What Is a Certificate of Deposit (CD)?
A certificate of deposit is one of the simplest and safest savings instruments available. You deposit a lump sum at a bank or credit union for a fixed term — anywhere from 3 months to 5 years — and receive a guaranteed, fixed interest rate in return. At maturity, you get your principal back plus all accumulated interest.
CDs are FDIC-insured up to $250,000 per depositor per institution (NCUA-insured at credit unions), making them essentially risk-free for amounts within that limit. The only real risk is locking your money up and needing it before the term ends — which triggers an early withdrawal penalty.
→ Use our free CD calculator to see your exact payout
How to Calculate CD Interest
CD interest compounds over time, which means you earn interest on your interest — not just on your original deposit. The formula is:
A = P × (1 + r/n)^(n×t)
- A = final balance at maturity
- P = your initial deposit (principal)
- r = annual interest rate as a decimal (4.75% → 0.0475)
- n = how many times interest compounds per year (daily = 365)
- t = term in years (1 year = 1, 6 months = 0.5)
Interest earned = A − P
Worked Example: $15,000 at 4.80% for 12 Months (Daily Compounding)
A = $15,000 × (1 + 0.0480/365)^(365 × 1) A = $15,000 × 1.04918 A = $15,737.70
Interest earned: $737.70
Don't want to do the math manually? Our CD calculator handles any term and rate instantly.
APR vs APY — Which One Matters?
When comparing CDs, always use APY (Annual Percentage Yield), not APR. APY accounts for compounding effects — it shows what you actually earn over a year. APR is the stated rate before compounding. The difference seems small but adds up:
| APR | Compounding | Effective APY |
|---|---|---|
| 4.50% | Annually | 4.50% |
| 4.50% | Monthly | 4.59% |
| 4.50% | Daily | 4.60% |
Most bank rate tables already show APY. If you see only APR, calculate effective APY with: (1 + r/n)^n − 1. Or use the APY calculator to convert instantly.
CD Rates in 2026: What to Expect
Following the Federal Reserve's rate hikes of 2022–2023, CD rates have remained elevated by historical standards. As of early 2026, top online banks and credit unions are offering:
| CD Term | Competitive Rate (APY) | Notes |
|---|---|---|
| 3 months | 4.00–4.75% | Short-term, high flexibility |
| 6 months | 4.25–5.00% | Popular for CD laddering |
| 12 months | 4.50–5.50% | Best rate-to-flexibility balance |
| 24 months | 4.00–4.75% | Slightly lower than 1-year due to inverted curve |
| 60 months | 3.75–4.50% | Lowest rate due to long-term uncertainty |
Note the inverted yield curve: in the current rate environment, shorter-term CDs often pay more than longer-term ones. That makes 6-month and 1-year CDs especially attractive right now for most savers.
CD vs High-Yield Savings Account (HYSA): Which Is Better?
| Feature | CD | HYSA |
|---|---|---|
| Rate | Fixed — guaranteed for the term | Variable — can change any day |
| Access to funds | Locked until maturity | Withdraw anytime |
| Rate level | Typically higher than HYSA | Competitive but uncertain |
| Best for | Money you won't need for months | Emergency fund, near-term cash |
| FDIC insured | Yes (up to $250K) | Yes (up to $250K) |
The verdict: For money you're confident you won't need, a CD locks in a higher guaranteed rate and removes the risk of a rate cut reducing your yield. For your emergency fund or any money you may need on short notice, keep it in a HYSA for flexibility.
CD Laddering: Get Both Rate and Liquidity
A CD ladder splits your savings across multiple CDs with staggered maturity dates. For example, $20,000 split equally into 3-month, 6-month, 1-year, and 2-year CDs. As each CD matures, you reinvest into a new long-term CD (or access the cash if needed).
Benefits of a CD ladder:
- You always have a CD maturing soon — so you're never fully locked out of your money
- You capture higher long-term rates without a full commitment
- If rates rise, you reinvest maturing CDs at the new higher rate
- If rates fall, your long-term CDs still earn the higher locked-in rate
Use the CD calculator to model each rung of your ladder, and the savings goal calculator to see how your CD strategy contributes to your overall savings plan.
Is CD Interest Taxable?
Yes — CD interest is taxed as ordinary income in the year it is credited to your account. Your bank will send a Form 1099-INT if you earned $10 or more in interest. Key points:
- Tax is owed even if you do not withdraw the money at maturity
- For multi-year CDs that credit interest annually, you pay taxes each year — not just at maturity
- CD interest does not qualify for the lower capital gains tax rates
- Consider holding CDs inside a Roth IRA to eliminate the tax drag — interest grows and is withdrawn tax-free
Use the tax calculator to estimate how much of your CD interest you will keep after federal income taxes.
How to Find the Best CD Rates
- Shop online banks and credit unions first — they consistently beat big-bank rates by 1–2 percentage points due to lower overhead costs
- Compare APY, not APR — always the APY
- Check minimum deposit requirements — some high-rate CDs require $5,000–$25,000 minimums
- Read the early withdrawal penalty — the best rate is worthless if you need the money early and the penalty wipes out your gains
- Confirm FDIC or NCUA insurance — verify the institution is federally insured before depositing
- Consider no-penalty CDs — some online banks offer CDs with no early withdrawal penalty; rates are slightly lower but they combine the best of both worlds
Once you find a rate you like, plug it into our CD calculator to see your exact earnings before committing. If you're comparing multiple options, try the compound interest calculator to model different scenarios side by side.