Buying a certificate of deposit is one of the simplest investments you can make. You choose a term length, deposit your money, and earn a fixed interest rate until the CD matures. The entire process can be done online in under 15 minutes if you already have a bank account. Here’s what you need to know before you buy, where to purchase one, and how to get the best return.
How a CD Works
A CD is a time-locked savings product offered by banks and credit unions. You agree to leave your money untouched for a set period, anywhere from a few months to 10 years, and the bank pays you a guaranteed interest rate in return. When the term ends (the “maturity date”), you get your original deposit back plus the interest earned.
The tradeoff is straightforward: your money is less accessible than it would be in a regular savings account, and in exchange you typically earn a higher rate. CDs are insured by the FDIC at banks (or the NCUA at credit unions) up to $250,000 per depositor per institution, so your principal is protected even if the bank fails.
Where to Buy a CD
You have two main channels: directly from a bank or credit union, or through a brokerage account.
Bank or credit union CDs are the most common route. You open the CD directly with the institution, either online or in a branch. Online banks tend to offer higher rates than traditional brick-and-mortar banks because their overhead costs are lower. As of late April 2026, top 1-year CD rates from online banks range from roughly 3.50% to 4.10% APY, while 5-year rates fall between about 3.30% and 4.00% APY.
Brokered CDs are sold through brokerage firms like Fidelity, Schwab, or E*TRADE. The CD itself is still issued by a bank and still carries FDIC insurance through that underlying bank, but you buy and hold it inside your brokerage account. The advantage is convenience if you already invest through a broker, plus a wider selection of banks and terms in one place. Brokered CDs also offer a different kind of flexibility: you can sell them on the secondary market before maturity, though you may receive more or less than you paid depending on current interest rates.
Steps to Open a Bank CD
The process is nearly identical to opening a savings account:
- Pick a term length. Shorter terms (3 to 12 months) give you quicker access to your money. Longer terms (2 to 5 years) sometimes pay higher rates, though that’s not always the case.
- Compare rates. Don’t default to your current bank. Online banks and credit unions frequently beat the rates at large national banks by a significant margin. Check rate comparison tools from sites like Bankrate or NerdWallet.
- Submit an application. Most banks let you apply entirely online. You’ll provide your name, address, Social Security number, and contact details. If you don’t already have an account at that bank, you may need to upload a photo ID.
- Choose single or joint ownership. Like other bank accounts, CDs can be opened jointly with another person.
- Decide how you want interest paid. You can collect all interest at the end of the term, which maximizes your total return through compounding. Or you can receive periodic payments (monthly or annually) if you want the cash flow along the way.
- Fund the account. Transfer money electronically from another bank account, or mail a check. Some CDs require a minimum deposit, often $500 or $1,000, though many online banks have no minimum at all.
What Happens at Maturity
When your CD’s term ends, the bank will notify you and give you a short window, typically 7 to 14 days, called a grace period. During that time you can withdraw your money, roll it into a new CD at the current rate, or change the term. If you do nothing, most banks automatically renew the CD at whatever rate they’re currently offering, which may be lower than what you originally locked in. Set a calendar reminder so you don’t miss it.
Early Withdrawal Penalties
Pulling money out of a bank CD before it matures costs you. Federal law requires a minimum penalty of seven days’ simple interest if you withdraw within the first six days, but there is no federal cap on what banks can charge beyond that. In practice, penalties vary widely by institution and term length. A 1-year CD might cost you 3 to 6 months of interest for early withdrawal, while a 5-year CD could cost you 12 months or more.
Before you commit, read the account agreement carefully so you know exactly what the penalty is. If there’s any chance you’ll need the money early, consider a shorter term, a no-penalty CD (which some banks offer at slightly lower rates), or the laddering strategy described below.
Building a CD Ladder
A CD ladder solves the main drawback of CDs: illiquidity. Instead of locking all your money into a single term, you spread it across multiple CDs with staggered maturity dates. As each one matures, you either use the cash or reinvest it into a new longer-term CD.
Here’s a simple example. Say you have $10,000 to invest. You could split it into five equal parts:
- $2,000 in a 1-year CD
- $2,000 in a 2-year CD
- $2,000 in a 3-year CD
- $2,000 in a 4-year CD
- $2,000 in a 5-year CD
After the first year, the 1-year CD matures. You reinvest that $2,000 into a new 5-year CD. The following year, the original 2-year CD matures, and you roll that into another 5-year CD. Eventually, all five CDs are 5-year terms, but one matures every 12 months. You capture the higher rates of longer terms while still having regular access to a portion of your money.
If you need more frequent access, use a shorter ladder with 6-month, 12-month, and 18-month CDs instead. Three to five CDs is typical for most people.
Taxes on CD Interest
Interest earned on a CD is taxed as ordinary income at the federal level, and in most cases at the state level too. Your bank will send you a 1099-INT form each year reporting the interest you earned. Even if you chose to let the interest compound and didn’t actually receive any cash during the year, you still owe taxes on the interest that accrued.
One way to defer taxes on CD interest is to hold the CD inside a tax-advantaged account. Many brokerages let you buy CDs within an IRA, where the interest grows tax-deferred (traditional IRA) or tax-free (Roth IRA).
Choosing the Right CD
The best CD for you depends on when you’ll need the money and how much you’re investing. A few things worth weighing:
- Rate vs. term. Longer terms don’t always pay more. Compare rates across multiple terms before assuming a 5-year CD is the best deal.
- Minimum deposit. Some of the highest-rate CDs require $10,000 or $25,000 to open. If you’re investing a smaller amount, focus on banks with low or no minimums.
- Early withdrawal penalty. A bank offering a slightly higher rate but a steeper penalty may not be worth it if your timeline is uncertain.
- FDIC or NCUA coverage. Confirm the institution is federally insured. If you’re investing more than $250,000, spread your deposits across multiple banks to stay within the coverage limit.
CDs won’t make you rich, but they’re one of the safest places to park money you know you won’t need for a defined period. The guaranteed return and federal insurance make them especially useful for short-to-medium-term goals like a home down payment, a car purchase, or simply earning more on cash that’s sitting idle.