How CD interest works
A certificate of deposit (CD) pays compound interest, interest that earns interest. The compounding frequency (daily, monthly, quarterly, or annually) determines how often earned interest gets added to your balance. Most CDs compound daily or monthly.
A = P × (1 + APY)^t
P = principal · APY as a decimal · t = years. From an interest rate r compounded n times a year, APY = (1 + r/n)^n − 1.
The rate you see advertised is the APY (Annual Percentage Yield), which already accounts for compounding: Regulation DD (12 CFR 1030, Appendix A) defines it from the interest a deposit earns over a year. So an APY is never compounded again. $10,000 at a 5% APY earns $500 in a year whether the bank compounds daily or monthly, and two CDs with the same APY and term earn the same. If you know only the interest rate, choose "An interest rate" and its compounding, and the calculator works out the APY.
National average CD rates by term
CD rates depend on the term length, the bank, and the current interest rate environment. These are the FDIC's national averages across banks and credit unions as of September 21, 2026; individual banks pay well above or below them, so compare the APY each bank advertises.
| Term | National average |
|---|---|
| 3-month | 1.13% |
| 6-month | 1.41% |
| 1-year | 1.73% |
| 2-year | 1.61% |
| 3-year | 1.36% |
| 5-year | 1.38% |
Source: FDIC National Rates and Rate Caps, published monthly. Check current rates with your bank before investing.
$10,000 CD examples
Value of a $10,000 CD at different APYs and terms (an APY already includes compounding):
| Term | 4% APY | 4.5% APY | 5% APY |
|---|---|---|---|
| 3-month | $10,099 | $10,111 | $10,123 |
| 6-month | $10,198 | $10,223 | $10,247 |
| 1-year | $10,400 | $10,450 | $10,500 |
| 2-year | $10,816 | $10,920 | $11,025 |
| 3-year | $11,249 | $11,412 | $11,576 |
| 5-year | $12,167 | $12,462 | $12,763 |
CD vs savings vs money market
CDs are one of several low-risk options for cash. Compare how the rate is set, liquidity, and risk before choosing:
| Product | Rate | Liquidity | Risk |
|---|---|---|---|
| CD | Fixed for the term | Locked until maturity (penalty to break) | FDIC-insured to $250K per depositor, bank and ownership category |
| High-yield savings | Variable; the bank can change it any time | Withdraw anytime | FDIC-insured; rate can drop |
| Money market account | Variable | Withdraw anytime; some banks set limits | FDIC-insured; variable rate |
| Treasury bills (4-52 weeks) | Set at each auction; sold at a discount | Hold to maturity or sell on the secondary market | Backed by the US government; no state income tax |
| Series I savings bonds | Fixed rate plus inflation, reset every 6 months | 12-month lockup; 3 months' interest lost before 5 years | US government backed |
CD laddering strategy
A CD ladder splits your cash across CDs with staggered maturity dates, giving you both higher long-term rates and regular access to funds.
Example: $25,000 5-year ladder
- $5,000 in a 1-year CD
- $5,000 in a 2-year CD
- $5,000 in a 3-year CD
- $5,000 in a 4-year CD
- $5,000 in a 5-year CD
Each year, one CD matures. Reinvest it in a new 5-year CD (at whatever rate is current) or withdraw the funds. After year 5, you have five 5-year CDs with one maturing each year, earning top-tier rates with annual liquidity.
Laddering hedges interest rate risk. If rates rise, you reinvest at higher rates each year. If rates fall, only one CD's worth of money gets reinvested at the lower rate.
Are CDs taxable?
Yes, CD interest is taxed as ordinary income at your federal marginal tax rate. This is different from long-term capital gains or qualified dividends, which get lower rates.
Interest is reported to the IRS on Form 1099-INT if you earn $10+ in a year. Taxes are owed in the year interest is credited, not when you withdraw. For a long-term CD, you may owe tax on interest you haven't received yet.
Hold CDs inside an IRA to defer taxes, or inside a Roth IRA to grow tax-free. State income taxes may also apply, depending on your state.
Early withdrawal penalties
Breaking a CD before maturity triggers a penalty, typically calculated as a number of months of interest:
| CD term | Typical early-withdrawal penalty |
|---|---|
| Under 1 year | 3 months of interest |
| 1–3 years | 6 months of interest |
| 4+ years | 12 months of interest |
If you withdraw very early, before much interest has accrued, the penalty can dig into your principal. Some banks offer no-penalty CDs that allow one free withdrawal, but they typically pay 0.5–1% lower APY.
When CDs make sense
CDs are a good fit when:
- You have a known future expense, saving for a down payment in 2 years or a wedding in 18 months. A matching CD term locks in the rate and protects against market volatility.
