at least $250,000 per depositor, per FDIC-insured bank, for each account ownership category. Credit union certificates are covered by the NCUA’s share insurance on the same standard limit.
- Coverage is per bank and per ownership category, not per CD. Single-name checking, savings and CDs at one bank are added together; joint accounts and IRAs are separate categories.
- Insurance only covers deposits. Stocks, bonds, mutual funds and Treasury securities are not FDIC-insured, even if bought through a bank.
You can confirm a bank is insured with the FDIC’s BankFind Suite.
Types of CDs you may come across
- Traditional fixed-rate CD: one deposit, one term, one fixed rate.
- Bump-up or step-up CD: allows a rate increase under set conditions or on a pre-set schedule.
- IRA CD: a CD held inside an individual retirement account, so IRA tax rules apply. If you are deciding between account types, our Roth IRA vs. Traditional IRA guide explains the differences.
- Callable CD: the bank—not you—can end the CD early, usually if rates fall. The SEC warns in its high-yield CD alert that a “one-year non-callable” CD does not mature in one year; it means the bank cannot call it during the first year, and the actual maturity can be many years away.
- Market-linked CD: returns are tied to a market index rather than a fixed rate. The FDIC notes that many accrue interest only at maturity and most do not allow early redemption.
- Brokered CD: bought through a brokerage firm rather than directly from a bank. If sold before maturity, you may get back less than you paid. See the SEC’s investor bulletin on brokered CDs before buying one.
CDs vs. high-yield savings accounts
Both can be federally insured, but they suit different jobs: a savings account keeps money accessible at a variable rate, while a CD usually fixes the rate and restricts access.
| Feature | Certificate of deposit | High-yield savings account |
|---|---|---|
| Access to money | Locked until maturity; penalty for early withdrawal | Withdraw when needed (subject to bank limits) |
| Rate | Usually fixed for the term | Variable |
| Deposits | Usually one deposit at opening | Add money any time |
| Insurance | FDIC/NCUA up to the limit | FDIC/NCUA up to the limit |
| Best for | Money with a known future date | Emergency funds and flexible goals |
Many savers use both: an accessible account for emergencies and CDs for money earmarked for a specific date. Our guide to high-yield savings accounts covers the flexible side in more detail. For long-term goals measured in decades, such as retirement, many people look at diversified investments instead; see what an index fund is for an introduction—keeping in mind that investments, unlike insured deposits, can lose value.
What is a CD ladder?
A CD ladder spreads your money across several CDs with staggered maturity dates instead of putting everything into one term. As each CD matures, you can use the cash or reinvest it in a new longer-term CD.
This gives you access to part of your money at regular intervals while reducing the impact of committing everything at a single rate.
How CD interest is taxed in the US
According to IRS Topic No. 403, interest on certificates of deposit is taxable interest, generally in the year it is credited to an account you can withdraw from without penalty. If you receive $10 or more in interest, you should get a Form 1099-INT, but you must report all taxable interest even if you do not receive the form.
For CDs with terms longer than one year, interest may need to be reported each year rather than only at maturity. If you pay an early withdrawal penalty, IRS Publication 550 explains that your 1099-INT shows total interest in box 1 and the penalty separately in box 2, and covers how to report and deduct the penalty. CDs held inside an IRA follow the IRA’s tax rules instead.
The UK equivalent: fixed-rate savings bonds
In the UK, the closest product is a fixed-rate bond (or fixed-term savings account) from a bank or building society: a fixed rate for a fixed term, with limited or no early access. Fixed-rate cash ISAs work the same way inside an ISA wrapper.
Eligible deposits at UK-authorised banks, building societies and credit unions are protected by the Financial Services Compensation Scheme. The FSCS limit rose to £120,000 per eligible person, per authorised firm on 1 December 2025. Brands sharing one banking licence count as a single firm. Interest outside an ISA may be covered by your Personal Savings Allowance; see GOV.UK’s guidance on tax-free interest.
How to open a CD: a simple checklist
- Decide when you will need the money, and choose a term that ends on or before that date.
- Confirm the institution is FDIC- or NCUA-insured (or FSCS-protected in the UK).
- Compare APY, minimum deposit, penalty, and any call or renewal terms in writing.
- Check that your total deposits at that institution stay within insurance limits.
- Record the maturity date and set a reminder before any grace period ends.
Frequently asked questions
Can you lose money in a CD?
For a standard CD at an insured bank or credit union, your deposit is protected up to the insurance limit if the institution fails. You can still get back less than you deposited if an early withdrawal penalty exceeds the interest earned, or if you sell a brokered CD before maturity.
What happens when a CD matures?
You can usually withdraw the funds, transfer them, or let the CD renew. Check your pre-maturity notice and any grace period before it renews.
Are CDs better than a high-yield savings account?
Neither is better in every case. A CD suits money with a known future date; a high-yield savings account suits emergency funds and goals where you may need access.
Is CD interest taxable?
In the US, yes—CD interest is generally taxable income and is reported on Form 1099-INT. CDs inside an IRA follow IRA tax rules.
How much of my CD is insured?
The FDIC and NCUA standard limit is $250,000 per depositor, per insured institution, per ownership category—not per CD. In the UK, FSCS protects eligible deposits up to £120,000 per person, per authorised firm.
The bottom line
A certificate of deposit is a straightforward, insured way to earn interest on money you can leave untouched for a set period. The key is matching the term to your timeline, understanding the penalty before you sign, and watching the maturity date so your money does not roll over on terms you did not choose.
Not financial advice. Information is general and was checked against official sources as of October 2026; product terms change, so confirm details with your bank, credit union or a qualified adviser.
