What Are CDs (Certificates of Deposit)?

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Last Updated:August 07, 2024

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Fast Facts

Offered by:

Banks and financial institutions

Risk:

Low

Liquidity:

Nil; early withdrawal penalty

Term:

3 months to 5 years and more

Interest rate:

Fixed

Benefit:

Steady interest income

I first learned about certificates of deposit (CDs) from my grandpa. A retired independent store owner, he lived on what I thought was a limited retirement income. He kept his money in envelopes, and he would be more cautious when the money got low. When he died when I was 19, I was the one who had to go through his files and gasped when I saw the 000s at the end of his account. His "limited" funds were millions, and he lived his retirement using CD ladders. Every month another CD would hit term, and he would take money from the CD, put it into various envelopes that I learned was envelope budgeting, reinvest some of the money, and live with what he budgeted.

Investing in CDs may seem old-fashioned, but they still exist for a reason. They are a type of savings account that continues to diversify your investment portfolio.

Jump To

What is a certificate of deposit?

CDs are high-yield savings accounts available through banks, credit unions, and financial institutions. Unlike traditional savings accounts, however, when you deposit money into a CD, you must leave it in the account for a fixed period or term. This fixed-term equates to higher interest rates. While traditional savings accounts average 0.04%, CDs average 0.18%.

The catch, however, is you must allow the CD to reach the end of the term. You will pay early withdrawal penalty fees if you withdraw funds before it matures.

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How does a CD work?

Opening a CD works the same way opening a bank account does. What you'll need to know before deciding on the CD are two things:

1. Interest rate. Of course, the point of investing in a CD is to make as much annual percentage yield (APY) as you can, so you'll want to find a financial institution that can bring you the biggest return. Most CDs will offer a fixed interest rate, but there are adjustable-rate options as well.

2. Terms. How long you want to keep your money locked away is important. The longer the term, the higher the interest rate. If you are nervous about accessing your money sooner than later, choose a shorter-term option. You'll find CD terms from 3 months and higher.

Different types of CDs

Beyond the traditional CD are several types of CD accounts you may consider. These include:

Add-on CDs allow you to add additional funds to the CD throughout its term.
Brokered CDs are purchased through a brokerage firm that can review multiple financial institutions to find you the best rates.
Callable CDs may tout higher interest rates but may be "called" by the bank before the maturity date is met, thereby risking your rates.
CD ladders, like my grandpa used, have varying term lengths, so you have access to funds throughout the long term, also known as laddering.
Jumbo CDs for those with at least $100k to invest.
Long-term CDs with 1 year or more with higher APY the longer you set your term.
No-penalty CDs provide lower interest rates but allow you to take out funds before maturity without penalties.
Short-term CDs that offer terms from three months to one year.
Step-up CDs provide you an annual opportunity to "bump up" your interest rate, should they go higher than your current rate.
Variable-rate CDs can rise with rising interest rates or fall with dropping interest rates.

Calculate rates

You can take a look at what your savings will be by using our CD Calculator. Enter the amount of money you want to deposit, the term length, and the APY you have seen, and you can see what you can earn and how earnings can increase with longer terms.

CD Calculator

Best CD Rates

Ally Bank

The longer you lock in your term, the higher your rate will be at Ally, which compounds your deposit daily. Find 1-year rates at 4.50% and no penalty rates at 4.00%. Ally has 3-, 6-, 9-, 12- and 18-month or 3- and 5-year options. At 3 months, you'll only earn 3.00% APY, but it's still higher than a traditional savings account. At 5 years, you can earn 3.90%

If you renew a CD after its term, Ally will give you a 0.05% Loyalty Reward.

Ally also offers a Raise Your Rate CD (a step-up CD) for 2 or 4 years, starting at 3.75%. A no-penalty CD is available with a 4.00% APY.

Read a full review on Ally Bank.

American Express

More than credit cards, Amex offers high-yield CDs for 1-year to 5-year terms. There is no minimum for your initial deposit. Like others, you'll get its highest APY – 4.50% – by keeping your funds in the account for 11 months. Its 60-month CD offers the lowest APY at 3.00%, which may be lower than some online high-yield savings accounts; you may want to put your money into a savings account at that rate.