- Rates are high and you expect them to fall, locking in a 5% APY for 3–5 years beats watching savings account rates drop as the Fed cuts.
- You want risk-free income, FDIC insurance covers up to $250K. A 5% CD earns $500 per $10,000 per year, guaranteed.
- You have an emergency fund already, keep 3–6 months of expenses in a liquid savings account, then use CDs for funds you don't need immediate access to.
CDs are a poor fit for long-term retirement savings (where stocks historically beat CDs over decades) or for emergency funds you might need to tap quickly.
Frequently asked questions
What is a CD (certificate of deposit)?
A certificate of deposit (CD) is a bank savings product where you deposit a fixed amount of money for a set term (3 months to 5+ years) and the bank pays you a guaranteed interest rate, higher than most savings accounts. In exchange, you can't access the money until the CD matures without paying an early-withdrawal penalty. CDs at FDIC-insured banks are covered up to $250,000 per depositor, per bank.
How is CD interest calculated?
Start from the APY the bank quotes: after t years the balance is P × (1 + APY)^t, so $10,000 at a 5% APY is $10,500 after one year and $12,762.82 after five. Compounding frequency only matters when all you have is the interest rate itself. A rate r compounded n times a year has an APY of (1 + r/n)^n − 1, so a 5% rate compounded monthly yields 5.12% and $10,000 grows to about $10,512 in a year.
What is APY vs APR?
APY (Annual Percentage Yield) is the effective annual rate you earn after compounding, this is what you see advertised on CDs. APR (Annual Percentage Rate) is the nominal rate before compounding. A 5% APR compounded monthly has an APY of 5.12%. For CDs, always compare APY, it's the apples-to-apples return. Enter an APY and the calculator grows it once a year; enter an interest rate and it applies the compounding you choose.
Are CD earnings taxable?
Yes, CD interest is taxed as ordinary income at your federal marginal rate (10%, 12%, 22%, 24%, 32%, 35%, or 37%). Banks send you a 1099-INT if you earn $10+ in a year. State taxes may also apply. A 5% CD earning $500 in interest costs $110 in tax at the 22% bracket, leaving $390 after-tax ($500 × 0.78). CDs held in IRAs defer taxes; CDs in Roth IRAs grow tax-free. Interest is taxed in the year it's credited, even if not withdrawn.
What happens when a CD matures?
At maturity, you have a grace period (typically 7–10 days) to decide: (1) withdraw the full amount (principal + interest) with no penalty, (2) let the CD automatically renew at the bank's current rate for the same term, (3) move the funds to a new CD or different account. If you do nothing, most banks auto-renew, which may lock you into a lower rate. Set a calendar reminder for your maturity date.
Can I withdraw from a CD early?
Yes, but you'll pay an early-withdrawal penalty. Typical penalties: 3 months of interest for CDs under 1 year, 6 months for 1–3 year CDs, 12 months for 4+ year CDs. Some banks charge a flat fee or a percentage of the deposit. If you withdraw very early, the penalty can exceed the interest earned, dipping into your principal. No-penalty CDs exist but usually offer lower APYs. Always read the CD disclosure before opening.
What is a CD ladder?
A CD ladder splits your savings across multiple CDs with staggered maturity dates. Example with $25,000: put $5,000 each in 1, 2, 3, 4, and 5-year CDs. Each year, one CD matures, you either withdraw the cash or reinvest it in a new 5-year CD. This gives you annual access to funds while earning the higher long-term rates. It reduces the risk of locking in when rates later rise.
Are CDs FDIC insured?
CDs at FDIC-insured banks are covered up to $250,000 per depositor, per bank, per ownership category. Principal and accrued interest are protected up to that limit if the bank fails. Share certificates at federally insured credit unions have the same $250,000 coverage through NCUA. Brokered CDs are bought through a brokerage and are FDIC-insured at the issuing bank when the FDIC's pass-through rules are met. Anything above the limits is uninsured, so spread large deposits across banks or ownership categories.
What is the best CD term?
It depends on the interest rate environment and your timeline. In a rising-rate environment, shorter terms (3–12 months) let you reinvest at higher rates soon. In a falling-rate environment, longer terms (3–5 years) lock in today's higher rates. A CD ladder hedges both ways. If you need the money in 6 months, a 6-month CD is safer than a 5-year CD with a penalty. Never invest in a CD you might need to break early.
How much interest will I earn on a $10,000 CD?
At a 5% APY, $10,000 earns $500 in 1 year, $1,025 in 2 years, $1,576 in 3 years and $2,763 in 5 years. At 4%: $400 in 1 year and $2,167 in 5 years. At 3%: $300 in 1 year and $1,593 in 5 years. Those figures already include compounding, because an APY does; only a higher APY or a longer term raises them. Use the calculator above for your own deposit, rate and term.