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CD Investment: How Much Can You Earn?

CDs are a popular savings instrument for consumers looking for low-risk investments with higher returns than regular bank savings accounts.

A certificate of deposit may be a smart place to keep your money if you want to earn a greater rate of interest on your savings while still having the safeguards of the Federal Deposit Insurance Corporation (FDIC) and avoiding some of the volatility and risks of the stock and bond markets.

CDs call for you to lock up your money for a set length of time (typically one to five years, depending on the bank or credit union) in exchange for a guaranteed interest rate. If you need to access your money before the term ends, many CDs incur a penalty.

To better understand the concept, why not keep reading.

What Is A CD?

A CD, or certificate of deposit, is a form of savings account with a fixed interest rate that is often greater than a conventional savings account, a set term length, and a set maturity date.

A CD is a deposit that you make for a set period of time, usually three to five years. Monthly fees are uncommon in CDs, but most carry an early withdrawal penalty.

Certificates of deposit, like conventional savings accounts, are insured by the Federal Deposit Insurance Corporation. The National Credit Union Administration insures share certificates, which are the credit union equivalent of CDs.

What Does a CD Stand For?

CD stands for certificate of deposit, which was once a paper document that proves your money was being held in a bank at a certain rate.

Although CDs no longer come with paper, your funds are still maintained at banks and credit unions and are federally guaranteed up to $250,000 per account.

What Is The Difference Between CDs And Savings Accounts?

A CD is different from a traditional savings account in several ways.

CDs offer higher interest rates than traditional savings accounts. CDs can be an appealing investment because of their minimal risk and high yields when compared to other bank accounts. If you want the option of adding funds overtime or taking advantage of rising rates, look into the best high-yield savings accounts.

Savings account rates fluctuate over time, whereas CD rates remain constant once you open one. This can be advantageous: CDs offer guaranteed returns, and if you buy one when interest rates are high, you’ll be able to keep it even if banks lower rates on savings accounts and new CDs.

Savings accounts allow you to access your money on a regular basis, whereas CDs do not. You may deposit and withdraw money from a savings account quite freely, but you can only withdraw money from most CDs penalty-free for a few days after the term finishes. (There’s just one exception which is no-penalty CDs, discussed later in this article.)


How Does A CD Work?

To open a certificate of deposit, follow the same steps as you would for any other bank account: You can apply for a loan either online or in person at a financial institution. The main difference is that you will almost always be able to make only one deposit into a CD. Like a conventional savings or checking account, you can’t make additional contributions over time.

The interest you earn on a CD is normally compounded and deposited to your account on a daily or monthly basis, and you receive it all at the end of the CD period. (Alternatively, if your bank allows it, you can choose to receive regular interest payments.)

When a CD’s term expires, the bank will usually renew it at a new rate, which is usually the same as new CDs for the same duration. This may not be in your best interests, as it is preferable to compare the best CD rates every time you start a new one. (For additional information on when CDs mature, see our article.)

What CD Term Should You Get?

This depends on your savings goals. Traditionally, the longer the term length: 

  • the longer you commit funds to a CD
  • the higher the interest rate.

Where Do You Open A CD?

Joining a bank or credit union outside of your primary financial institution, such as an internet bank, to open a CD with one of the greatest rates may be necessary.

It may be worthwhile to make the switch, especially if you can receive considerably better rates than you would at a typical bank.

According to a survey by NerdWallet and Goldman Sachs, more than one in every five Americans who are saving money established a savings account with an online-only bank between the start of the COVID-19 outbreak and December 2020.

When Do You Choose A CD?

You want to keep your earmarked savings safe. If you have money set aside for a major purchase in the future, such as a car or a down payment, a certificate of deposit can be an excellent method to keep it safe and earn interest.

You desire a high rate of return with less risk. If you want to escape the stock market’s volatility while earning a higher return than other savings accounts, CDs can be a good option.

According to the Federal Deposit Insurance Corp., the national average rate for a standard savings account is 0.06 percent, much below the 0.24 percent average rate for a five-year CD. 

