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Certificate Of Deposit (CD)

Category — Bond Types
By Konstantin Vasilev Member of the Board of Directors of Cbonds, Ph.D. in Economics
Updated September 11, 2023

What is a certificate of deposit (CD)?

Are you searching for a reliable and secure way to grow your savings, but you are not ready to invest in the stock market? Look no further than a Certificate of Deposit or CD. A Certificate of Deposit is a proven financial tool that offers you a unique opportunity to earn interest on your hard-earned money while enjoying peace of mind.

So, what exactly is a Certificate of Deposit?

Imagine a savings product that combines the best of both worlds – a fixed lump sum and a guaranteed interest rate. That’s precisely what a Certificate of Deposit is all about. It’s a specialized savings account that lets you lock in a specific amount of money for a predetermined period, ranging from a few months to several years. In return, the bank rewards your commitment by paying you interest.

 Certificate Of Deposit (CD)

Types of CDs

  1. Traditional CD. The classic option. You make a one-time deposit for a specific fixed period and earn a fixed interest rate. You can choose to cash out at the end of the term or renew it for another period. Be aware of early withdrawal penalty probability.

  2. Bump-up CD. Perfect for a rising-rate environment. If rates increase during your CD term, you can request to "bump up" your rate to the current higher rate once. Keep in mind that the starting APY might be lower than that of a traditional CD.

  3. Step-up CD. Similar to a bump-up CD, but the rate automatically increases by predetermined intervals during the term. Evaluate the initial APY and potential rate increases.

  4. Liquid (No-Penalty) CD. Allows withdrawals before the term ends without a penalty, generally after an initial period. Offers better APY than savings accounts but lower than traditional CDs. Weigh liquidity against potential return.

  5. Zero-coupon CD. Bought at a discount, pays no interest during the term. Upon maturity, you receive the face value and accrued interest. Note that you’re taxed on the accruing interest annually.

  6. Callable CD. Feature a higher annual percentage yield, but the issuer can "call back" the CD before maturity. A risk in changing rate environments; consider economic conditions before opting for this type.

  7. Brokered CD. Sold through brokerage firms, potentially offering better rates. More liquid than bank CDs, but not all are FDIC-insured. Beware of callable brokered CDs and understand fees.

  8. High-yield CD. Traditional CD with competitive rates. Use resources like Bankrate to find the best deals.

  9. Jumbo CD. Requires a larger deposit and may or may not yield higher returns than traditional CDs.

  10. IRA CD. Held in a tax-advantaged retirement account. Ideal for risk-averse individuals seeking guaranteed returns within the account’s limits.

  11. Add-on CD. Lets you deposit more money during the term. Check the terms for the number of additional deposits allowed.

  12. Foreign Currency CD. Complex option tied to foreign currencies. Higher returns are possible, but currency fluctuations pose risks. Be cautious, as not all may be FDIC-insured.

How do certificates of deposit (CDs) work?

You choose the amount you want to invest and select the duration of your CD, tailoring it to your financial goals and timeline. As time progresses, your money accumulates interest, boosting your initial investment. You’re rewarded with your original deposit and the accrued interest at the end of the agreed-upon period.

It’s important to note that CDs come with a time-tested rule: to make the most of your investment, resist the urge to withdraw funds before the CD matures. While life’s uncertainties can’t be predicted, early withdrawal from a CD can result in penalty fees or a loss of interest earnings.

CDs stand as a unique breed of savings vehicles. Similar to the functionality of savings or money market accounts, they offer a means to allocate funds towards specific goals like a home down payment, a new vehicle, a grand vacation, or simply for parking excess funds that aren’t earmarked for daily expenditures. This financial tool ensures your balance grows with a set yield.

However, CDs introduce a distinct approach, unlike savings and money market accounts. They necessitate an initial deposit that remains untouched until its maturity date, whether that’s six months or a five-year span. While savings and money market accounts permit varying balances through deposits and up to six monthly withdrawals, CDs lock in your commitment. In exchange for this limitation on accessibility, CDs generally present higher interest rates compared to savings or money market accounts.

CD account details

Interest Rate. A secured interest rate is valuable as it offers a definite and foreseeable yield on your deposit within a specific timeframe. This rate remains constant, safeguarding your earnings from any potential bank modifications. Conversely, a fixed rate might not be advantageous if rates surge significantly later, limiting your chance to capitalize on more lucrative CD options.

