A certificate of deposit is one of the most straightforward ways to earn a guaranteed return on your savings. You deposit money, agree to leave it alone for a set period of time, and the bank pays you a fixed interest rate in return. No market risk, no guesswork.

The tradeoff is access. Unlike a savings account, your money is locked in until the CD matures. Pull it out early and you’ll usually pay a penalty. But for money you know you won’t need for a while, a CD can be one of the better low-risk options available.

This guide covers how CDs work, the different types available, and how to decide whether one makes sense for your situation.

What Is a CD?

A certificate of deposit, or CD, is a type of deposit account that pays a fixed interest rate in exchange for leaving your money untouched for a set period of time. That period is called the term, and it can range anywhere from a few months to several years.

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When the term ends, your CD matures. At that point you get your original deposit back plus all the interest you earned. Most banks will automatically roll your CD into a new one if you don’t take action during the grace period after maturity, so it’s worth marking your calendar.

CDs are offered by banks and credit unions and are federally insured up to $250,000, just like a checking or savings account. The difference is the commitment. In exchange for locking your money in, you get a guaranteed rate that won’t change regardless of what happens to interest rates while your CD is open.

How Does a CD Work?

Opening a CD is similar to opening any other bank account. You choose a term, deposit your money, and the bank locks in your rate for the duration of that term. From that point, your balance earns interest at the agreed rate until the CD matures.

Interest on most CDs compounds daily and is credited to your account monthly or at maturity, depending on the bank. The longer your money sits, the more compounding works in your favor.

A few things worth knowing before you open one:

You Can’t Add Money After Opening: Whatever you deposit upfront is what earns interest. If you want to add more, you’d need to open a new CD.

The Rate Is Fixed: If interest rates rise after you open your CD, your rate stays the same. That’s a tradeoff. You get certainty, but you give up flexibility.

There’s a Grace Period at Maturity: When your CD matures, most banks give you a window, typically 7 to 10 days, to decide what to do with the money. If you don’t act, it usually auto-renews into a new CD at whatever the current rate is.

Early Withdrawal Comes With a Penalty: If you need your money before the term ends, you’ll pay a fee. How much depends on the bank and the term length.

Types of CDs

Most banks offer more than just a standard CD. Here’s a breakdown of the most common types and when each one makes sense.

CD type	Typical APY	Early withdrawal penalty	Flexibility	Best for
Traditional	Highest of all types	Yes	None	Savers who won’t need the money before maturity
No-penalty	Slightly lower than traditional	No	Can withdraw anytime after 7 days	Savers who want a guaranteed rate but may need access
Bump-up	Lower starting rate	Yes	One rate increase allowed	Savers who think rates will rise during the term
Step-up	Lower starting rate, rises over time	Yes	Automatic rate increases at set intervals	Savers who want predictable rate growth
Jumbo	Slightly higher than traditional	Yes	None	Savers with $100,000 or more to deposit
IRA CD	Varies by term	Yes	Subject to IRA rules	Conservative savers building retirement income

Traditional CDs

The most common option. You choose a term, lock in a fixed rate, and leave your money alone until maturity. Simple and predictable. The best rates are usually found at online banks like Sallie Mae and 

Marcus by Goldman Sachs, which tend to pay significantly more than large brick-and-mortar banks.

No-Penalty CDs

A no-penalty CD works like a traditional CD but lets you withdraw your money early without paying a fee. The tradeoff is a slightly lower rate. Marcus by Goldman Sachs offers no-penalty CDs in several terms, which makes them worth comparing if flexibility matters to you.

Bump-Up CDs

A bump-up CD lets you request a rate increase once during your term if rates rise. Banks typically offer this option on 12 or 24-month terms. The starting rate is usually lower than a standard CD, so you’re paying for the option to bump up.

Step-Up CDs

Similar to a bump-up CD, but the rate increases automatically at set intervals rather than requiring you to request it. With a step-up CD you know upfront what your rate will be at each stage.

Jumbo CDs

A jumbo CD requires a larger minimum deposit, usually $100,000 or more. In exchange, they sometimes pay a slightly higher rate. Worth looking into if you have a large sum to deposit, though the rate advantage over standard CDs has narrowed at many banks.

