A certificate of deposit (CD) is a type of savings product offered by financial institutions that allows you to lock in an interest rate (usually expressed as an APY) for a set amount of time. You typically cannot deposit more money, nor withdraw the funds from the CD during the set term without paying a penalty to do so.
The trade-off for locking in your cash for a specific period of time is that you can earn higher yields on a CD than you can with a savings account. Still, in order to cash in those benefits, you need to be sure that you won’t need the cash over the course of the CD term.
Annual percentage yields (APYs) and account details are accurate as of January 29, 2024.
How a CD works
When you open a CD you’ll choose a term (typically expressed in a number of months) that meets your savings needs, and deposit a set amount of money on which you want to earn interest. This money will usually earn a fixed APY for the duration of the CD.
Unless you opt for a certain type of CD, you won’t be able to add more funds to the CD. The better option, then, is to open another CD, perhaps even creating a CD ladder. Likewise you won’t be able to withdraw your principal without forking over a fee unless you selected a no-penalty CD.
CD terms often range between three months and five years, but some banks have CDs as short as one month and as long as 10 years.
As the CD nears its maturity, you’ll receive a notification from your financial institution that your CD is about to expire. You’ll typically have 10 days to withdraw the funds, or else the CD will automatically renew with the same term. If interest rates have changed your new CD will be at current market rates.
Types of CD accounts
Each bank will offer its own specific terms and rules, here are some common CD types you may find.
High yield: High-yield CDs often pay more than the average CD. You’ll often find these types of CDs at online banks. For example, the 18-month term on the Ally Bank High Yield certificates of deposit currently earning 4.45% APY.
No-penalty: No-penalty CDs allow you to break the CD before maturity without a penalty. Typically, you’ll get a slightly lower interest rate on these than you would on high-yield CD from the same bank. However, they are great if you’re not comfortable locking your money away.
Raise your rate: If interest rates rise during the term of your CD, raise your rate CDs allow you to increase your rate to the new higher rate once per term.
Jumbo: Jumbo CDs have large minimum deposit requirements, often $100,000. Most do not have maximum deposit limits but those that do typically cap it at $1 million.
How to choose the CD that’s best for you
When shopping for a best CD for you there are a few terms you’ll want to look out for:
Term: Consider how long it will be until you’ll need this money. To avoid fees, find a term that is equal to or less than that amount of time you need to save for. There are a wide variety of terms so if you aren’t finding the perfect term, try a different bank.
APY: Compare APYs across several banks to ensure you are getting the highest APY available for your desired term.
Withdrawal penalty: While you probably aren’t planning to break the CD, no one can predict the future and you might find yourself in a situation where you have no choice. It’s good to be aware of the withdrawal penalty.
What if I need to withdraw from a CD early
Financial situations can change, such as job loss or medical bills. If you need to withdraw money from a CD before it matures you will likely pay a penalty of a few months interest.
This usually isn’t a very large amount and if the choice is breaking the CD or putting expenses on a credit card you can’t pay off then the CD penalty is likely the cheaper option.
Keep in mind that many banks do not allow partial withdrawals. If you just need a portion of the funds you can open a new CD with the remaining money, but your interest rate is likely to be different.
Are CDs worth it?
CDs definitely have a place in financial planning and are worth using when they fit your goals.
If you are looking for a safe investment with a fixed interest rate and can lock the funds up for a predetermined time frame then, yes, CDs are worth it.
However, if you may need the money at a moment’s notice, for example, your emergency fund, then you’ll do better in a high-yield savings account where you have free access to your money at any time.
CDs vs. Savings accounts
While CDs lock your money away for a fixed term and interest rate, savings accounts do not.
With a savings account, you are free to make deposits and withdrawals as needed. The only limit you will find is that many banks only allow six withdrawals per month from savings accounts. This rule is a leftover from a regulation that was suspended in 2020.
The APY for CDs and savings accounts are likely similar, especially on short-term CDs, however keep in mind that CDs have fixed interest rates while savings accounts APYs are variable. If you are looking for guaranteed rates, the CD might be the way to go here.
Frequently asked questions (FAQs)
Yes, CDs are FDIC insured up to $250,000 per owner per account type. If you have more than $250,000 to put into CDs consider opening CDs at several different banks so that you don’t deposit more than can be insured.
If you are concerned about your coverage use this FDIC calculator to ensure that your funds are protected.
A CD ladder is a strategy used to spread your cash through several CDs with different terms so you always have some money becoming available, and take advantage of higher interest rates.
Say you have $10,000 you want to invest. You could split up that amount evenly amount CDs with terms of three, six, nine and 12 months. Once the three-month CD matures, you then purchase another 12-month CD, and enjoy the relatively high interest rate.
Receiving a steady stream of income helps you to manage your cash flow, says Daren Blonski, managing principal, Sonoma Wealth Advisors, a California-based wealth management firm.
“You should always rotate your money and always have something come due,” he said.
When a CD matures you’ll receive a notification from your bank letting you know your options. You can withdraw the funds and interest, you can open a different CD with a new term or you can let your current CD roll over with the same term length but likely a different interest rate.
The APY for the roll-over CD will likely be different due to interest rate changes while your old CD was in place. If you are happy with the length of your CD and the new interest rates then there is no harm in letting the CD roll over.
