A CD is a type of savings account that you’ll open with a bank or other financial institution. Traditionally, you’d agree to leave this account alone for the entire length of the term, and in exchange, the bank would pay you a higher interest rate than regular savings accounts. But there are many other types of CDs available that may suit your goals better, from high-yield to zero-coupon.
Read on to learn more about CDs and discover which type of CD aligns with your financial needs.
Banks and credit unions now offer more advanced CDs than the old "set-it-and-forget-it" model. These modern choices help you grow your savings while staying flexible. Let’s break CDs down so you can choose the best CD for you.
With a fixed-rate traditional CD, you make a single deposit up front, lock in a guaranteed interest rate, and leave your money untouched until it matures. These accounts are great if you want to save your money securely and enjoy predictable, steady growth.
If you don’t have a large lump sum to deposit all at once, consider add-on CDs, which let you make multiple deposits throughout the term. You usually start with a smaller initial deposit than traditional CDs, and every additional deposit earns the same fixed interest rate as your first deposit.
This savings account combines the tax advantages of an individual retirement account (IRA) with the security of a CD. Normally, you’d pay taxes on your CD each year, even if it hasn’t matured yet. But if you purchase a CD with IRA contributions, you won’t be subject to taxes until you start withdrawing funds.
High-yield CDs can offer more than double the interest rate of standard CDs. You’ll often find the most competitive rates at online banks — they can afford to provide high-yield CDs since these institutions don't have the expenses associated with physical branches. To attract more customers, online banks pass these savings along in the form of better annual percentage yields.
For those with substantial funds to deposit, jumbo CDs offer competitive interest rates in exchange for large minimum deposits, often starting at $100,000. Despite the large price tag, these CDs are still considered secure, as the Federal Deposit Insurance Corporation (FDIC) insures contributions of up to $250,000.
No-penalty CDs let you withdraw your money early — typically after the first six days — without fees. While this gives you more flexibility, these accounts tend to offer lower interest rates.
A step-up CD’s interest rate increases automatically at specific points during the term. For example, if you open a three-year step-up CD, the bank might raise your rate every 12 months. This is a simple way to earn without manually tracking interest, but the starting rate is often lower than a traditional fixed CD.
A bump-up CD lets you request a higher interest rate if market rates rise. The rate doesn't adjust automatically — you must actively request the change, and you're often only allowed to do this once per term. These CDs usually start with a lower initial rate than traditional CDs, so it's important to consider whether the potential increase will benefit you.
Instead of earning interest, zero-coupon CDs are sold at a discount and pay their face value at maturity. For example, you’d purchase a CD for $85,000 but collect $100,000 when the term ends, giving you a $15,000 profit.
Foreign currency CDs are purchased with U.S. dollars, and the bank converts those funds into another currency for the whole term. When it’s time to withdraw, the bank will reconvert your earnings into U.S.D.
Exchange rate fluctuations affect your gains, so you could earn more if the foreign currency strengthens or lose value if it weakens. Because of this, these CDs are generally riskier than standard options.
Before you choose where to deposit your savings, consider the following factors.
Depositing in a CD involves locking away funds for a specific period, usually from several months to several years. The length of this term affects the amount of interest you’ll accumulate. Here are the three main types:
Some banks offer promotional rates on unique term lengths, such as seven or 14 months, so it’s worth comparing your options.
When you open a CD at a bank, the FDIC protects your money. If you choose a credit union instead, the National Credit Union Administration provides similar protection. Both agencies insure up to $250,000 per person, per institution, covering both your initial deposit and any interest you earn.
If you're considering depositing more than $250,000, you can stay fully protected by spreading your money across banks or using different account ownership types. For example, a married couple with two beneficiaries might qualify for up to $1,500,000 in FDIC-insured coverage at a single bank, depending on how they set up their accounts.
Banks and credit unions set different deposit minimums for CDs, so evaluate your available funds and interest rate options to find the best fit. Below are a few common ranges:
Some institutions also offer tiered interest rates, meaning higher deposits earn better returns.
A CD ladder is a simple strategy for spreading your money across CDs that mature at different times. As each term ends, you roll funds into a new five-year CD, ensuring you always have access to some of your money while still benefiting from long-term interest rates.
Here’s an example CD to show how this would work:
You can balance flexibility and growth using the CD barbell strategy. This involves splitting your money in two and buying one short and one long-term CD.
Short-term CDs provide quick access to cash, and long-term CDs allow you to lock in higher interest rates. When your short-term CDs mature, you can spend, save, or redeposit the funds based on current interest rates and market conditions.
If you’re looking to earn more than a regular savings account, a CD might be a great fit. But before you decide, it helps to understand how CDs compare to annuities.
CDs work well for short-term goals, as most terms don’t last more than a few years. You can choose longer maturity dates, but remember that their earnings might not always keep up with inflation, which could reduce your purchasing power over time.
Annuities are better for long-term objectives, such as saving for retirement or securing a steady income stream for the future. They often provide higher returns than CDs and guarantee payouts for long periods — potentially even the rest of your life.
Some people use a combination (contributing to both CDs and annuities) to balance security and development.
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.
