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What is a Certificate of Deposit (CD): is it the Right Investment?

Garret Geitner Updated: February 18, 2024 • 12 min read
low risk investment

If you want to save money and still earn interest, a Certificate of Deposit (CD) account is a great option. What is a cd account and how does it work? With CD accounts, you can choose from different terms and rates to meet your financial needs. Opening a CD account is easy and stress-free, allowing you to start earning interest on your savings quickly.

What is a Certificate of Deposit

A certificate of deposit (CD) is a type of savings product that can earn more interest than a traditional savings account; this is because when you open a CD account, you agree that you will not touch the money for a certain period - this can be for as little as three months to periods as long as 5 or 10 years. Generally, the longer the term or amount of time, the higher the interest rate.

Certificates of deposit (CDs) are considered low-risk investments available in today's market. They offer a guaranteed return generally higher than traditional savings accounts and other savings products, such as money market accounts. CDs are backed by FDIC insurance and typically have a fixed term length, allowing investors to enjoy higher yields without taking on additional risk.

They generally require a large initial deposit but offer higher APYs than traditional savings accounts. CDs also provide security and stability, as the money is FDIC insured up to $250,000 per depositor.

Best CD Accounts

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Capital One
  • No minimum balance to open a CD account
  • Flexible interest payment options
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  • Minimum deposit: $500
  • 10-Day CD rate guarantee
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  • Minimum deposit: $2500
  • No accounts fee on our CD account
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Most Common Types of CDs:

  • Traditional CD: A standard type of CD where you deposit a lump sum of money for a fixed term and earn a guaranteed interest rate until maturity.
  • Callable CD: Allows the bank to "call back" or terminate the account before maturity, giving the bank the option to adjust the interest rate or withdraw the funds without penalty.
  • Jumbo CD: Requires a larger minimum deposit than traditional CDs and typically offers higher interest rates in return.
  • IRA CD: This is held in a tax-advantaged individual retirement account (IRA), allowing for potential tax benefits and retirement savings.

Common CD terms:

A CD term refers to the set amount of time your CD has to mature before you are allowed to remove the funds without risking paying a penalty fee or losing out on interest. When it comes to CD terms, there are "short-term" and "long-term" CD rates. Short-term typically refers to CDs with terms as short as one month all the way up to one year. Long-term CDs typically refer to CDs with terms from 4-5 years.

Keep in mind that the current rates described above are national averages across all financial institutions.

If you are looking for a higher APY, you may be able to find CDs with higher interest rates closer to somewhere between 4% and 5% when shopping online. Many online banking institutions are in a better position to offer CDs with higher rates of return.

CDs are attractive for investors

How do Certificates of Deposit Work?

Certificates of Deposit require you to deposit money for a fixed period and offer higher rates than regular savings accounts. This makes them an attractive option for those who want to earn more on their deposits without taking on additional risk. CDs also come with the added benefit of FDIC protection, so your money is safe even in a bank failure.

CDs attract investors looking for low-risk, high-yield investments. They offer competitive fixed rates and can be used for short-term or long-term investments, depending on your financial goals. With CDs, you can deposit your money in one lump sum or make periodic deposits over time to maximize returns.

Here is a step-by-step guide to how to choose the best CD account:

  1. Find an FDIC-insured financial institution that offers CDs: You can find CD options everywhere. From your local bank or credit union to online banks and brokerage firms, you have plenty of options to choose from when deciding where you want to open your CD. The main thing you will want to look for is that the financial institution you decide to work with is FDIC-insured. The FDIC insures up to $250,000 per depositor, per insured bank, for each account ownership category.
  2. Pick a CD type: There are many CD products to choose from. We will cover each one in more detail later in the article. However, the next step after finding an FDIC-insured institution you want to work with is choosing the type of CD you want. There are traditional, bump-up, step-up, liquid, zero-coupon, callable, brokered, high-yield, jumbo, IRA, add-on, and foreign currency CDs available.
  3. Choose a term and interest rate: Review all of the different terms and interest rates available for the CD product you want. Typically, the longer the term, the higher the interest rate.
  4. Decide how you want your interest paid: Some CDs allow you to take your interest payments as a monthly or annual payment. You can choose one of those options or choose to have the interest reinvested into the CD to earn compounding returns.
  5. Create and fund the account: Once you have found the CD you would like to open, then you will need to work directly with the financial institution and provide them with your name, address, contact information, your social security number, and any other information they need for the account. Last, you will need to make the initial deposit into the account via online or phone transfer or by writing a check.
  6. Wait until the maturity date: Once the term of the CD ends, then you are free to collect your initial deposit plus interest without penalty. At this point, you could decide to take your money or roll your account balance into a new CD to continue earning returns on your savings.

