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Understanding CD Accounts: How They Work and Benefit You

Certificates of deposit (CDs) have different rules than other types of accounts

By

Matt Ryan Webber

Updated October 26, 2025

Reviewed by

Katie Miller

Fact checked by

Rukshani Lye

A certificate of deposit (CD) is an account that pays a specific rate of interest for a set period of time, from a few months to years. CDs usually pay higher interest rates than typical savings accounts. If you have to take money out of your CD before it matures, you will generally be subject to early withdrawal penalties.

CDs are considered to be a safe investment and a good place to put money aside until you need it, while earning interest in the meantime. CDs can vary widely from one financial institution to another in their interest rates and other features.

Key Takeaways

CDs lock up your money for a set term, but offer usually higher interest rates than regular savings accounts.
Withdrawing money from a CD before maturity often incurs early withdrawal penalties.
Different financial institutions offer varied CD rates and terms, so it's wise to shop around.
CDs are considered safe investments as most are federally insured, but they are less liquid than other investments.
Once a CD matures, you can roll it over to another CD, transfer the funds, or withdraw the proceeds.

How Does a CD Account Work? — Investopedia / Michela Buttignol

Essential Considerations Before Opening a CD Account

A certificate of deposit is a relatively simple investment product and buying one is a straightforward process. Here are the key steps for buying a CD:

1. Decide How Much You Want To Invest

First, you should determine how much money you can invest in a CD. This is important because CDs are not very liquid—that is, you can't get your money out easily if you need it in an emergency. Because of this, you should only put money into a CD if you are fairly sure you aren't going to need it before the CD matures. CDs have early withdrawal penalties (more on that below), which makes them a bad choice for emergency savings or other money you might want at a moment's notice.

2. Determine What Kind of CD You Want

Many banks and credit unions in the U.S. offer at least one certificate of deposit and many have a wide array of them. You'll find CDs offered by nearby brick-and-mortar banks as well as from regional and national banks that accept customers online. Investopedia's regularly updated ranking of the best CD rates, for example, tracks over 200 financial institutions that offer CDs.

There are three main considerations when choosing a CD. The first is the term, or how long you are willing to leave your money in the CD before you can withdraw it. CD terms range from a few months to years. If you aren't sure when you're likely to need your money back, it's better to err on the side of caution. You can always choose a CD with a short term and then re-invest the money in another CD after it matures.

Interest rates are another consideration. Longer terms generally mean higher rates. But the range of CD rates can vary widely from one financial institution to another. The top-paying CDs in the country may pay many times the national average rate, so it's smart to shop around.

Finally, consider whether a standard or specialized type of CD would be best for you. Standard CDs pay a set interest rate and charge penalties for early withdrawals. There are other types that pay variable interest rates or that are more flexible, such as liquid CDs. In general, you'll pay extra for that flexibility by means of a lower interest rate.

Managing Your CD Account After Opening

Let's say you've purchased a CD. Then what?

1. Protecting Your Investment: Leave Your Money Untouched

Now comes the (potentially) easy bit: leaving your money alone. Once you've signed up for a CD, the bank or credit union will give you instructions on how to transfer funds to the new account. Once you've made a deposit, try to resist the temptation to withdraw money before your CD matures, unless you face emergency expenses.

Warning

The early withdrawal penalty on a typical CD can be substantial, in some cases exceeding any interest you've earned. So you could lose some of the money you invested.

2. Planning for CD Maturity: Next Steps

When your CD reaches the end of its term, you'll have some decisions to make. You will usually have three options:

Roll the CD over into a new CD at that bank or credit union: You can choose a CD of the same term or a different one, if available.
Transfer the funds into another account at that bank: Your options include savings, checking, and money market accounts.
Withdraw the proceeds: You can ask the financial institution that holds your CD to transfer the money to an account at a different institution or mail you a check to deposit yourself.

If you don't provide any instructions before the bank or credit union's deadline, it will usually roll your CD proceeds into a new CD of the same term. If that's not your intention, missing the deadline could mean locking yourself into a CD with a subpar rate or paying an early withdrawal penalty to get your money out.

How Much Does a $10,000 CD Make in a Year?

How much a $10,000 earns in a year depends on how much it pays in interest. For example, if the interest rate is 4.5%, you will earn $450 in a year. If the interest rate is 2.3%, you will earn $230 in a year.

How Much Does a $5,000 CD Make in a Year?

How much a $5,000 CD makes in a year will depend on the interest rates of the CD you purchase. For example, if the interest rate is 4.5%, you will earn $225. If the interest rate is 2.3%, you will earn $115.

How Much Money Do You Need to Invest in a CD?

Many banks and credit unions require at least a certain minimum amount to open a CD, such as $500 or $1,000, but some set no minimum.

Can You Lose Money in a CD?

It's very unlikely that you'll lose money in a CD. CDs are considered one of the safest investments around. Your bank or credit union assumes all the risk for delivering the interest rate it promises you and most CDs are federally insured up to certain limits.

Do CDs Pay Interest Monthly?

The way CDs pay interest varies by account. Some CDs pay interest monthly, weekly, or even daily. Others pay all the interest at the end of their term.

Can You Add Money to Your CD Account?

You usually can't add money to a CD account. Most CDs require a one-time investment and you can't add to it later. You can, of course, buy another CD if you have additional money. One exception is called an add-on CD, although they are uncommon compared to standard CDs.

The Bottom Line

Certificates of deposit (CDs) are different from other types of accounts offered by banks and credit unions in that they typically pay higher interest rates but also require that you leave your money on deposit for a set period of time. They can be smart investments when you can align their maturity dates with a specific future need for your money. If you withdraw funds from your CD account before it matures, you'll usually have to pay an early withdrawal penalty.

Article Sources

Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.

U.S. Securities and Exchange Commission. "Certificates of Deposit."
Federal Deposit Insurance Corporation. "National Rates and Rate Caps."
Office of the Comptroller of the Currency. "What Are the Penalties for Withdrawing Money Early From a Certificate of Deposit (CD)?"
Consumer Financial Protection Bureau. "What Is a Certificate of Deposit (CD) Rollover or Renewal?"

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