Term. The term signifies the duration you commit to keeping your funds deposited to evade penalties (e.g., 6-month CD, 1-year CD, 18-month CD, etc.). The term concludes on the maturity date, marking the full maturation of your CD and permitting penalty-free fund withdrawal.

Principal. With a few exceptions for specialized CDs, this stands for the initial deposit amount you commit when initiating the CD.

Institution. Banks and credit unions where you initiate your CD dictates several terms of the arrangement, including early withdrawal penalties (EWPs) and whether your CD will automatically renew if you don’t provide alternate instructions upon maturity.


CDs vs. traditional savings accounts

Traditional savings account rates are typically lower variable interest rates, which can change based on market conditions. However, they provide the advantage of easy access to your funds whenever needed, subject to a certain number of allowable transactions per month. While savings accounts may have a monthly fee, they are favored for their flexibility and convenience, making them suitable for managing day-to-day expenses and maintaining liquid funds.

On the other hand, CDs present a different approach. They offer a fixed interest rate that tends to be higher than what savings accounts provide. However, CDs require a commitment to keep your money untouched until the CD’s maturity date. Accessing funds before the term’s end usually results in penalties. The potential for higher returns balances this limitation on liquidity. CDs are particularly attractive for those who have specific savings goals and can afford to lock in their funds for a defined period.

CDs vs. bonds

Certificates of deposit (CDs) and bonds share the status of being secure investment choices. Both offer moderate returns while minimizing the possibility of losing your initial investment. Functioning like interest-bearing loans, they cast you as the lender. These options often attract investors seeking slightly more lucrative alternatives to traditional savings accounts. However, they possess core differences that can guide certain investors toward a more suitable choice.

CDs vs. money market accounts

Money market accounts (MMAs) and certificates of deposit (CDs) both fall under the umbrella of insured by Federal Deposit Insurance Corp savings accounts that earn interest, yet they diverge significantly in terms of interest rates and accessibility.

CDs typically boast higher interest rates compared to money market accounts but come with a trade-off: they lock up your funds until a specified term concludes. During this period, which can span several months or years, early withdrawals often result in penalties, such as forfeiting a portion of earned interest. CD rates are often fixed, offering a predictable return on your investment.

Conversely, a money market account can provide more flexibility. They grant access to your funds and generally feature interest rates similar to standard savings accounts. Withdrawals from money market accounts are usually penalty-free, and their rates can change over time. Money market accounts sometimes offer check-writing capabilities and tend to require higher minimum balances. These accounts may also be referred to as money market savings or money market deposit accounts.

CD earnings taxation

The taxation of earnings from a Certificate of Deposit (CD) follows a specific framework. As interest accrues on your CD, the bank applies it to your account at regular intervals—typically monthly or quarterly. These earned interest amounts are clearly reflected in your statements. Comparable to the interest paid on savings or money market accounts, these earnings accumulate and are reported to you in the subsequent year. When you file your tax return, you’re required to report this interest as part of your income.

An important distinction often confuses individuals: the notion that CD earnings are taxed upon withdrawal of the funds, usually at maturity or earlier in the case of early withdrawal. However, this belief is not accurate. From a tax-reporting perspective, the interest you earn on your CD is subject to taxation when the bank credits it to your account. This holds true regardless of when you eventually withdraw the funds from your CD. Therefore, even if you can’t immediately use the interest earnings, they are still considered taxable income in the year they are credited to your account by the bank. This clarifies the timeline for CD earnings taxation and ensures accurate tax reporting based on the bank’s application of interest, not the actual withdrawal of funds.

How to choose a CD?

  1. Define Your Goals. Begin by evaluating your financial landscape and pinpointing your investment goals. Consider what you intend to achieve with your funds: a substantial purchase, a vacation, or a home down payment. Assess your timeframe and the amount you can comfortably commit.

  2. Term Length Matters. CD terms vary widely, ranging from short periods like a month to extended ones spanning years. Match the term length with your financial objectives. If you require funds in the near future, opt for a CD that matures when you need the money.

