Certificates of deposit (CDs) are types of savings accounts that offer better returns than traditional saving options. 

When you open a CD, you agree to give your money to a bank or credit union for a predetermined time period. In exchange, you’ll receive a higher interest rate than you’d typically get with a traditional savings account. And many CDs offer fixed interest rates and compounding growth, so they’re a predictable way to grow your savings.

Read on to discover exactly how CD accounts work and determine whether CDs are a good savings option for you.

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Are CDs a good investment right now?

CDs can be great if you’re looking for secure, long-term investments. If you don’t need immediate access to your money, CDs are a straightforward way to earn more than in a traditional savings account. And fixed-rate accounts offer predictable returns, so you’ll know exactly how much cash you’ll have at the end of your term.

However, banks typically charge fees for pulling money out of a CD before it matures. So, if you think you’ll need to access your money prior to your CD’s maturity date, you might be better off with a savings account with fewer restrictions. And locking your funds into a CD may also mean that you miss out on other investment opportunities.

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Certificate of deposit pros and cons

Like any investment strategy, CDs have advantages and disadvantages to consider.

Pros

Safety and security

The Federal Deposit Insurance Corporation (FDIC) insures up to $250,000 of money deposited in FDIC-insured banks, per depositor. This coverage applies to all deposit accounts, making CDs low-risk investments. And many CDs offer fixed interest rates, so you’ll earn interest at a consistent pace.

Multiple types available

Banks make CDs available in a wide variety of terms. While most CDs have fixed interest rates and early withdrawal penalties, some banks offer different products, such as no-penalty CDs or accounts that allow you to move to a higher interest rate during your term. This flexibility could ensure your investments continue to match your financial goals.

Higher rates than traditional savings accounts

As of January 2025, the FDIC reports that the national average interest rate on savings accounts is just 0.41%, while 12-month CDs sit at 1.82%. 

A review of large banks in the US reveals that, as of January 2025, you can typically expect CD rates to be between 2–4%, depending on the term and how much you have to invest. But for traditional savings accounts, you may only have access to sub-1% rates that can go as low as 0.01%.

CD laddering strategies

One popular investment strategy involves staggering your money across multiple CDs. With CD laddering, you give yourself rolling access to your funds, mitigating the issue of early withdrawal fees. A CD ladder not only helps you access your funds gradually but also allows you to take advantage of both short- and long-term interest rates. As each CD matures, you can reinvest at the latest rates or access the funds if needed.

As a hypothetical, say you have $5,000 to invest in a laddering strategy — it may look like this:

• $1,250 in a three-month CD at 2.25%
• $1,250 in a six-month CD at 2.0%
• $1,250 in a nine-month CD at 2.0% 
• $1,250 in a one-year CD at 3.0%
  

Each quarter, you would have access to another $1,250 of your original $5,000, plus interest earned.

Are CDs exposed to market volatility?

Most CDs aren’t exposed to the market, so you likely don’t have to worry about losing money if there’s a downturn. And many accounts offer fixed growth, so dropping interest rates likely won’t impact your returns. 

Cons

Investment timelines

While other types of investments allow you to contribute over a period of time, you typically can’t add money to a CD after you open it. This means you need to fund your entire principal upfront, which may not be a suitable option for some people.

Limited liquidity and early withdrawal penalties

With a CD, you have limited access to your money. While policies vary, banks tend to charge early withdrawal fees equivalent to three months’ worth of interest or as much as one year’s worth of interest from the total amount invested in the CD. This can be costly if you need to access your funds for an emergency or to fund a better investment opportunity.

Inflation risk

The interest earned on a CD — while attractive — might not outpace the inflation rate. Hypothetically, say you invest money in a fixed CD at 2% and inflation rises to 3.5%. Once your account matures, the interest you earned would have a lower purchasing power than when you initially invested.

Lower returns than other investments

Other types of savings and investment opportunities may offer better returns than CDs. For example, some high-yield savings accounts have more competitive interest rates than CDs. And investments in stocks, while riskier, may generate much higher earnings than CDs.

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What do annuities offer compared to CDs?

If looking for products that strikes a balance between security and high interest earnings, you may consider investing in annuities. Choosing annuities over CDs might make more sense for the following reasons:

Interest rates

CDs: Most CD interest rates are fixed and, historically, have been lower than the interest rates of annuity products. And if you decide to opt for a variable CD, your interest rate would be tied to an underlying benchmark interest rate, such as the federal funds rate, which means your earnings would decrease if federal interest rates drop.

Annuities: There are several types of annuities to choose from, each with their own interest structure. The main three include:

• Fixed: Interest rates are consistent throughout the term of the investment.
• Variable: Interest rates change based on market fluctuations, which can give you access to better returns. 
• Indexed: Interest rates are tied to the performance of a specific index fund, such as the S&P 500^®. When the index performs well, your earnings increase. And even if interest rates fall, your investment may be protected because annuities often offer minimum guaranteed returns.

Tax considerations

CDs: You would pay taxes annually on interest earned with a CD, even if your account hasn’t reached maturity yet.

Annuities: Annuities can offer you more control over when you pay taxes. 

Non-qualified annuities are funded with after-tax dollars, so when you start taking withdrawals, you wouldn’t pay taxes on the principal, only the earnings. 

On the other hand, qualified annuities are funded with pre-tax dollars, which are tax-deductible so your principal grows tax free. When you start taking withdrawals, you would pay income tax on the entire amount, including the principal. This can be advantageous if you believe you’ll be in a lower tax bracket later in life. 

Withdrawal options at maturity

CDs: You can either take your money out or reinvest into a new type of account.

Annuities: Depending on the type of annuity you invest in, you can either take a lump sum or regular payments for a set period of time. Regular payouts can extend for long periods, even up through the rest of your life.

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FAQs

How much could a $10,000 CD make in one year?

Your exact returns would depend on your contract’s terms. Interest rates and compounding frequency both affect how much you could earn from investing in a CD. Hypothetically, say you invest $10,000 into a CD with a 3% interest rate compounding monthly. By the end of one year, you could earn $304.00 in interest. 

Should I open a certificate of deposit (CD)?

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You should open a certificate of deposit (CD) if you want a safe, fixed return on your money and don’t need access to it for a set period. CDs offer guaranteed interest and are FDIC-insured, making them ideal for conservative investors. However, if you need flexibility or higher potential returns, consider other options like high-yield savings or annuities.

What’s the downside to a CD?

As provided above, there are a number of Cons associated with CDs. One of them is that your money is locked away for a set length of time. Therefore, if you have an emergency or need to access your funds early for any reason, you’ll likely pay an early withdrawal penalty. 

Should I open a CD?

This depends on your financial goals. If you’re looking for longer-term, secure investments, CDs may be a good choice. But if you’re interested in more aggressive growth, options like stocks, annuities, and mutual funds may be better choices.

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This communication is for informational purposes only. It is not intended to provide, and should not be interpreted as, individualized investment, legal, or tax advice.