How a CD works
You deposit a lump sum, pick a term, and the institution promises a rate for that term. Most CDs pay a fixed rate, though the disclosure must say whether it is fixed or variable, how often interest is paid or compounded, the maturity date and how any early withdrawal penalty is calculated.
Rates are quoted as an annual percentage yield (APY), a standardized figure set by the Truth in Savings rules that reflects both the rate and how often interest compounds over 365 days. That makes APYs comparable across banks and terms, unlike the APR quoted on loans.
At maturity you can withdraw the money, move it, or let it renew. Many CDs renew automatically for a similar term at whatever rate the bank then offers. For an automatically renewing CD longer than one month, the bank must send renewal disclosures at least 30 calendar days before maturity, or at least 20 days before the end of a grace period of five days or more. If you miss the grace period, your money is usually locked into the new term, penalty and all.
Banks and credit unions sell several variations on the basic CD.
- No-penalty CDs waive the early withdrawal charge, usually in exchange for a lower rate than a standard CD of the same term.
- Bump-up CDs let you ask for a higher rate, often just once, if the bank raises its rates during the term.
- Add-on CDs accept more deposits after opening; a standard CD takes one deposit.
- IRA CDs hold retirement money and follow the IRA’s tax rules, covered below.
CD early withdrawal penalties
A CD’s penalty is set by the bank, so it varies widely; many are expressed as a number of days or months of interest. Federal Regulation D sets only a floor: to count as a time deposit, an account must charge at least seven days’ simple interest on money withdrawn within six days of deposit. That is why even CDs marketed as having no penalty typically lock the money for the first week.
On a CD cashed early, a penalty measured in months of interest can absorb most of what you have earned, as the example below shows. Read the penalty clause before comparing rates: a slightly higher APY with a harsh penalty can be the worse deal if there is any real chance you will need the money.
The penalty does have a tax silver lining. Your bank reports the full interest in box 1 of Form 1099-INT and the penalty separately in box 2. You report all the interest, then deduct the penalty on Schedule 1 of Form 1040, whether or not you itemize, so you are taxed only on what you kept.
CD rates in 2026 and how to compare them
National averages make a useful floor, not a target. In its August 2026 national rates update, based on end-of-July data, the FDIC put the national average at 1.71% for a 12-month CD and 1.36% for a 60-month CD, while the 12-month Treasury yield was 4.08%. The FDIC average is weighted by deposits, so the largest banks dominate it; comparing several institutions, and Treasury yields, shows what the market is paying.
In that same table the 12-month average topped every longer term, a reminder that locking money up longer is not automatically rewarded. Compare offers on four things: APY, term, the early withdrawal penalty, and whether the CD is callable.
Also compare the result with Inflation. With CPI-U up 3.4% in the 12 months to August 2026, a CD paying less than that loses purchasing power even before tax. Alternatives for the same money include a high-yield savings account or a money market fund if you need access, Treasury bills if you want state-tax-free interest, and I bonds or TIPS if you want inflation protection.
Bank CDs vs. brokered CDs
Brokered CDs are issued by banks but sold through brokerage firms, which can sometimes negotiate higher rates by bringing the bank large deposits. The SEC warns that they are typically more complex and may carry more risks than CDs bought directly from a bank.
The main risks are specific. A callable CD can be ended early by the issuing bank, usually after rates fall. To get money out early, you may have to sell on the secondary market, and if rates have risen, you sell at a discount and can lose part of your deposit. A sole owner may instead be able to pay the issuing bank’s penalty.
Deposit insurance can still apply. For FDIC coverage to pass through, the records must show the broker acting as your agent, such as a custodian for customers. Coverage counts everything you hold at the issuing bank, so a brokered CD added to your existing accounts there can push you over $250,000.
How CD interest is taxed
CD interest is ordinary income, taxed at your marginal tax rate, and unlike Treasury interest it is also subject to state income tax. The payer sends Form 1099-INT when it pays you $10 or more, but you owe tax on all interest either way.
Timing depends on the term. Interest that is credited and can be withdrawn without a substantial penalty is taxable in the year it becomes available. On a CD longer than one year, you must include part of the total interest in income each year under the original issue discount rules, even if it is paid only at maturity.