  3. Hunt for Competitive Rates. To maximize your earnings, research banks’ CD rates extensively. While national averages can be modest, exploring online banks can yield rates as high as 3% APY or more. Online banks often provide better rates due to their lower overhead costs.

  4. Affordable Opening Deposit. Different financial institutions stipulate varying minimum deposit requirements to open a CD. While some have no minimums, others ask for $500, $1,000, or more. Your choice should align with your budget, ensuring that the deposit remains invested for the entire term.

  5. Penalty Awareness. Keep an eye on early withdrawal penalties. Banks impose these penalties if you withdraw money before maturity. Thoroughly review the terms and conditions to understand penalty fees, which tend to increase with longer CD terms.

  6. Tailored CD Types. Explore CD options beyond traditional ones. For instance, a no-penalty CD might suit you if flexibility is key, even though it might offer a lower APY. Add-on CDs allow you to make additional deposits during the term, and IRA CDs offer tax advantages. Familiarize yourself with bump-up and step-up CDs, designed to capture higher yields as rates rise.

  7. Security First. Prioritize federally insured institutions backed by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA) Share Insurance Fund. This protection covers your deposits up to $250,000 per account ownership category. Ensure your chosen institution is covered by these safeguards for peace of mind.

How can I open a CD?

  1. Select the Right CD. Begin by comparing CD interest rates from various federally insured banks and credit unions. Consider the CD term, type, and ownership structure that aligns with your financial goals. CD terms range from a few months to several years, and you’ll need to decide how long you’re comfortable locking up your funds. Determine whether you want a regular CD or a specialty option like a no-penalty or add-on CD. Additionally, choose between a single or joint account, keeping in mind the insurance limits for FDIC and NCUA coverage.

  2. Choose Your Application Method. Depending on the bank, you can open a CD through online platforms, over the phone, or in-person at a branch. Some banks prefer online applications, while others may require branch visits. Online applications generally take around five to 20 minutes, but this can vary. Existing customers might find the process smoother. If you’re missing any information, a branch visit may be necessary, especially if the bank has physical locations.

  3. Prepare Identification. Be ready to provide one or two forms of identification, along with your U.S. residential address and contact details (phone number and email address).

  4. Select Interest Disbursement. Financial institutions typically offer two options: receive all the interest at the CD’s maturity (common) or opt for regular interest payments, like monthly or annually. If you prefer to maximize interest through compounding, choose to receive it at maturity.

  5. Initiate the Opening Deposit. Unlike savings accounts, CDs usually allow only one opening deposit. Deposit a predetermined amount and let it remain untouched until the CD matures. Funding methods may involve linking to another bank account and transferring funds, mailing a check, or depositing a check at a branch.

Are CDs safe instruments?

Certificates of Deposit (CDs) stand out as exceptionally secure savings and investment instruments, primarily due to two crucial factors:

To begin, the interest rate of a CD is fixed and guaranteed, ensuring absolute predictability. Your CD’s return remains unaltered and consistent, as stipulated in your deposit agreement with the bank or credit union. The assurance of receiving the agreed-upon return sets CDs apart from other investment options.

Furthermore, the safety net of federal insurance reinforces CD investments. Institutions offering CDs are protected by the same federal insurance that covers deposit products. The Federal Deposit Insurance Corp. (FDIC) offers insurance for banks, while the National Credit Union Administration (NCUA) safeguards credit unions. In the event of a rare bank failure, the U.S. government secures up to $250,000 of your deposited funds with an FDIC- or NCUA-insured institution. This safeguard ensures that even in such an improbable occurrence, your funds remain intact.

To optimize your funds’ safety, prioritize choosing an institution with FDIC or NCUA insurance coverage—most institutions offer this protection. Moreover, ensure your deposits don’t surpass the $250,000 limit in your name at any single institution. For those holding larger sums, it’s possible to maximize coverage by distributing funds across multiple institutions or accounts, possibly even involving multiple names like that of a spouse. This thoughtful approach ensures that your CD investments remain a steadfast and secure component of your financial portfolio.


  • What CD term should I choose?

  • How are CD earnings taxed?

  • What happens when a CD matures?

  • Can you lose money on a CD?

  • What if I need to withdraw my money early?

  • Are you taxed on a CD when it matures?

  • What is a CD ladder?

  • Should I buy multiple CDs?

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