What Is a Certificate of Deposit (CD)?
A CD is a time deposit offered by banks and credit unions. You agree to leave a fixed sum on deposit for a set period — the term — in exchange for a guaranteed interest rate. At maturity, you receive your original deposit plus all accrued interest.
FDIC deposit insurance generally covers up to $250,000 per depositor, per FDIC-insured bank, for each account ownership category — making CDs one of the safest places to park cash. The trade-off is liquidity: you can't touch the money without paying an early withdrawal penalty, which is typically a few months of interest.
APY vs. Interest Rate on a CD
Banks are required by the Truth in Savings Act to advertise CDs using APY (Annual Percentage Yield), which is the effective annual rate after compounding is factored in. This makes it easy to compare offers across banks — a 4.50% APY at one bank is directly comparable to a 4.50% APY at another, regardless of whether each bank compounds daily, monthly, or quarterly.
The underlying nominal rate (APR) is lower than the APY when compounding occurs more than once per year. For example, a 4.50% APY compounded daily corresponds to a nominal rate of about 4.40%. Always compare CDs by APY, not the nominal rate. The APY Calculator converts between the two for any compounding frequency.
CD Terms and Typical Penalties
CD terms range from as short as 1 month to as long as 10 years, though 3 months to 5 years covers the most common options. Rate and term don't always move together — sometimes short-term CDs pay more than long-term ones. That inverted pattern held for much of 2023 and 2024; in late September 2026 the best nationally available rates differed by only about a quarter point between 6-month and 5-year terms.
Early withdrawal penalties are the main downside of CDs. Typical penalties:
| CD Term | Typical Penalty |
|---|---|
| Under 6 months | 1–3 months of interest |
| 6–12 months | 3–6 months of interest |
| 1–2 years | 6 months of interest |
| 2–5 years | 6–12 months of interest |
If the penalty is large enough and you withdraw early enough, you could end up with less than your initial deposit. This calculator's penalty estimator shows the math clearly before you commit.
Choosing a CD Term
Longer terms don't automatically pay more. On October 21, 2026, the best nationally available rates in Bankrate's table were 4.40% for 6 months, 4.60% for 1 year, 4.80% for 2 years, 4.85% for 3 years, 4.70% for 4 years, and 5.00% for 5 years. When rates are that close, the decision is mostly about when you need the money and whether you want to lock in today's rate. Each term below uses a $10,000 deposit at 4.50% APY unless noted.
6-month CD
Six months fits a known expense about half a year away: a closing date, a tuition bill, a planned purchase. $10,000 at 4.50% earns $222.52. It is also the least painful way to try a CD for the first time.
At this length the real alternative is a no-penalty CD, which lets you withdraw everything without forfeiting interest but usually pays somewhat less. A typical 3-month interest penalty on a standard 6-month CD costs about $112.50 if you break it, and withdrawing in the first three months can dip into principal. If there's a real chance you'll need the money early, the no-penalty version costs a small, known amount to remove a larger, unknown one. A 6-month CD is a poor home for an emergency fund for the same reason.
1-year CD
The 1-year CD is where many people start: $10,000 at 4.50% earns $450.00. Rolling two 6-month CDs at the same rate earns exactly the same, because compounding depends only on how long the money is invested and at what rate, not on how many times you renew. So the choice is about risk. Rolling the shorter term keeps you liquid every six months and captures higher rates if they rise; locking the year protects you if they fall. That trade-off applies at every step up the term curve.
2-year CD
Two years is where locking a rate starts to matter, because a rate change is likely somewhere in the window. At the same rate, one 2-year CD and two back-to-back 1-year CDs earn the same $920.25. The difference shows up when rates move: lock a 2-year at 4.50% and you finish at $10,920.25; take a 1-year at 4.50% and renew at 3.50% and you finish at $10,815.75. If rates rise instead, the pair of 1-year CDs comes out ahead. Two-year CDs commonly charge 6 months of interest to break, about $225.00 here.
3-year CD
$10,000 at 4.50% grows to $11,411.66 over three years. The comparison to make is with the 5-year: when the curve is flat or inverted, the 3-year often pays as much or more, and on October 21, 2026 the best 3-year rate (4.85%) was above the best 5-year (5.00%). When the two match, the 3-year gives the same yield with two fewer years locked up; the 5-year's only extra is two more years at a fixed rate if rates fall. At 4.50% with inflation near 3%, a CD beats inflation by about a point and a half a year, which preserves purchasing power but is no substitute for investing money with no date attached.
5-year CD
Five years buys a guaranteed rate for the longest window most banks offer; $10,000 at 4.50% earns $2,461.82. At the same rate, five back-to-back 1-year CDs would earn exactly the same; the advantage is only that the rate is locked. The penalty deserves attention: a 12-month interest penalty is about $450.00, roughly 18% of the full five years' interest.
At this length, Treasury notes are a serious alternative. Their interest is exempt from state and local income tax, which can outweigh a lower headline rate: a California resident in the 9.3% bracket keeps about 4.08% of a 4.50% CD's yield after state tax, less than a 4.40% Treasury pays in full. In a state with no income tax the CD wins. Treasurys can also be sold before maturity at whatever price prevailing rates imply, where a CD offers only the penalty.
CD Interest After Tax and Inflation
CD interest is taxed as ordinary income each year it accrues, and inflation erodes what it buys. For $10,000 at 4.50% APY, in the 22% federal bracket, with 3% inflation:
| Term | Interest | After 22% federal tax | Interest in today's dollars |
|---|---|---|---|
| 1 year | $450.00 | $351.00 | $145.63 |
| 2 years | $920.25 | $717.79 | $293.38 |
| 5 years | $2,461.82 | $1,920.22 | $749.67 |
The last column uses the Fisher relation, real value = deposit × ((1 + APY) ÷ (1 + inflation))^years, before tax. State income tax, where it applies, comes on top. Holding the CD in a traditional IRA defers the tax; in a Roth IRA qualified withdrawals are tax-free.
CD Ladder Strategy
A CD ladder splits your savings across CDs with different maturities so that some CD matures every year (or more frequently). For example, with $25,000:
- $5,000 in a 1-year CD
- $5,000 in a 2-year CD
- $5,000 in a 3-year CD
- $5,000 in a 4-year CD
- $5,000 in a 5-year CD
When the 1-year CD matures, you reinvest it into a new 5-year CD. Over time, you'll have a CD maturing every year while keeping your money in longer-term CDs, which usually pay more. This balances liquidity with yield and reduces the risk of locking everything into a rate that falls.
CD vs. High-Yield Savings Account
HYSAs and CDs both pay significantly more than traditional savings accounts, but serve different purposes:
| CD | HYSA | |
|---|---|---|
| Rate | Fixed for term | Variable, can change anytime |
| Liquidity | Locked until maturity | Withdraw anytime |
| Rate level | Usually higher | Usually slightly lower |
| Best for | Money with a known timeline | Emergency fund, short-notice needs |
Many savers use both: a HYSA for their emergency fund (liquid, earns good yield) and CDs for money earmarked for a specific goal with a known date — a house down payment in 18 months, for example. Also worth noting: at typical APYs, a CD's nominal return doesn't always beat inflation. The inflation calculator shows how much real purchasing power a CD's payout actually represents at the end of the term.