Guide - Savings & Investing - US
US CDs Explained: APY, Penalties, and CD Ladders
Certificates of deposit can be useful when you want a known rate for a fixed term. The trade-off is liquidity: taking money out early can cost months of interest.
How CD interest compounds
A CD pays interest on a fixed deposit for a fixed term. Some banks quote a nominal interest rate and an APY. The APY is the more useful comparison because it includes compounding. If two CDs have the same stated rate but one compounds more often, the more frequent compounding produces a slightly higher effective yield.
Example uses 4.5% nominal interest, monthly compounding, and a 12-month term before tax.
Early withdrawal penalties
CD penalties are often written as a number of months of interest. A 12-month CD might charge three months of interest if you cash out early. If you withdraw very early, the penalty can wipe out most or all interest earned so far.
| Months held | Interest earned | Penalty | Net interest |
|---|---|---|---|
| 3 | $112 | $113 | -$1 |
| 6 | $226 | $113 | $113 |
| 12 | $459 | $0 | $459 |
When a CD ladder helps
A ladder divides cash across several CDs with different maturity dates. Instead of locking all your money for one term, you might put equal amounts into 3-month, 6-month, 9-month, and 12-month CDs. As each one matures, you can spend it, move it to savings, or roll it into a new longer-term CD.
Frequently asked questions
Are CDs FDIC insured?
Bank CDs are generally FDIC insured within applicable limits when held at an FDIC-insured bank. Credit union share certificates may be NCUA insured. Always confirm coverage and ownership limits before depositing large balances.
Is CD interest taxable?
In taxable accounts, CD interest is generally taxed as ordinary interest income in the year it is credited or made available, even if you leave it in the CD.
What is a CD ladder?
A CD ladder splits cash across several maturities so some money comes due regularly while the rest can stay locked at longer-term rates.