What Is a Certificate of Deposit (CD) Account?

Updated: June 21, 2024

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A certificate of deposit (CD) account is a savings account that holds a fixed amount of money for a fixed period, typically at a higher interest rate than regular savings accounts. The issuing bank or credit union pays interest on the deposit until the CD reaches its maturity date.

If you hold your CD until maturity, you’re guaranteed your initial investment plus interest. But if you withdraw before the term ends, a penalty usually applies. CDs are ideal if you want to securely save a lump sum and don’t require immediate access to those funds.

Key Takeaways

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CDs typically offer higher interest rates compared to regular savings accounts.

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CDs provide a safe way to earn a guaranteed return compared to other investments.

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While there are different types of CDs, they usually have fixed terms, meaning you agree to leave your money for a set period.

Understanding CD Accounts

A certificate of deposit (CD) is a contract between you and a bank where you deposit a sum of money for a fixed term, as short as three months or as long as five to ten years in some cases. CD accounts require you to leave your money untouched until the withdrawal date to earn interest. The bank pays you interest on this amount. CD accounts are generally available through banks and credit unions.

How CD Accounts Work

A CD account requires you to specify the term and then make an initial deposit. The interest rate available to you will depend on the length of the term and the amount you deposit — generally, higher deposits will yield higher interest rate opportunities.

Some key features of a CD account include:

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    Interest Rate

    This is the rate at which your money grows, fixed for the term. The interest rate for a CD is typically higher than a traditional savings account.

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    Term

    The term is the period of time you agree to leave your money in the account.

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    Opening Deposit

    This is the initial amount you need to put down to open the CD.

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    Early Withdrawal Penalty

    You typically pay a penalty if you withdraw funds before the CD matures.

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ARE CD ACCOUNTS FDIC-INSURED?

CDs offered by banks are FDIC insured up to $250,000 per depositor. NCUA insurance provides similar protection for CDs offered by credit unions.

How CD Rates Are Determined

CD rates are mainly influenced by the Federal Reserve's federal funds rate, which sets a benchmark for interest rates in response to the broader economic environment. The actual CD rates offered to you will vary based on the financial institution, term length, CD type and deposit amount.

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HOW TO MAXIMIZE CD RATES

To maximize your CD rate, shop around, look for promotional rates, avoid early withdrawals and deposit as much as you can.

What Are the Types of CDs?

There are a variety of CD (certificate of deposit) types available to you, depending on your needs and your investment goals. Banks and credit unions aren’t required to offer every kind, so it’s helpful to understand what you want out of your investment before you start — and to shop around at different banks — to find the right product mixture for you.

CD Type
Description

Traditional CD

Fixed interest rate and term length

High-Yield CD

Offers a higher interest rate than traditional CDs

Bump-Up CD

Allows you to increase the interest rate once during the term

Step-Up CD

Interest rate increases at regular intervals

Liquid or No-Penalty CD

Allows early withdrawal without penalty

Pros and Cons of CD Accounts

Overall, CD (certificate of deposit) accounts are insured investment tools that offer access to higher interest rates than traditional savings accounts. But you lose access to your money until the CD matures, which requires diligence and tight financial planning.

We highlight more of the benefits and drawbacks of CDs below.

Pros of CD Accounts

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    Higher Interest Rates

    CDs typically offer better interest rates than regular savings accounts.

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    Safety

    CDs are FDIC-insured up to $250,000 per depositor and NCUA-insured for credit unions.

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    Predictable Returns

    The fixed interest rates of CDs provide a guaranteed return.

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    Diverse Options

    The different types of CDs available can meet varying financial needs.

Cons of CD Accounts

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    Limited Liquidity

    CD funds are locked up for the term length, with penalties for early withdrawal.

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    Inflation Risk

    The fixed interest rates of CDs may not keep up with inflation, diminishing your final returns.

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    Opportunity Cost

    The money tied up in a CD can't be invested elsewhere if better opportunities arise.

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HOW ARE CDS TAXED?

The interest earned on CDs is taxed as ordinary income at your individual federal income tax rate, which can range from 10% to 37%, depending on your taxable income and filing status. In addition to federal income taxes, you may also be subject to state and local taxes on your CD interest, depending on where you live.

