The guide below explains how CDs work, what to consider before opening one, and how CD laddering can provide periodic access to your savings.
What is a CD?
A CD is a type of deposit account that allows you to earn interest on your funds over a specific period of time, or term. In exchange for leaving your money in the account, you receive a fixed interest rate until the CD matures.
After making the minimum deposit required to open the CD, you typically cannot deposit additional funds after opening. If you withdraw funds before the end of the term, you will typically pay an early withdrawal penalty. Withdrawing funds early may also reduce your earnings.
CD terms typically range from a few months to several years. Interest rates vary by CD term, financial institution, and market conditions.
Many CDs automatically renew after maturity, depending on the account terms. Before the grace period ends, review the renewal term and interest rate and decide whether you want to renew the CD or withdraw your funds.
Interest earned on a CD is generally subject to federal income tax and may need to be reported as taxable income. Consult a tax professional if you have questions about how CD interest may affect your taxes. Eligible deposits at an FDIC-insured bank are covered by FDIC insurance up to applicable limits.
Why CDs can be useful when rates change.
Interest rates can change over time in response to economic conditions, which means the variable rate you earn on some deposit accounts may increase or decrease. For savers who value predictability, a CD offers a different approach.
With a CD account, your interest rate is fixed for the entire term. That means you know exactly what rate you'll earn regardless of how market rates change during that period. Whether rates rise, fall, or remain unchanged, the rate on your CD stays the same.
CDs are generally considered a low-risk savings option and may offer competitive interest rates, depending on the term and market conditions.
What is CD laddering?
CD laddering spreads your savings across multiple CDs with different maturity dates. CD laddering can help if you're concerned about locking all of your savings into a single rate. This approach provides periodic access to your funds while allowing you to keep some money in CDs for longer terms.
For example, you could divide your savings among several CDs that mature at annual intervals. As each CD matures, you can withdraw the funds if needed or renew the CD based on the rates and terms available at that time. A CD ladder also prevents your entire savings balance from being tied to a single interest rate or maturity date.
For savers who want some flexibility in a changing rate environment, a CD ladder may offer another option by providing periodic opportunities to access funds or reinvest as CDs mature.
Is a CD right for you?
The best savings product for you depends on your financial goals, timeline, and need for access to your money. Compare the advantages and drawbacks of CDs and high-yield savings accounts to make a more informed decision about where to keep your savings.
CDs vs. high-yield savings accounts
If you're concerned about changing rates, it helps to understand how CDs differ from high-yield savings accounts. While savings account rates can rise or fall over time, a CD allows you to lock in the same rate for the entire term. These two savings products also differ in how easily you can access your funds.
| Feature | Certificate of deposit (CD) | High-yield savings account |
|---|---|---|
| Interest rate | Fixed for the entire CD term | Variable and can change over time |
| Access to funds | Funds are generally intended to remain in the account until maturity | Funds remain accessible when needed, subject to account terms |
| Best for | Planned savings goals with a defined timeline | Emergency savings and short-term financial goals |
| Predictability | Interest rate remains fixed throughout the term | Interest rate may change over time |
| Early withdrawals | Typically subject to an early withdrawal penalty | Generally available without an early withdrawal penalty, subject to account terms |
A CD may be a better fit if you want a fixed rate and do not need immediate access to your money. A high-yield savings account may be preferable if you want more flexibility to withdraw funds. You may choose to use both in your overall savings strategy: for example, you might keep emergency savings in a high-yield savings account while planning for long-term expenses with one or more CDs.
What happens when a CD matures?
When your CD matures, your options depend on the terms of your account. Many CDs provide a grace period after maturity when you can decide whether to withdraw the funds, renew the CD, or choose another option, depending on the account terms.
At maturity, you may be able to:
- Renew your existing CD for another term.
- Open a new CD with a different interest rate or term.
- Withdraw your principal and earned interest.
- Withdraw a portion of your funds and place the remaining balance in a new CD.
Review the available options before the grace period ends to determine whether renewing or withdrawing the funds better fits your current savings needs.
How to choose a CD for your financial goals.
The CD that best fits your needs depends on your savings timeline, when you may need access to your money, and your comfort level with setting aside funds for a fixed period. If you plan to establish a CD ladder, look for accounts that offer a mix of competitive interest rates, achievable minimum deposit requirements, and maturity dates that fit your timeline.
As you compare available CD options, consider:
- Minimum opening deposit requirements
- Term length and renewal options
- Interest rate and annual percentage yield (APY)
- Penalties and corresponding terms
- FDIC insurance coverage
Open a CD and start saving today.
If you're concerned about how changing rates may affect your savings, a CD can provide greater predictability by locking in a fixed rate for a set term. Explore our available CD options at Popular Direct to find an account that fits your finances and savings timeline. View current CD rates and apply online.