No matter which type of CD you choose and where you acquire it, it is important to take the necessary time to compare different CD options and rates and choose a term length that works best for your financial situation. You do not want to be put in a position where you need to take an early withdrawal. Early withdrawal penalties can be quite costly.


CD Rates

Several factors influence CD (certificate of deposit) account rates, including the term of the CD, the prevailing interest rate in the market, and the minimum deposit required by the financial institution.

  • A longer-term CD typically offers a higher interest rate. For example, a 5-year CD generally offers a higher interest rate than a 1-year CD. This is because long-term CDs can provide a higher rate of return because the bank can use the funds deposited for a longer period.
  • Prevailing market rates also influence the interest rate on CD accounts. When the Federal Reserve increases interest rates, CD rates will also rise. Conversely, CD rates may decrease if the Fed lowers rates.
  • Last, the minimum deposit for a CD can also affect the interest rate. Banks may offer higher rates for larger deposits, as it allows them to use the funds more effectively and generate a higher return on their investment.

A 12-month CD typically pays a higher rate than a 31-day or 6-month CD. The length of the term also affects rates. For example, a 2-year CD may offer a lower rate than 1 year, while 5 years may yield higher rates.
For example, if you open a 12-month traditional CD with an APY of 4% and an initial deposit of $5,000, you could expect to have $5,200 at the end of the 12 months.

Average Certificate of Deposit Rates

CD Type Average Rate
6-Month 3.60%-4.70%
1-Year term 4.15%-5.05%
3-Year 4.00%-4.50%%
4-Year term 3.00%-4.55%

Historical CD Rates


Types of CDs

There are 12 main types of CDs available to US consumers. Here is a breakdown of their features.

  1. Traditional: A one-time deposit that meets the minimum deposit requirements and earns a fixed rate of interest over a specified period of time. At the end of the term, you can cash out or roll the balance over into a new CD. There are penalties for early withdrawals.
  2. Bump-up: A one-time deposit with the option to increase the APY once during the CD term if benchmark interest rates increase while you own the CD.
  3. Step-up: A one-time deposit that automatically moves to a higher APR at certain intervals during the term.
  4. Liquid: A one-time deposit that allows you to withdraw money from the CD before the maturity date with no penalty. The APR for a liquid CD may still be higher than rates on high-yield savings and money market accounts. However, they will most likely be lower than other CD types.
  5. Zero-coupon: A one-time deposit that purchases the full value of a matured CD at a discounted rate. With a zero-coupon CD, you will not have the option to receive interest payments throughout the term. Instead, you will receive the full maturity value of the CD at the end of a term. For example, you purchase a 5-year $10,000 CD for $8,500. At the end of the 2 years, you would receive the $10,000 plus the accrued interest.
  6. Callable: A one-time deposit at a higher APY allows the bank to call back the CD before it reaches full maturity. In exchange for the highest interest rate, if rates drop significantly during the term of the CD, the bank can pay you out your original deposit and any accumulated interest and make you reinvest it at a different rate.
  7. Brokered: If you already have a brokerage account, you can use a broker to help you purchase a CD with a high APY. Make sure you ask your broker if the CD is FDIC-insured.
  8. High-yield: When financial institutions are looking for new customers, they typically will offer a high-yield CD. A high-yield CD is a traditional one with a special offer that includes an “above market” rate.
  9. Jumbo: A jumbo CD sometimes comes with a higher APY than a traditional one. However, they also require a much larger minimum deposit. Jumbo CDs typically require a minimum deposit of $100,000 or more.
  10. IRA CD: An IRA CD is a tax-advantaged individual retirement account that offsets risk by building retirement savings with guaranteed returns. This is a great way to diversify a retirement account. However, keep in mind that you will not be able to withdraw until you reach 59 and ½ years of age.
  11. Add-on: An add-on CD allows you to make additional deposits into the CD during the term. The limit to the number of additional deposits you can make depends on the financial institution.
  12. Foreign currency: Foreign currency CDs are where you purchase a CD in a foreign currency using dollars and then convert it back to dollars when it is time to cash out after the maturity date. These CDs are seen to have higher risk with potentially higher returns or losses because they are subject to global economic fluctuations.

Pros and cons of CDs

Before opening a CD, there are many factors you need to consider to ensure that a CD is the best savings option for your financial situation. These are some of the main advantages and disadvantages of opening a CD.