CD Accounts vs. Other Savings Accounts

When choosing where to place your savings, compare CDs and savings accounts to see which best suits your needs. The best for you will depend on how you want to use the money and how long you feel comfortable leaving it untouched.

High-Yield Savings Account vs. CD Account

Both high-yield savings accounts and certificates of deposit are interest-earning accounts, but they work differently. A high-yield savings account offers a higher interest rate than traditional savings accounts.

High-yield savings accounts offer greater liquidity, but their interest rates are variable. This means the rate can fluctuate at any time, depending on market conditions.

CDs have fixed interest rates that are locked in for a set term. This provides certainty about your earnings but also means that you can't access your money without penalty until the term ends. You also can’t invest the funds elsewhere if better opportunities arise without losing money.

Feature
High-Yield Savings
CDs

Initial Deposit

Low or no minimum

Minimum deposit required

Interest Rate

Variable

Fixed

Withdrawal

Easily accessible

Restricted until maturity

Penalties and Fees

Limited penalties, if any apply

Early withdrawal penalties may apply

Insurance

FDIC insured up to $250,000

FDIC insured up to $250,000

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CAN YOU ADD MONEY TO A CD?

Typically, you can’t add money to a CD after you’ve made your initial deposit. At maturity, you’ll have a grace period to add or withdraw funds.

There is an exception for add-on CDs. Add-on CDs are a special type of CD that allows you to add money to your initial balance by making an additional deposit during your CD’s term. Add-on CDs aren’t as common as regular CDs; not all banks and credit unions offer them.

Money Market Account vs. CD Account

Both CDs and money market accounts (MMAs) usually offer higher interest rates than traditional savings accounts. MMAs allow up to six transactions per year and have variable rates, whereas CDs require you to wait for the term to mature before accessing your deposit to avoid penalties.

Feature
MMAs
CDs

Initial Deposit

Typically higher than savings accounts

Minimum deposit required

Interest Rate

Variable, tied to market interest rates

Fixed

Withdrawal

Limited withdrawals per month, may have fees

Limited penalty-free withdrawals

Penalties and Fees

May have fees for exceeding withdrawal limits

Early withdrawal penalties may apply

Insurance

FDIC insured up to $250,000

FDIC insured up to $250,000

How to Open a CD Account

A CD account can be a smart financial move, especially if you have a sum of money you don’t anticipate needing soon. If you expect a drop in interest rates, locking in a good rate with a CD now can be an excellent strategy to secure your return on investment.

Opening a CD account takes just a few simple steps:

1
Research

Compare rates, terms and the different kinds of CDs available from different banks and credit unions.

2
Choose a CD

Select the CD type and term that best fits your financial goals.

3
Apply

Complete the application process online or at a local branch.

4
Fund the CD

Deposit the required amount to open the CD.

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HOW TO AVOID SCAMS WHEN CHOOSING A CD

When choosing a certificate of deposit, avoid scams by taking the following actions:

  • Confirm the Institution: Ensure it’s an FDIC-insured bank or NCUA-insured credit union. Don’t open a CD if you can’t guarantee the funds will be insured in case of a bank failure.
  • Be Wary of Third-Party Brokers: They may mislead or scam you. When possible, work directly with your institution of choice or a preferred broker they trust.
  • Understand Interest Payments: Some CDs have variable rates or accrue interest only at maturity, so make sure you understand how your funds will earn you money.

FAQ About CD Accounts

We answered some of your commonly asked questions about CD (certificate of deposit) accounts.

What happens if you withdraw early from a CD account?
How much money do you need to start a CD account?
Are CD rates going up or down?
What is a CD ladder?
What are the requirements for a CD account?

About Alvin Yam, CFP


Alvin Yam, CFP headshot

Alvin Yam is a certified financial planner (CFP) with over 15 years of experience working with individuals and corporations. Before founding Paraiba Wealth Management, he was a director at HSBC and a financial consultant at Charles Schwab. Yam is MoneyGeek's expert consultant on wealth management and personal banking.

Yam earned his bachelor's degree in political science from the University of California, San Diego and his Master of Business Administration from Loyola Marymount University.


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Shield Insurance

The content on this page is accurate as of the posting/last updated date; however, some of the rates mentioned may have changed. We recommend visiting the lender's website for the most up-to-date information available.

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