Aside from the five-year CD, high-yield three-month, six-month, or one-year CDs may be a better option if you’d rather wait months rather than years for access to your money.

When Do You Stick With A Savings Account?

For savings, such as your emergency fund, that you might need in a pinch: Early withdrawal from a CD and payment of a penalty might be a financial setback.

When you’re putting money aside, keep the following in mind: A CD requires a one-time payment, and most do not allow you to make additional deposits after the original deposit. A savings account is excellent for gradually increasing your wealth.

What Types Of CDs Are There?

CDs usually have a set period and a set rate of interest. However, depending on where you bank, you may be able to choose from a few additional options.

No-penalty CD:

Also known as a “liquid CD,” this CD allows you to withdraw money early without incurring a penalty in exchange for lower rates than other CDs.

A CD with higher-than-average CD rates is known as a high-yield CD. Traditional brick-and-mortar banks often provide greater rates than online banks and credit unions.

Jumbo CD:

A jumbo CD is similar to a conventional CD, but it has a greater minimum balance requirement — often $100,000 — as a trade-off for historically higher rates.


A normal certificate held in a tax-advantaged individual retirement account.

Bump-up or Step-up CD:

These CDs have a greater interest rate at the end of the term. Bump-up CDs require you to request a rate increase if one is available, whereas step-up CDs have a set rate rise schedule. Both offer lower interest rates than fixed-rate CDs, and some have higher minimum deposit requirements. You can usually only seek one rate hike, while long-term CDs may let you do so twice.

Brokered CD:

A brokered CD is one that is sold by a third party, such as a brokerage firm. (See our explainer for additional information on other types of brokered CDs, including callable CDs.)

What Happens When A CD Matures?

When a CD matures (or expires), there is a week-long grace period during which you can withdraw funds. Many CDs automatically renew after that period for the same length as before, and withdrawals before the next maturity date are subject to a penalty. When CDs reach maturity, learn more about your alternatives.

How Do CD Rates Work?

Annual percentage yield, or APY, is the unit of measurement for CD rates. After compounding, this is the annual interest rate. Compounding occurs when your account makes money from both the initial deposit and the growing interest.

What Is A CD Ladder?

A CD ladder is a savings strategy that entails the opening of both short- and long-term CDs. This gives you more flexibility than placing all of your money into a single CD, allowing you to take advantage of higher rates on three- to five-year CDs while still having regular access to a portion of your money over time.

Here’s how different CD techniques operate…

You invest in a variety of term lengths proportionally. The proceeds from each shorter certificate are then reinvested in a new long-term CD.

Assume you have $10,000 to spend on CDs. You put $2,000 into one-, two-, three-, four-, and five-year CDs, respectively. You place the money from the one-year CD into a new five-year CD when it matures. You reinvest cash from the matured two-year CD in another five-year CD the following year. If you need cash, you can continue the process until you have a five-year CD maturing every year, or you can withdraw penalty-free from whatever CD is maturing that year.

What Are The Various Rates Of CDs?

CD Rates By Term And Type

Get a closer look at the best rates on certificates of deposit:

  • Best CD rates overall
  • Best 3-month CD rates
  • Best 6-month CD rates
  • Best 1-year CD rates
  • Best 3-year CD rates
  • Best 5-year CD rates
  • Best no-penalty CD rates
  • Best IRA CD rates

CD Rates By Bank

If you’re interested in learning more about certain banks’ CDs, here’s a list of traditional and online banks’ CDs (as well as one brokerage’s offering):

  • Ally Bank CD rates
  • Bank of America CD rates
  • Capital One CD rates
  • Chase CD rates
  • Discover Bank CD rates
  • Fidelity CD rates
  • Marcus CD rates
  • Wells Fargo CD rates

Are CDs Safe?

For two reasons, certificates of deposit are one of the safest savings or investment products available. First, their rate is constant and guaranteed, so you don’t have to worry about your CD’s return being reduced or fluctuating. It’s in your deposit agreement with the bank or credit union that you’ll get exactly what you signed up for.

