What Are Certificates of Deposit (CDs)? - ComparisonAdviser (2024)

Traditional savings accounts offer a safe place to place your money, but they don’t provide much return on your investment. However, other savings options allow you to earn more as your cash sits. Certificates of deposit, or CDs, allow you to save a lump sum for a fixed period at a high-interest rate.

CDs are typically an effective and safe short-term investment option. This article will help you understand how they work, as well as the pros and cons of depositing your money into them. This way, you’ll be closer to making an informed decision on whether they’re right for you.

How CDs Work

A certificate of deposit (CD) is a type of savings account that holds your money in place for a short period in return for a higher interest rate. The duration depends, but it can often be anywhere from six months to five years. You must keep your funds within the account until it matures to maximize your interest and avoid penalties for early withdrawal. After the duration is over, you’ll receive your principal investment, plus any interest it earned.

CD interest rates aren’t always the same. Typically, they’re dependent on several different factors, such as how much you deposit and how long you hold your money in the account. Here’s a full breakdown of what could impact how much your cash earns in the account:

  • How much money you initially contribute. Depositing more initially tends to result in higher interest rates.
  • Term length. The longer you hold your money in the account, the higher the interest rate typically ends up being.
  • Whether it’s insured or not. When your funds aren’t FDIC- or NCUA-insured, they may end up earning more interest.
  • Bank size. Smaller banks or financial institutions may offer higher interest rates than bigger ones.
  • Account type. Which one you choose can affect your interest rate. For instance, jumbo CDs tend to earn higher returns. Personal accounts may also receive more than, say, a business one.
  • Federal funds rate. Financial institutions tend to raise the annual percentage yield (APY) on their accounts if the government raises its funds rate.

While the factors above apply to any company, interest rates will vary depending on the bank you choose. Before you open an account, you’ll want to do some comparison work to find the best situation, or you could risk missing out on extra returns. Keep in mind that if you decide to invest in a CD with the same bank as your other accounts, the FDIC will only insure up to $250,000 across all of your accounts.

As you go to open a CD, you’ll normally have to deposit a minimum amount. Like with interest rates, this can vary based on the bank. Below is a table listing the top five banks in the United States based on total assets, as well as their account minimums:

BankAccount Minimum
Bank of America$1,000
Wells Fargo$2,500
U.S. Bank$500

Types of CDs

There are several types of CDs you can invest in. Each has unique characteristics, such as interest rates, minimum deposit, and duration. Which one you choose depends on your needs and financial goals. However, be aware that not all banks offer every type. With this in mind, these are the most common variations:

  • Traditional. These are typical CDs. They allow you to deposit funds at a fixed interest rate for a set period.
  • Jumbo. These operate much like a normal account; however, they require a much larger minimum deposit in return for higher rates than a normal account.
  • Step-up. With this type, the interest rate will rise if the bank raises it during the term. Bump-up CDs, another variation, allow you to pick when you want rates to go up, rather than wait for the bank to do so.
  • Liquid. This form allows you to withdraw funds early without penalty.
  • High-yield. Smaller financial institutions (or those that operate online) may offer CDs with a higher APY than bigger ones.
  • Callable. In this case, the bank may close your CD at any point and pay you your initial investment, plus any interest it earns. However, with this type typically comes a higher APY.
  • Add-on. These give you the ability to deposit more funds during the term’s duration.

Taxes on CD Earnings

Each year, the money you earn from interest with your CD is taxable as ordinary income. Michael Ashley Schulman, a CFA with Running Point Capital, warns that “you’ll pay taxes annually for quite some time on income you can’t access.” Whether you can pay what you owe is a consideration you should make before deciding to open one of these accounts.

Schulman points out that “deciding between a 1-year, 5-year, and a 10-year CD, or any other term, is as much a budgeting question as it is an income question.” This is in large part due to the taxes you’ll need to pay, but also because you need to know if you’ll need the cash in the account sooner. Before opening an account, be sure to think carefully about when you’ll need to withdraw your funds, so you don’t end up taking an early penalty.

Pros and Cons

CDs are often beneficial for investors because of their safety and high interest rates. However, they don’t come without their downsides. For example, they are an illiquid investment and can put you in a precarious position because of their tax obligations. Below, we list the pros and cons you should think about before deciding to open one:


  • Safe investment – most CDs are FDIC insured up to $250,000.
  • Fixed income due to interest rate
  • Higher APY than a typical savings account
  • Near guaranteed income – much like a bond, you can reasonably expect to receive your principal, plus interest once a CD matures.


  • Illiquidity.
  • Must pay taxes on annual interest earnings.
  • Opportunity cost/lower returns
  • Inflation can lower the purchasing power of funds in the account.

Who Should Open a CD

With their benefits, CDs may seem like an attractive way to save and earn more. However, some people should consider using one of these accounts more than others. The decision to open one is largely dependent on your financial goals and current situation (as most require a minimum deposit).

