What is a Certificate of Deposit (CD)?

Written by Kim PinnelliUpdated: 3rd Nov 2022
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A CD is like a savings account with a twist. It’s a good option for people looking to earn more interest than a savings account offers but who can tie up their funds for a specified period.

Keep reading to find out what a CD is, explore the different types of CDs, and more. This quick guide will help you take clear next steps.

What is a Certificate of Deposit (CD)?

A certificate of Deposit (CD) is a bank deposit you make for a predetermined period and at a fixed rate of interest.

You agree to leave the money for the term, and the bank agrees to pay a certain interest rate if you leave the funds. Most CDs last for 3 months to 5 years.

How Do CDs Work?

A Certificate of Deposit is a timed deposit you make with a bank. You agree to leave the funds in the account for the stated period, and in exchange, you’ll earn the stated interest rate.

Some CDs pay interest monthly, quarterly, or annually. If you leave the interest unpaid until maturity, your money will grow the fastest with compounding. A CD is like a savings account – but you earn a fixed rate of interest for a predetermined amount of time.

You have to leave the funds in the account until maturity, and if you don’t, you’ll pay a penalty, which usually equals a couple of months of interest.

CD Rates

CD rates stay the same for the duration of the certificate. For example, if you invest in a 1-year CD, you earn the same APY for the entire year no matter how rates change.

CD Terms (Time Frame)

The term is how long you agree to tie up your funds. Using the 1-year CD example from above, you agree to keep your funds in the CD for 1 year.

If you withdraw earlier, you could pay a penalty for early withdrawal.

CD Maturity Date

On or around the CD maturity date, you have three options:

  • Withdraw the funds (no penalty)
  • Let the funds roll over into an identical CD for another term
  • Roll over the funds into a CD with a different term

CD Penalty

If you withdraw the funds early, you may pay a penalty. Read the fine print before you invest in a CD.

Some banks charge a week or so of interest and others charge as much as 12 months of interest as a penalty.

>> More:  How to Open a CD

Types of Certificate of Deposits (CDs)

  • Traditional CD: Banks offer CDs for stated periods and interest rates. For example, they may offer a 1-year CD at 1.05%. If you leave your money untouched for 1 year, you’ll earn 1.05% interest on your deposit.
  • High-Yield CD: Like a high-yield savings account, a high-yield CD pays the best interest rates in the market. They usually have low minimum balance requirements, but like high yield savings accounts, they are available online.
  • Jumbo CD: If you have a large amount of money to deposit, a jumbo CD offers even better rates for the same terms. You’ll have to commit a larger amount of money but will get a greater return on your investment.
  • No-Penalty CD: CD penalties can eat up your profits if you need the funds early. A no-penalty CD gives you peace of mind because you can withdraw funds at any time without penalty, but they pay lower rates.
  • Step-Up CD: A step-up CD works like a traditional CD, paying a fixed interest rate for a specified term. But, once or twice throughout the term, the bank will bump your rate up.
  • Liquid CD: A liquid CD is just like a no-penalty CD. You can withdraw funds as needed, but I don’t recommend it since it reduces the interest you’ll earn.
  • Brokered CD: Your bank isn’t the only place to buy CDs. Your investment broker sells them also. If you invest through your broker, it’s a brokered CD.
  • IRA CD: You can include a CD in your IRA account. Any interest you earn stays in your IRA and remains tax-deferred until you withdraw them during retirement.

Where Can I Get a CD?

You can get CDs at any bank, including your local bank, but there are a few top banks to consider if you want the best CD rates.

#1. CIT Bank

CIT Bank offers a large selection of CDS, including:

  • Term CDs
  • No-penalty 11-month CDs
  • Jumbo CDs
  • Ramp-up CDs

CIT Bank gives many opportunities to save for your long-term goals and for large deposit amounts or short-term and/or liquid.

>> More: CIT Bank Review 

#2. Axos Bank

Axos Bank offers APYs up to 0.20% on each of its CD terms ranging from 3 months to 5 years. All deposits are FDIC-insured and only require $500 to open.