Inside an IRA, a CD’s interest follows the account’s rules instead: tax-deferred in a traditional IRA, potentially tax-free in a Roth IRA. For deposit insurance, IRA deposits are a separate ownership category, insured up to $250,000 per owner apart from your regular accounts at the same bank.
Illustrative numbers
Breaking a 24-month CD after 9 months
- Interest
- Total dollars of interest earned on the principal over the term
- Principal
- The amount deposited at the start of the term
- Days in term
- The actual number of days in the CD’s term
For a 365-day term the formula reduces to APY = 100 × interest ÷ principal. This is the Truth in Savings (Regulation DD) method banks must use.
Deposit and terms$20,000 for 24 months at 4.00% APY
Interest credited after 9 months: $20,000 × (1.04^0.75 − 1)About $597
Penalty in the account terms: 6 months of simple interest$20,000 × 4.00% × 6 ÷ 12 = $400
Amount receivedAbout $20,197
Form 1099-INT$597 interest in box 1, $400 penalty in box 2
Net taxable interest after deducting the penaltyAbout $197
Two-thirds of the interest earned went to the penalty, leaving about 1% for nine months of waiting. Had the money gone into a high-yield savings account instead, a rate of about 1.32% would have matched that result, so a CD pays off only if you are reasonably sure you can wait out the term.
At a glance
Bank CDs compared with brokered CDs and Treasury bills
| Feature | Bank CD | Brokered CD | Treasury bill |
|---|---|---|---|
| Where you buy | Directly from a bank or credit union | Through a brokerage account | TreasuryDirect or a brokerage |
| Protection | FDIC or NCUA insurance up to $250,000 per depositor, per ownership category | FDIC insurance if records show the broker as your agent | Direct debt of the U.S. government |
| Typical terms | Commonly 6 months to 5 years | Months to 20 years | 4 to 52 weeks |
| Getting money early | Pay the bank’s early withdrawal penalty | Sell on the secondary market, possibly at a loss | Sell at the market price |
| State income tax on interest | Yes | Yes | No |
| How the rate is set | By the bank, usually fixed for the term | By the issuing bank; some are callable | At auction; sold at a discount to face value |
Put it in your plan
CD in MoneyWhatIf
In MoneyWhatIf, money in CDs fits a cash account, which carries its own interest-rate assumption, so you can enter the CD’s rate. Cash accounts stay on that rate when Market Simulator or Plan Resilience replays market history for investment accounts. The annual tax chart includes tax on savings interest, and the selling order ranks cash alongside brokerage and retirement accounts, so you can see whether a short year would reach for cash you meant to leave in a CD.
Common questions
CD FAQs
What is a CD ladder?
A CD ladder splits savings across CDs that mature at different times, such as $20,000 divided into four $5,000 CDs maturing in one, two, three and four years. Each year one CD comes due, so a quarter of the money is available without a penalty. You can spend it or roll it into a new four-year CD at the far end, which averages out the rates you lock in. It is a bond ladder built from insured deposits.
How much does a $10,000 CD earn in a year?
For a one-year CD, multiply the deposit by the APY. At an illustrative 4.00% APY, $10,000 earns $400; at the FDIC’s August 2026 national average of 1.71% for a 12-month CD, it earns $171. APY is an annual figure, so a shorter term earns a fraction of it: a 6-month CD at 4.00% APY pays about $198, or $10,000 × (1.04^0.5 − 1).
Are CDs safe?
CDs at FDIC-insured banks or NCUA-insured credit unions are insured up to $250,000 per depositor, per institution, per ownership category, and coverage includes accrued interest. A $195,000 CD with $3,000 of accrued interest is fully insured at $198,000. The bigger risk is quieter: inflation can outpace a fixed rate, lowering your real return.
Is a CD better than a high-yield savings account?
It depends on whether you can commit the money. A CD locks in a rate for the term, which helps if rates fall, but charges a penalty for early access. A high-yield savings account keeps money available, but its rate can change at any time. Many savers keep emergency money in savings and put known, dated goals in CDs.
What is a callable CD?
A callable CD lets the issuing bank end the CD early and return your money, typically after interest rates fall, leaving you to reinvest at lower rates. Only the bank can call it; you cannot. The call date is not the maturity date, so a CD advertised as one-year non-callable may run for many years if the bank never calls it.