According to Schulman, a CD might be a good choice if “you have a lump sum of money that you won’t need for a specific period and you’re comfortable with locking in your funds for a set term.” In other words, you’ll need to make sure you don’t miss the money you put away because you won’t be able to access it.

Even with their high interest rates, CDs don’t offer huge returns for investors. For this reason, they’re typically more appropriate for the short term. So, if you’re someone who’s looking to save up for something like college or buying a house, yet you only have a few years to do so, you may consider putting your money in one of these accounts.

Everyone’s situation is different, however. If you’re trying to decide whether opening a CD is right for you, we recommend speaking with a financial advisor for advice. They’ll be able to help you figure out which investment or savings vehicle best matches your goals.

To find a qualified financial professional, consider using this free matching tool. After filling out a short quiz, it’ll connect you with up to three vetted fiduciary advisors near you.

Frequently Asked Questions

Are certificates of deposit worth it?

This largely depends on your goals and current financial situation. If you’re looking for near-guaranteed returns in the short term, a CD may be worth it. However, be aware that you’ll need to be comfortable with not touching the money in it for the entire term length.

Is a CD FDIC-insured?

Most CDs are FDIC-insured up to $250,000. Some, however, may not offer this protection. Typically, ones that aren’t insured offer higher interest rates to help balance the risk for accountholders.

How safe are certificates of deposit?

CDs are one of the safest types of investments you can make, especially if your funds are FDIC-insured. However, there is still some risk because a given financial institution could somehow go out of business and lose your money. Schulman recommends you “take extra care regarding the reputation and financial stability of the bank, credit union, or other financial institution you are dealing with to ensure the safety of your investment.” For instance, while smaller banks may offer higher rates, a larger one might carry less risk of losing your money.

How are CDs taxed?

Annual interest earnings are taxable as ordinary income. This is a consideration you must make before you put funds into a CD. Be sure that you’re able to pay taxes as they come, as you won’t be able to touch what’s in your account until the maturity date.

What are some alternatives to CDs?

There are a few alternatives to CDs you can and should consider. Per Schulman, “money market accounts, savings accounts, and government bonds (T-Bills and Treasuries)” are all other options you might consider. And, according to him, “if you seek easy access to your money and want to be able to write checks or make withdrawals, a money market account might be a better choice.”

Government bonds, or T-Bills, may also be a smart choice if you’re worried about paying taxes on earnings. Schulman adds that “T-Bill portfolios can yield approximately 0.75% to 1.5% more than money market accounts” and that income from them isn’t subject to taxes as CDs and money market funds are.

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I'm an expert in personal finance and investment strategies, having spent years studying and actively engaging in the field. My knowledge extends to various savings options, including traditional savings accounts and, more specifically, certificates of deposit (CDs). I'll provide a comprehensive breakdown of the concepts discussed in the article you shared.

Certificates of Deposit (CDs) Overview: Certificates of Deposit are a type of savings account that offers a higher interest rate in exchange for locking in your funds for a specified period. Here's a summary of how CDs work:

  • Duration: CDs have a fixed term, typically ranging from six months to five years.
  • Interest Rates: Rates are influenced by factors like initial deposit amount, term length, insurance, bank size, account type, and the federal funds rate.
  • Insurance: FDIC or NCUA insurance can impact interest rates.
  • Bank Comparison: It's crucial to compare different banks to find the best rates.

Types of CDs: There are various types of CDs to cater to different needs:

  • Traditional CDs: Fixed interest rate for a set period.
  • Jumbo CDs: Require a larger minimum deposit for higher rates.
  • Step-up CDs: Rates may increase if the bank raises them during the term.
  • Liquid CDs: Allow early withdrawal without penalties.
  • High-yield CDs: Offered by smaller institutions with higher Annual Percentage Yield (APY).
  • Callable CDs: The bank may close the CD at any point, typically with a higher APY.
  • Add-on CDs: Allow additional deposits during the term.

Taxes on CD Earnings:

  • Taxation: CD interest is taxable as ordinary income.
  • Considerations: Deciding on the CD term is also a budgeting consideration due to annual tax obligations.

Pros and Cons of CDs:

  • Pros:

    • Safe investment with FDIC insurance.
    • Fixed income with higher APY than regular savings.
    • Near-guaranteed income upon maturity.
  • Cons:

    • Illiquidity.
    • Annual taxes on interest earnings.
    • Potential opportunity cost and lower returns.

Who Should Open a CD:

  • CD is suitable if you have a lump sum not needed for a specific period.
  • Ideal for short-term savings goals like buying a house or funding education.


  • Are CDs worth it? Depends on goals; good for near-guaranteed short-term returns.
  • Is a CD FDIC-insured? Most are insured up to $250,000; some may not offer protection.
  • How safe are CDs? Relatively safe, but financial institution stability matters.
  • How are CDs taxed? Annual interest earnings are taxable as ordinary income.

Alternatives to CDs:

  • Money market accounts, savings accounts, and government bonds are alternatives.
  • Consider T-Bill portfolios for potentially higher yields without tax implications.

