What is the grace period after a CD matures?

Most banks offer a seven- to 10-day grace period after a CD matures. Basically, it's a short window of time to either withdraw your funds, renew the CD, or transfer the money elsewhere without facing penalties.

Do you have to pay taxes on CD interest earnings?

Yes, CD interest is considered taxable income . You'll need to report any interest earned on your tax return, even if you don't withdraw it. It's like regular checking or savings account interest -- the bank will provide a 1099-INT form which you'll file with your tax return.

Can you add money to a CD after it's opened?

Nope! That's why it's super important to do all your research upfront, and lock in the best rates when they're available. The deposit amount is fixed.

Which is better, a CD or a high-yield savings account?

It really depends on your money goals. CDs can offer higher interest rates, but they require locking in your money for a set term. High-yield savings accounts are more flexible, but rates can change at any time.

How Does a CD Work? A Beginner's Guide

Certificates of deposit (CDs) have been around in the USA since the early 1800s. Yes, they are boring and old-school… But they're also one of the safest places to put your money, and get a guaranteed return.

Even if CDs aren't in your money plan now, understanding them will make you a more informed saver. Here's what you need to know.

What exactly is a CD?

Think of a CD just like a savings account. Except your money is "locked in" for a fixed term.

In exchange for depositing your money and not touching it, banks offer you a fixed interest rate. Later, when the CD eventually matures (a fancy word for when the term ends) the bank then gives you back all your money, plus the interest they owe.

A real world example

In June 2024, my friend bought a 12-month CD, with a 4.50% APY.

He deposited $5,000 into this CD. He patiently waited 12 months, and then in June 2025, the CD matured. The bank then returned to him $5,225.

That's his initial $5,000 deposit, plus $225 in interest.

How does a CD really work?

Here's a more detailed step-by-step breakdown of the process of buying CDs, and how your money grows:

1. First, you deposit a lump sum

It all starts with you opening an account and making a deposit. When you open a CD, you give the bank a specific amount of money (like, $5,000 for example), which is often referred to as the "principal."

Back in the day you'd have to walk into a bank branch and deal with a teller. But these days, you can open a CD easily online, or via a bank's mobile app.

Once your account is open, you can transfer your money electronically (or physically in a branch) to begin the CD term.

Many of the best online CDs have no minimum requirements. So you can start with just $100 if you want to.

2. You agree on a term and an interest rate

Banks offer CDs in all different term lengths and interest rates. The one you pick should match your financial goals for the money you are depositing.

The bank agrees to pay you a fixed interest rate, or annual percentage yield (APY). This rate is guaranteed for the whole CD term, no matter what happens in the market, banking sector, or federal interest rates.

Part of the agreement is that your money is also "locked in". If you need to access your funds early, this is ok… But early withdrawals typically trigger a penalty, which means the bank will claw back some of your earned interest (or even reduce your principal if taken out too soon).

4. You wait patiently and earn interest

This is why CD's are "boring." Because once you've put your money in, it's really a waiting game. Like watching paint dry.

Some banks calculate interest on a daily basis, and some have monthly or quarterly compounding scheduled. Usually, you can keep track of all the money you're making inside the bank's online portal or mobile app.

5. At the end date, you get your money back (plus interest)

Finally, when the CD reaches maturity, the bank releases your original deposit along with all the accrued interest.

At this point, you can do whatever you want with the money. If you have plans to spend it, you can! Or if you want to start another CD term with a new interest rate, that's OK too!

Why choose a CD over other savings options?

You won't get rich overnight with CDs. They're built for safe and conservative returns.

CDs are for people that want safety and predictability with a chunk of their money. Since the interest rate is guaranteed, you know exactly how much you're making, and that your funds are protected.

Here are some of the strengths and weaknesses of CDs:

Pros of CDs

Guaranteed returns: Fixed APYs means you earn exactly that rate, nothing more or less. There could be a 40% stock market decline and it wouldn't affect your CD.
Higher rates than savings accounts: Especially with top online banks, CDs usually offer higher APYs than what you'd earn in a regular checking or savings account.
FDIC insurance: Your money is protected up to $250,000 per bank. I'll talk more about this a little later.
Simple and hands-off: There's really no ongoing management required.

Cons of CDs

Your money is locked in: Since your funds are locked until the maturity date, you should only deposit money that you don't need access to in the short term.
Penalties for early withdrawal: If you take money out early, you'll be penalized and this can reduce or eliminate all your earnings.
Rates can lag behind inflation: In an economy with low interest rates, you might find that your money is worth less when the CD matures.
Rates usually lag behind longer term investments. Over the long run (think, 10+ years) you can usually make a higher return investing the money elsewhere.

