Certificate of deposit

What It Means

A certificate of deposit (CD) is a deposit you agree to leave with a bank or credit unionCredit unionA not-for-profit financial cooperative owned by its members, offering accounts and loans to people within the field of membership its charter sets. See more for a set term, such as 6 months or 5 years, ending on its maturity date. Taking the money out before then usually costs an early withdrawal penaltyEarly withdrawal penaltyThe IRS 10% additional tax on money taken from a 401(k), IRA or similar account before age 59½, unless an exception applies. See more, and federal law sets only a minimum for that penalty. When the term ends, you can withdraw the money or let it renew, and the CFPB notes a CD may roll over on its own unless you tell the bank otherwise.

How It Sounds at Home

• "That money's locked in a CD until March."
• "The CD rolled over before I noticed."
• "If I cash it in early, I lose three months of interest."

The Breakdown

Worked example. Alex puts $5,000 into a 12-month CD at an example 4.00% APYAPYA yearly rate showing the total interest a deposit account pays, counting how often interest compounds, as defined by federal Truth in Savings rules. See more. The bank's early withdrawal penalty, also an example, is three months of interestInterest rateThe yearly percentage a lender charges for borrowing money, not counting fees; the APR adds certain fees to show a fuller cost. See more.

What the result means. Cashing out halfway still leaves some interest in this example, but the penalty takes half of it. Try a withdrawal after 1 month in the calculator: the penalty stays at $50 while the interest earned is only about $16, so the rest comes out of the deposit. HelpWithMyBank.gov notes federal law sets no maximum penalty, so the account agreement decides how much you lose.

When the CD matures. Your bank or credit union has to send a written notice before the maturity date, saying when the CD ends and whether it renews automatically. If it renews, the new rate can be higher or lower than the old one, so mark the date and decide before it rolls over.

Brokered CDs are different. A CD bought through a brokerage generally has no early withdrawal penalty, but getting out early means selling it on a secondary market, where you may get back less than you paid. Investor.gov notes brokered CDs generally pay simple interestSimple interestInterest figured only on the principal, never on interest already earned, so the same balance at the same rate adds the same amount each period. See more rather than compound.

Good to Know

HelpWithMyBank.gov, run by the OCC, says banks are generally required by law to charge a penalty when you take CD money out before maturity. Federal law sets only a minimum (at least seven days' simple interest for a withdrawal within six days of the deposit) and no maximum, so your account agreement decides the rest. According to the CFPB, your bank or credit union must send a written notice before the CD matures, and a renewed CD's rate may be higher or lower than before. CDs at an FDIC-insured bank are deposits covered up to $250,000 per depositor, per insured bank, for each ownership category. For a brokered CD, Investor.gov and the SEC advise reading the fine print on the maturity date and any early withdrawal terms before you buy.

Related Terms and Categories

• CD ladder

  Splitting savings across several CDs with staggered maturity dates, so part of the money comes due at regular intervals instead of all at once.

• Savings account

  A bank or credit union account for money you're setting aside for later, which earns interest and is insured up to federal limits at insured institutions.

• APY

  A yearly rate showing the total interest a deposit account pays, counting how often interest compounds, as defined by federal Truth in Savings rules.

• High-yield savings account

  A savings account paying a variable interest rate that's generally higher than a traditional savings account's, often offered by online banks.

• Money market account

  A bank or credit union deposit similar to savings that may pay a higher, tiered rate for bigger balances and often allows checks or a debit card.

• Simple interest

  Interest figured only on the principal, never on interest already earned, so the same balance at the same rate adds the same amount each period.

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