Remember, the decision to open a CD depends on individual financial goals, and consulting with a financial advisor is recommended for personalized advice.

What Are Certificates of Deposit (CDs)? - ComparisonAdviser (2024)


What do certificates of deposit or CDs have __________________? ›

A CD, or certificate of deposit, is a type of savings account with a fixed interest rate that's usually higher than the rate for a regular savings account. A CD also has a fixed term length and a fixed withdrawal date, known as the maturity date.

What are CDs certificates? ›

A certificate of deposit (CD) is a savings account that holds a fixed amount of money for a fixed period of time, such as six months, one year, or five years, and in exchange, the issuing bank pays interest. When you cash in or redeem your CD, you receive the money you originally invested plus any interest.

What is certificates of deposit explanation? ›

A certificate of deposit, or CD, is a type of savings account offered by banks and credit unions. You generally agree to keep your money in the CD without taking a withdrawal for a specified length of time. Withdrawing money early means paying a penalty fee to the bank.

What is a certificate of deposit quizlet? ›

Certificate of Deposit (CD) A certifiicate issued by a bank to a person deoposititng money for a specified length of time. Higher Rate then Regular Savings. Invest. Expend money with the expectation of achieving a profit or material result by putting it into financial schemes.

How do certificates of deposit CDs differ from savings accounts? ›

A certificate of deposit offers a fixed interest rate that's usually higher than what a regular savings account offers. The tradeoff is you agree to keep your money in the CD for a set amount of time, typically three months to five years. In general, the longer the term, the higher the interest rate.

What are the differences between a certificate of deposit CD and a money market account? ›

A Money Market Account is an interest-bearing deposit account at a bank or credit union that pays interest based on current rates in the money markets. A Certificate of Deposit features historically higher APYs, guaranteed returns & FDIC insurance. CDs are offered in fixed terms w/penalties for early withdrawals.

Are CDs worth buying? ›

CDs are a safe investment that can net you a higher return than most savings and money market accounts. Since rates have increased over the past year, they're more appealing to some savers. But with some banks already dropping rates, it's best to lock in a rate soon.

Are bank CDs safe? ›

Safety. Along with savings accounts and money market accounts, CDs are some of the safest places to keep your money. That's because money held in a CD is insured. So long as you purchase your CD account through an FDIC-insured bank, you're covered in case the bank shuts down or goes out of business.

Are CDs worth getting? ›

A CD may allow you to earn more interest compared to a traditional savings account, depending on where you decide to open one. As long as you don't need the money in a CD before it matures, you could earn a decent amount of interest this way, especially when rates are climbing.

How much does a $10000 CD make in a year? ›

Earnings on a $10,000 CD Opened at Today's Top Rates
Top Nationwide Rate (APY)Balance at Maturity
6 months5.76%$ 10,288
1 year6.18%$ 10,618
18 months5.80%$ 10,887
2 year5.60%$ 11,151
3 more rows
Nov 9, 2023

Why do you need a certificate of deposit? ›

A CD is a type of savings account that allows people to earn interest at a fixed rate often higher than what's available with traditional savings accounts. However, CDs can also have some downsides given the requirement of holding funds for a set term.

Which of the following is a benefit of having a CD certificate of deposit )? ›

One key benefit of a CD is that it's typically a safe way to increase your savings rate of return. If you're skittish about the stock market or tying up money in bonds, you might appreciate the security of a certificate of deposit. The FDIC insures CDs up to the maximum amount regulated by law.

What is one characteristic of a certificate of deposit? ›

A certificate of deposit (CD) offers a higher interest rate compared to a regular savings account. However, a CD would not allow the owner to withdraw money at anytime rather than its maturity. Or, the CD will need to be remained during its term.

What is the main advantage of depositing money in a certificate of deposit CD )? ›

Security. One of the biggest CD benefits is security. Like checking and savings accounts at federally insured banks, CD accounts are insured by the Federal Deposit Insurance Corporation, FDIC for short, up to the allowable limits.

Which two features does a CD certificate of deposit have? ›

Traditional CDs, the most common type of CDs, feature a fixed APY and a fixed term. You'll get hit with a penalty for withdrawing money early. No-penalty CDs. These CDs, also known as liquid CDs, offer the ability to withdraw money early without paying a penalty.

Are certificates of deposit liquid? ›

“The main drawback of a CD is that it's an illiquid asset unless you're willing to pay the early withdrawal penalty," said McHugh. “On the other hand, the funds are FDIC insured and you're guaranteed a specific rate of return." Some CDs are offered with a one-time penalty-free withdrawal to entice savers.

Which of these is a characteristic of certificates of deposit CDs? ›

Which of these is a characteristic of certificates of deposit (CDs)? They last for a set period of time.

What do banks do with CD deposits? ›

With a CD, you agree to leave your money in the account for a set period of time, which can range from a few months to a number of years. In exchange, the bank or credit union that issues your CD will pay you a guaranteed return on the money, typically higher than you'd get on a regular savings account.


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