CiT Bank

CiT features term CDs, no-penalty CDs for 11 months, jumbo CDs, and RampUp (step-up) CDs with rates topping off at 3.50%

To open a term CD requires a $1,000 minimum, and it offers the same APY for 2 years to 3 years (0.40%) and jumps to its high at the 6-month or 13-month terms. No-penalty CDs require the same opening deposit and earn 3.50% at their highest.

Marcus by Goldman Sachs

With as little as $500, Marcus provides 5.15% for a 1-year term and 4.00% for 5 years. Signup for a 12-month CD and find its best rates at 5.15%. On the flip side, if you get a 6-month term, you'll only receive 5.10% APY. The rates don't fluctuate as much as other banks offering an increase for every term increase, but the APY is still a good one.

Synchrony Bank

With no minimum deposit amount required, Synchrony's 1-year CDs provide 4.80% APY. You'll find 16 different term options – the most offered in this list. CD terms begin with a 3-month CD at 0.25% and end with a 5-year CD at 4.00%.

Best CD rates comparison

Bank	3-mo	6-mo	9-mo	12-mo	13-mo	14-mo	15-mo	18-mo	24-mo	36-mo	48-mo	60-mo	72-mo
Ally Bank	3.00%	4.75%	4.85%	4.50%	N/A	N/A	N/A	4.25%	3.75%	4.00%	3.75%	3.90%	N/A
American Express	N/A	N/A	N/A	4.35%	N/A	N/A	N/A	3.25%	4.00%	3.00%	3.00%	3.00%	N/A
CiT Bank	N/A	3.00%	N/A	0.30%	3.50%	N/A	N/A	3.00%	0.40%	0.40%	0.5%	0.50%	N/A
Marcus by Goldman Sachs	N/A	5.10%	5.00%	5.15%	N/A	N/A	N/A	4.70%	4.40%	4.15%	4.05%	4.00%	3.90%
Synchrony Bank	0.25%	4.80%	4.90%	4.80%	N/A	N/A	N/A	4.50%	4.20%	4.15%	4.00%	4.00%	N/A

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Pros and cons of CDs

Pros

Low-risk. Of the various investment products you have at the ready, this is one of the lowest risks. They are also FDIC-insured for up to $250,000.
High-yield savings. CDs have higher return rates than regular savings accounts found at brick and mortar banks and most online banking institutions (both of which offer CDs).
Variety of options. As with any savings accounts, the amount of money you'll earn depends on the period of time in which you can collect an amount of interest. You can find 3 to 6 month CDs to 5 or more years before a term ends.

Cons

Penalty fees. If you need to withdraw your funds before the term ends you will pay high fees and lose the rate of return expected at the deposit.
Not quite high-yield. While the APY is higher than a regular savings account, CDs as an investment earn less than investing in an IRA, 401(k), or the stock market.
No access. Unless you are willing to pay those fees, your money is not yours to access until a term ends.

FAQs

Are CDs insured?

Yes, CDs are typically insured by the FDIC (for banks) or NCUA (for credit unions) up to the standard insurance limit, which protects your deposit in case the institution fails.

Can I add more money to my CD after opening it?

Most CDs do not allow additional deposits after the initial deposit. However, there are some “add-on” CDs that permit additional contributions during the term.

What should I consider before investing in a CD?

Consider factors such as the term length, interest rate, penalties for early withdrawal, and how the CD fits into your overall financial strategy and liquidity needs.

Can I withdraw money from a CD before the term ends?

Early withdrawal from a CD usually incurs a penalty, which can be a portion of the interest earned or a specified amount. The terms of the penalty are outlined in the CD agreement.

The bottom line

Based on your deposit amount, term length, and CD interest rates, CDs can be a great way to set aside savings for the longer term. While the rates may not be as high as you'd like to see in a bullish return on investment for retirement, the slow and steady route does add to the winnings at the end of the race.

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Lissa Poirot is Joy Wallet’s Head of Content and an award-winning journalist and editor with a focus on finance, travel and health. Her work has appeared online and in print, and she has often been cited as a source on both. She currently resides in Pennsylvania.

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