IRA CDs

A CD held inside an individual retirement account. You get the same fixed rate and FDIC protection as a standard CD, but with the tax advantages of an IRA.

CD Rates: What to Expect

CD rates are set by individual banks and credit unions, but they’re heavily influenced by the Federal Reserve’s benchmark interest rate. The national average 12-month CD rate is 1.65% as of June 2026, according to the FDIC. But that average is weighed down by the low rates that traditional brick-and-mortar banks pay. The best rates right now are hovering around 4% APY, according to Bankrate, and they’re mostly found at online banks.

Sallie Mae is currently offering 3.90% APY on its 12-month CD and 4.00% APY on its 15-month CD. Marcus by Goldman Sachs has high-yield CDs paying up to 4.05% APY. For a current look at the best rates across different terms, check out our best CD rates page, which we keep updated.

Term Length

Longer terms don’t always pay more. In the current environment, shorter-term CDs of 6 to 12 months are often paying as much or more than longer terms. Worth checking before you commit to a 3 or 5-year CD.

Deposit Size

Some banks offer better rates for larger deposits. Jumbo CDs sometimes pay a slightly higher rate, though the gap has narrowed.

Institution Type

Online banks consistently pay more than traditional banks. Credit unions can also be competitive. The highest 1-year CD rate offered by credit unions is 3.37%, more than 4 times the 0.84% rate offered by national banks, according to WalletHub.

Rate Environment

CD rates have been trending down since late 2023, following a series of Federal Reserve rate cuts in 2024 and 2025. Rates have stabilized somewhat in 2026, with some projections pointing to a possible rate increase later in the year.

CD Early Withdrawal Penalties

When you open a CD, you agree to leave your money in for the full term. Break that agreement and most banks will charge you an early withdrawal penalty. Understanding how these work before you open a CD is important because in some cases the penalty can wipe out a significant chunk of the interest you’ve earned.

Most early withdrawal penalties are calculated as a set number of days or months of interest, not a flat dollar fee.

Bank	CD term of 12 months or less	CD term over 12 months
Sallie Mae	90 days of simple interest	180 days of simple interest
Marcus by Goldman Sachs	90 days of interest	180 days of interest (up to 5 years); 270 days for 5+ years
Discover	3 months of simple interest	6 months of simple interest (up to 4 years); 18 months for longer
Synchrony Bank	90 days of simple interest	180 days of simple interest
Typical brick-and-mortar bank	90 to 180 days of interest	180 days to 1 year of interest

Here’s a general idea of what penalties look like across different term lengths:

• Short-term CDs (under 12 months): typically 90 days of simple interest
• 12-month CDs: often 90 to 180 days of interest
• Longer-term CDs (2 to 5 years): commonly 180 days to a full year of interest

One thing worth knowing: if you withdraw early before you’ve earned enough interest to cover the penalty, the fee can dip into your original deposit.

For a full breakdown of how penalties work, check out our guide to CD early withdrawal penalties.

No-Penalty CDs

A no-penalty CD works like a traditional CD with one key difference: you can withdraw your money before the term ends without paying a fee. That makes them a useful middle ground between a standard CD and a high-yield savings account.

The tradeoff is rate. No-penalty CDs typically pay a bit less than traditional CDs of the same term. You’re giving up some yield in exchange for the flexibility to get your money out if you need it.

Most no-penalty CDs come in shorter terms, typically 7 to 13 months. Marcus by Goldman Sachs offers no-penalty CDs in 7-month, 11-month, and 13-month terms, which gives you some flexibility on timing.

One thing to watch: some no-penalty CDs have restrictions on how soon after opening you can withdraw, often requiring you to wait at least 7 days. And in most cases, you have to withdraw the full balance rather than a partial amount.

CD Laddering

A CD ladder is a strategy where you split your money across multiple CDs with different maturity dates instead of putting everything into one CD. As each CD matures, you either use the money or roll it into a new CD, typically at the longest term in your ladder.