All in all, CDs are a solid choice for short- to mid-term savings -- money you'll need in the next one to five years that you want to keep safe and untouched.

How to choose the right CD

Before jumping into bed with any old bank, it really pays to shop around. CDs offers vary wildly between banks. Here are few things to consider when shopping for a CD:

1. CD term length

First, think about how long you want to lock up your money for. If you're buying a house two years from now, locking in a 2-year CD might be a good choice. The CD will mature right in time for you to get your funds back.

Banks typically group CDs into buckets of short, medium, and long-term offers.

Short-term CDs: 3 to 12 months
Medium-term CDs: 1 to 3 years
Long-term CDs: 3 to 5+ years

Pro tip: If you're not sure about committing for the long haul, start with a shorter-term CD to test the waters. It's usually better to choose a term that's too short than risking the chance of having to withdraw early.

2. Annual percentage yield (APY)

If you only remember one thing from this article, it should be this: ALWAYS shop around when looking for the best CD rates. It's crazy how big the difference can be between bank offers.

For example, as of July 2025, the average APY of all 12-month CDs offered nationwide is just 1.63%. That's the average.

Whereas right now top CD rates from online banks are up in the 4.00% APY range! That's a huge difference.

Same product, term, and safety, just a massively different return.

Rates as of July 8, 2025

LendingClub CD

Member FDIC.

APY:

4.25%

Term:

14 Months

Min. Deposit:

$500

Open Account for

On LendingClub's Secure Website.

Discover® Bank CD

Member FDIC.

APY:

4.00%

Term:

1 Year

Min. Deposit:

$0

Open Account for

On Discover Bank's Secure Website.

3. Double-check the minimum deposit requirements

Some banks require $500 to open a CD. Others set the bar higher at $5,000 or more (and offer a better yield to compensate for the higher deposit). And some have no minimum deposit requirement at all.

Before you open an account, double-check these requirements to make sure you're OK meeting the minimum.

4. Learn about early withdrawal penalties

Every bank has different early withdrawal penalties. So it's best to check these in the vetting process.

On the off chance you need to take your money out of a CD before the maturity date, you'll want to know what to expect in terms of fees and penalties.

Are CDs safe?

I've mentioned FDIC insurance previously. Let me explain what this is.

The Federal Deposit Insurance Corporation (FDIC) is a government agency that protects people's money in case a bank goes out of business. It's like a safety net for your savings.

So if you put your money in a CD at a bank (or in a regular checking or savings account) the government protects it up to $250,000 per person.

Credit unions have the same protection through the NCUA, which works just like FDIC insurance.

This is why CDs are considered super safe. People refer to them as "risk free" because the FDIC insurance protects your initial capital.

So, should you buy CDs?

This really isn't a yes or no answer, because CDs come in all sizes, and rates fluctuate over time.

Whether it makes sense for you to open a CD or not really depends on your goals right now.

Opening a CD might be a good idea if:

You have cash savings you won't need for a while, and like the interest rate offered.
You want a better return than a regular savings or checking account.
You're risk-averse and don't want any volatility.
You're building a stream of income as part of a retirement income plan.

If you need more flexibility and instant access to your cash, a high-yield savings account (HYSA) might be a better fit.

The bottom line

CDs aren't as exciting as stocks or as flexible as a savings account. But that's a feature, not a bug. They're designed that way.

CDs are a short to mid-term set-it-and-forget-it tool for growing your money with zero risk.

Just remember to always shop around and read the terms and conditions before locking up your money.

Ready to browse options? Check out our expert's top picks for best CD rates right now.

FAQs

Most banks offer a seven- to 10-day grace period after a CD matures. Basically, it's a short window of time to either withdraw your funds, renew the CD, or transfer the money elsewhere without facing penalties.
Yes, CD interest is considered taxable income. You'll need to report any interest earned on your tax return, even if you don't withdraw it. It's like regular checking or savings account interest -- the bank will provide a 1099-INT form which you'll file with your tax return.
Nope! That's why it's super important to do all your research upfront, and lock in the best rates when they're available. The deposit amount is fixed.
It really depends on your money goals. CDs can offer higher interest rates, but they require locking in your money for a set term. High-yield savings accounts are more flexible, but rates can change at any time.

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