What is a certificate of deposit (CD)? | Consumer Financial Protection Bureau (2024)

FAQs

What is a certificate of deposit (CD)? | Consumer Financial Protection Bureau? ›

Consider these tips for choosing wisely, including ways to avoid scams. A bank certificate of deposit (CD) typically offers a higher rate of interest than a regular savings account, in exchange for you keeping the money for a specified term on deposit, usually from three months to five years or more.

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.

Standard CDs are insured by the Federal Deposit Insurance Corp. (FDIC) for up to $250,000, so they cannot lose money. However, some CDs that are not FDIC-insured may carry greater risk, and there may be risks that come from rising inflation or interest rates.

Once you deposit funds in a CD account, you keep them there until the term is complete. Once the term is up or the CD “matures,” you'll usually be given a grace period during which you can access your principal (the amount you initially deposited) and the interest paid out on your deposit.

CDs come with almost no risk and often earn interest rates above what you can earn from a regular savings account. While you have to commit to leaving your money in the account for a certain period of time, they're often a smart investment when you know you won't need the funds and don't want to risk losses.

A Certificate of Deposit (CD) could lose money if funds are withdrawn early, incurring penalties that may exceed earned interest. CDs are generally low-risk and guarantee a fixed interest rate for the term. Early withdrawal penalties can sometimes reduce the principal, not just the interest.

“Consumers should be reassured that savings accounts and CDs are covered by FDIC [or NCUA] insurance up to $250,000. CDs are as safe as putting money in a savings account, and in most cases will provide a higher return,” says Rebell.

Key takeaways

Interest earned on CDs is considered taxable income by the IRS, regardless of whether the money is received in cash or reinvested. Interest earned on CDs with terms longer than one year must be reported and taxed every year, even if the CD cannot be cashed in until maturity.

How much can I make if I put 5000 in a CD? ›

How much interest would you make on a $5,000 CD? We estimate that a $5,000 CD deposit can make roughly $25 to $275 in interest after one year. In comparison, a $10,000 CD deposit makes around $50 to $550 in interest after a year, depending on the bank.

This CD will earn $120.39 on $500 over five years, which means your deposit will grow by 24.6%.

That's up to each issuer. In practice, however, most CDs compound either daily or monthly. The more frequent the compounding, the more interest your interest will earn. The frequency with which your CD compounds is reflected in the annual percentage yield (APY) that the CD's issuer promises you when you buy a CD.

Depending on the bank, a $5,000 CD deposit will make around $25 to $275 in interest after one year.

Is it worth putting money into a CD? For some people, it can be worth putting money into a CD. If a person is seeking a riskless investment with a modest return, CDs are a good bet—you'll earn a higher rate than you would with a checking or savings account, but you'll have to commit your funds for a fixed period.

A CD is a time deposit account, so you're making a commitment to keep your money in the CD for a set length of time. If you want to take money out of your CD before it matures, you'll pay an early withdrawal penalty. At many banks, the early withdrawal penalty is based on the amount of interest you earn in a day.