Here’s a simple example. Instead of putting $20,000 into a single 5-year CD, you split it into 5 equal amounts and open a 1-year, 2-year, 3-year, 4-year, and 5-year CD with $4,000 each. When the 1-year CD matures, you roll it into a new 5-year CD.

CD laddering works best when longer-term CDs pay meaningfully more than shorter ones. In a flat rate environment, the strategy is less compelling.

For a full walkthrough of how to build a CD ladder, check out our guide on what is a CD ladder and how do I build one.

CDs vs. Savings Accounts

CDs and savings accounts are both safe, FDIC-insured places to keep your money. The right choice comes down to 2 things: how long you can leave the money alone and how much certainty you want about your rate.

A savings account is flexible. You can deposit and withdraw money whenever you need to. The tradeoff is that the rate is variable.

A CD locks your money in for a fixed term but gives you a guaranteed rate in return. If rates fall during your term, you keep your higher rate. If rates rise, you’re stuck with the lower one.

A practical way to think about it: if you have money you know you won’t need for 12 months or more and you want to lock in a guaranteed rate, a CD makes sense. For your emergency fund specifically, a savings account almost always wins since you need that money to be accessible without penalty.

CDs vs. Money Market Accounts

CDs and money market accounts are often compared because they both tend to pay more than a standard savings account. But they work differently in ways that matter.

The biggest difference is access. A money market account lets you deposit and withdraw money freely. A CD locks your money in for a fixed term.

For people with larger cash balances, using both makes sense. A money market account for cash you might need access to, and a CD or CD ladder for money you’re confident you can set aside.

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Taxes on CD Interest

CD interest is taxable income. The IRS treats it the same as interest earned on a savings account, which means you owe federal income tax on whatever you earn in a given year, whether you withdraw the money or not.

On rates, CDs generally have the edge, especially for longer terms. Money market account rates are variable and can drop at any time. CD rates are fixed for the full term.

That last part catches a lot of people off guard. If you open a 3-year CD and leave it alone until maturity, you still owe taxes on the interest each year as it accrues. Your bank will send you a 1099-INT form each year.

IRA CDs

If your CD is held inside a traditional IRA, you won’t owe taxes on the interest until you withdraw the money in retirement. If it’s in a Roth IRA, qualified withdrawals are tax-free entirely.

Penalties Reduce Your Taxable Income

If you pay an early withdrawal penalty, you can deduct that amount from your taxable income, even if you don’t itemize.

For a full breakdown of how CD interest is taxed, check out our guide on do you pay taxes on CD interest.

How to Open a CD

Opening a CD is one of the simpler financial tasks you can do. Most banks let you do it entirely online in about 15 minutes.

Decide on Your Term and Amount

Before you apply anywhere, think through how long you can realistically leave the money alone and how much you want to deposit.

Shop for the Best Rate

Online banks like Sallie Mae and Marcus by Goldman Sachs consistently offer more competitive rates than brick-and-mortar institutions. Our best CD rates page is a good starting point.

Check the Minimum Deposit

Marcus requires $500 to open a CD. Sallie Mae requires $2,500. Some banks have no minimum at all.

Gather What You Need

Most banks will ask for a government-issued ID, your Social Security number, and your bank account information for the initial transfer.

Read the Terms Before You Commit

Before you submit, review the early withdrawal penalty, the maturity date, and whether the CD auto-renews.

Set a Maturity Reminder

Put the maturity date in your calendar. Most banks give you a grace period of 7 to 10 days after maturity to decide what to do.

The Bottom Line

A CD is one of the simplest ways to earn a guaranteed return on money you don’t need immediate access to. The national average 12-month CD rate is 1.65% as of June 2026, but the best rates are hovering around 4% APY at online banks like Sallie Mae and 

Marcus by Goldman Sachs. Sticking with the rate at your current bank without shopping around is one of the most common and costly mistakes CD savers make.

Before you open one, be clear on your timeline. If there’s a real chance you’ll need the money before the term ends, a no-penalty CD or a high-yield savings account is probably a better fit.

And if you’re not sure how to structure things, CD laddering is worth looking into. It gives you the higher rates of longer-term CDs without tying up all your money at once.