The same federal insurance that protects all deposit products also protects CD investments. Banks are insured by the FDIC, while credit unions are insured by the NCUA. If you open a CD with an FDIC- or NCUA-insured institution, the US government will protect up to $250,000 of your funds on deposit with that institution if that institution fails. 56 Bank failures are extremely uncommon these days. 7 However, it’s comforting to know that your funds would not be jeopardized in the event of a bank failure.

The key to ensuring your savings are as safe as possible is to choose an institution that has FDIC or NCUA insurance (the vast majority do, but a tiny percentage have private insurance instead) and to keep your deposits in your name under $250,000 at any one time.

56 If you have more than that amount in deposits, you can increase your coverage by dividing your cash over several institutions and/or names (e.g., your spouse).

How Much Do I Need To Open a CD?

To open each CD on the menu, each bank and credit union sets a minimum deposit requirement. Some banks will have a minimum deposit policy that applies to all CD terms, while others will offer rate tiers, with higher APYs for those who fulfill larger minimum deposits.

In theory, having more money to deposit should result in a larger return. In practice, though, this isn’t always the case. For example, having $25,000 on hand for deposit may allow you to open a CD that is not available to those with smaller deposits. However, several of the top ten CD rates may be obtained with small investments of $500 or $1,000. And anyone with at least $10,000 can get the majority of the best prices. For a premium rate, a $25,000 deposit is only called for on rare occasions.


How Are CD Earnings Taxed?

The bank will apply interest to your account at regular periods if you have a CD. This is normally done monthly or quarterly, and it will appear as earned interest on your statements. It will accumulate and be reported to you as interest earned in the new year, just like interest paid on a savings or money market account, so you may state it as income when you present your tax return.

People are sometimes perplexed by this because they are unable to withdraw and spend their interest profits. As a result, they expect it to be taxed on the gains when they withdraw the CD money at maturity (or sooner if they cash out early). This isn’t true. Your CD earnings are taxed when the bank applies them to your account for tax reasons, regardless of when you withdraw your CD funds.

What If I Need To Withdraw From A CD Early?

When you take money out of a CD early, you usually have to pay a penalty that ranges from several months to a year’s worth of interest. See our calculator for a list of CD early withdrawal penalties from various banks. If you need to make an early withdrawal due to a financial emergency, call your bank to see if they can assist you.


Best Way To Invest In CD

Certificates of deposit are often purchased using one of three strategies: CD bullet, CD ladder, and CD barbell

Best CD rates credit unions

They are :

Pentagon Credit Union

Community Federal Credit Union

Service Credit Union

Connexus Credit Union

Alliant Credit Union

America First Credit Union

First Tech Federal Credit Union

Navy Federal Credit Union

Certificate Of Deposit vs. Fixed Deposit

A fixed deposit and a certificate of deposit have very little in common. They’re the same person. In comparison to typical savings accounts, they have the same term period, a minimum deposit requirement, and high interest rates. One distinction is that CDs can be freely negotiated, whereas FDs cannot.


Frequently Asked Questions (FAQs)

How is interest credited in a CD? Monthly? Quarterly? Yearly?

It is dependent on the bank and the CD type. Some banks compound interest daily and credit it monthly, while others compound interest monthly and credit it quarterly or annually.

Are there fees for opening a CD?

No. There aren’t usually fees associated with opening or maintaining a CD.

Can a certificate of deposit be used as collateral for a mortgage?

Yes. A certificate of deposit is definitely a good source of collateral due to its liquidity.

What is the highest yield ever earned on a CD?

The greatest CD yield to date was nearly 18 percent, achieved in 1980. However, inflation was strong at the time, offsetting this seemingly incredible yield.

To what extent is a CD’s interest rate guaranteed?

The interest rate on a CD is guaranteed at maturity as long as it isn’t callable.


A certificate of deposit isn’t the quickest way to grow your money, but it does provide a guaranteed return and security that money in the stock market does not. A high-interest CD might be a valuable addition to your overall savings strategy.

You may make a respectable return on your money while having your savings backed by the federal government if you choose the correct sort of CD, use a laddering technique, and avoid withdrawal penalties.




Image source:
Akujobi Chijindu
Akujobi Chijindu
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