>> More: Axos Bank Review 

#3. Ally Bank

Ally Bank offers a variety of CDs, including:

  • High-yield CDs
  • Raise your rate CD (step-up CD)
  • No penalty CD

Ally Bank offers a variety of terms and offers IRA CD options too.

>> More: Ally Bank Review

Pros and Cons of CDs


  • Earn a rate higher than a savings account pays
  • Offers a fixed rate for the term of the CD
  • Offers FDIC insurance for protection
  • Forces you to save since withdrawing early incurs a penalty


  • Your money isn’t liquid, and you have to pay to access your money early
  • CDs earn less than stocks or bonds (typically)
  • You’re stuck with the same rate even if interest rates increase

Who Should Use Certificate of Deposits?

Anyone looking for a fixed rate of return but with insurance and a guaranteed rate of return should consider a CD.

While the rate of return is almost always lower than a stock or bond investment, it’s a nice guarantee.

Alternatives to CDs

  • High-Yield Savings Accounts: Online high-yield savings accounts pay interest rates higher than standard savings accounts and require low minimum deposits. You can access the funds whenever you want without penalty.
  • Long-Term Bonds: Long-term bonds tie up your money longer, but you may earn higher interest rates. You’ll usually tie up your funds for a few years versus a few months.
  • Short-Term Bonds: Short-term bonds have shorter maturity periods but also have lower rates of returns. They’re similar to CD rates but with a higher risk.
  • Money Market Accounts: A money market account is a cross between a savings and checking account. They pay higher APYs than savings accounts, and you have access to your funds when you want. The rates are usually lower than CDs though.

Can You Lose Money with a CD?

As long as you invest in a CD at an FDIC-insured bank, you can’t lose. If the bank goes out of business, your deposits are covered up to $250,000.

Are CDs a Good Investment?

CDs earn you more money than a savings account, so in that aspect they are good. But they shouldn’t be your only investment.

Diversify your funds by investing in stocks, bonds, real estate, and cash (CDs) for the best results.

>> More: What Is a CD Ladder?

When Should I Get a CD?

Getting a CD at any time is a great way to increase your earnings. The best time to get a CD is when you’ve done the following:

  • Saved an emergency fund (3 – 6 months of expenses)
  • Maxed out your employer match on your 401K
  • Contributed the maximum allowed amount on your IRA
  • Paid off high-interest debt

If you still have money ‘left over’ to invest, a CD is a great way to keep it safe while allowing it to grow.

How Are CD Earnings Taxed?

Any interest you earn on a CD (not your deposit) is taxable income, and you must claim them on your taxes.

They aren’t capital gains like you’d earn on stocks but are added to your regular income.

What is a CD Ladder?

A CD ladder is a strategic way to spread out your deposit over five or more CDs to stagger the maturity dates.

The most common CD ladder strategy is to buy a 1, 2, 3, 4, and 5-year CD, all in equal increments. When each CD matures, you roll it over into a 5-year CD.

This gives you a grace period upon each CD’s maturity if you need the money, or you can roll it all over into a 5-year CD, maximizing your earnings.

Are CDs Safe?

CDs are as safe as your savings account as long as you buy them from an FDIC-insured bank.

Are CDs Insured?

As long as you invest in a CD at an FDIC-insured bank, your deposits are insured up to $250,000.

Bottom Line: What is a CD?

A CD is a great way to diversify your funds and earn interest on funds you’d leave as cash.

If you can’t handle tying funds up for too long, focus on shorter-term CDs, but the longer-term you choose, the higher interest rates you earn.

Kim Pinnelli
Kim Pinnelli

Kim Pinnelli is a Senior Writer, Editor, & Product Analyst with a Bachelor’s Degree in Finance from the University of Illinois at Chicago. She has been a professional financial writer for over 15 years, and has appeared in a myriad of industry leading financial media outlets. Leveraging her personal experience, Kim is committed to helping people take charge of their personal finances and make simple financial decisions.