Safety: CDs are considered low-risk investments, often insured by the FDIC up to certain limits, making them a safe choice for preserving capital. Early Withdrawal Penalties: Withdrawing money before the CD's maturity date can lead to significant penalties, reducing overall earnings.
Guaranteed Return: CDs offer fixed interest rates, ensuring a predictable return on investment. Limited Liquidity: Accessing funds before the maturity date can result in penalties, reducing overall earnings.
FDIC Insured: Up to $250,000 per depositor, per insured bank, for each account ownership category, providing a safe investment option. Lower Yield Compared to Other Investments: The safety of CDs comes with lower interest rates compared to riskier investment options.
Variety of Terms: Investors can choose from a range of terms, typically from a few months to several years, to match their financial goals. Inflation Risk: The fixed interest rate might not keep up with inflation, potentially diminishing purchasing power over time.
Simple and Accessible: CDs are straightforward to open and understand, making them an accessible investment option for beginners. Interest Rate Risk: If interest rates rise after purchasing a CD, you're locked into the lower rate, missing out on higher earning potential.
No Market Risk: The return on a CD is unaffected by market fluctuations, offering a stable investment choice. Minimum Deposit Requirements: Some CDs require a significant minimum deposit, which might not be feasible for all investors.
Higher Rates: Typically, CDs offer higher interest rates than savings accounts, especially for longer terms.  
No Monthly Maintenance Fees: CDs typically do not come with monthly maintenance fees, making them a cost-effective investment option.  

Should I Open a CD?

If you have been saving money each month and are looking for a safe and secure place to keep it with higher returns than your bank’s traditional savings account, a CD may be a good option. Before opening a CD, make sure that you are positive that you can afford to keep the money locked away for a period of time. If for any reason you need to access the funds before the end of the term, you could be subject to penalties and/or lower returns on your initial investment.

Also, when considering opening a CD, you should know how to shop and compare different CD options for the best return on your investment.

Here are some CD features you may want to review and compare before choosing the right one.

  • Interest rate/APY: When reviewing different CD options, take a close look at the APY to see how much you can earn per year including compound interest.
  • Term: Compare term lengths to find the right term based on your savings goals. Remember, you cannot touch your money without penalty before the end of the term.
  • Minimum deposit requirement: Compare minimum deposit requirements to make sure you find the right CD based on the amount you wish to invest.
  • Early withdrawal penalty: Compare each CD option to see how much you could lose in fees if you need to access the funds before the maturity date.
  • Additional fees: Ensure that the CD options do not include additional maintenance or brokerage fees.

How Much Do I Need to Open a CD?

Most CDs require a minimum deposit of between $500 and $1,000, with some banks offering CDs with no minimum deposit requirements. Also, remember that if you are looking for a specific type of CD, like a jumbo CD, you may be required to make a minimum initial deposit of $100,000 or more.

Here are some of the minimum deposit requirements for a traditional CD from a few of the top banks in the US.

  • Ally Bank: None
  • Bank of America: $1,000
  • Capital One: None
  • Chase Bank: $1,000
  • Marcus by Goldman Sachs: $500

Where Can I Get a CD?

You can get a CD at most major banks, credit unions, brokerage firms, and online financial institutions. If you are looking for CDs with some of the highest APYs available, then you may want to consider purchasing a CD through an online financial institution.

Many online financial institutions are currently offering CDs with APYs as high as 4% or 5%, which is well above the national average. Just make sure that the CD you are purchasing is FDIC-insured.

CDs vs. Saving Accounts

The main difference between a traditional savings account and a CD is access to your money. Although both types of accounts discourage making withdrawals, a CD can actually penalize you for withdrawing money before the end of the term. With a savings account, typically you are allowed to make a certain number of withdrawals each month.

Another difference between a traditional savings account and a CD is that in exchange for locking your money into a CD for a specified period of time, a financial institution will typically give a higher rate of return on your investment.

Read the full list of differences


Certificates of deposit can make excellent investment opportunities for people looking for a secure place to put their money where it can earn more interest than a traditional savings or money market account. Currently, some of the best CD options can be found online through financial institutions like Capital One (1 year at 4.15%), Marcus by Goldman Sachs (1 year at 4.5%), and Fulbright (1 year at 5.25%).

You could also consider opening a CD at your local bank or credit union. However, remember that APYs at these institutions may be closer to the national average and much lower than online financial institutions. Either way, before opening a CD, you must be in a secure enough financial position that you know that you will not need the money for an extended period of time. Additionally, you will want to compare all of your CD options by reviewing the APYs, term lengths, minimum deposit requirements, and early withdrawal penalty amounts of each CD option to ensure you are making the best financial decision possible.



How Are CD Earnings Taxed?

CD earnings, also referred to as yields, are taxed as interest income by the IRS at your ordinary income tax rate.

Can you lose money on a CD?

If you invest in a non-insured or unregulated CD, you may take on more risk. The FDIC or NCUA does not back these types of CDs, and they may not have the same level of protection as traditional CDs.

Are CDs FDIC insured?

Yes, if the financial institution is FDIC-insured, then a CD deposit is insured for up to $250,000, like all other deposit accounts.

Written by Garret Geitner linkedin-icon

Garret Jacob is an experienced financial writer with experience covering topics in the mortgage industry, personal and business loans, real estate and more. Earlier in his career, Garret spent 13 years working in the supply chain and logistics industry.