What Is a Certificate of Deposit (CD)? How It Works, What It Pays, and the Catches

Short answer: A certificate of deposit (CD) is a savings account where you agree to leave your money untouched for a set term — from a few months to five years or more — and the bank pays you a fixed interest rate in return. In November 2026 the national average on a 1-year CD is 1.76% APY, but the best nationally available CDs pay 4.65% to 5.00% APY. The catch is the lockup: take the money out early and you pay a penalty, usually 90 to 180 days of interest.

What a CD Is and How It Works

A certificate of deposit is a time deposit: you hand a lump sum to a bank or credit union, which agrees to pay a fixed rate for a fixed term, and you agree not to touch the money until the maturity date. When the term ends, you get your deposit back plus all the interest it earned.

Opening one is straightforward: choose a term, deposit a lump sum that meets the minimum — commonly $500 to $2,500 at online banks, and $100,000 or more for a jumbo CD — and the rate is locked the day you open it.

At maturity, most banks give you a grace period of seven to ten days to decide what to do — withdraw the money, move it to savings, or roll it into a new CD at the current rate. If you do nothing, the CD usually renews automatically into a new CD of the same term at whatever rate the bank is then offering — which may be much lower than the rate you just enjoyed.

How a CD Pays Interest

CD rates are quoted as APY — annual percentage yield — the total interest a deposit earns over one year, including compounding. A CD advertised at 4.65% APY on $10,000 pays $465.00 of interest over one year. The rate is fixed for the full term: open a 5-year CD at 5.00% APY and it pays 5.00% in year five even if the Federal Reserve has cut its benchmark rate by then.

Compounding turns a rate into a balance. With APY, the math is simple: after n years, $10,000 at an APY of r becomes $10,000 × (1 + r)ⁿ. At 5.00% APY for five years, that is $10,000 × 1.05⁵, or $12,762.82. At the national-average 5-year rate of 1.41% APY, the same deposit becomes $10,725.16.

One more feature of the payout: CD interest is taxed as ordinary income in the year it is earned, even if the CD has not matured yet and you cannot touch the money. Your bank sends a Form 1099-INT for interest of $10 or more. At a 22% federal marginal rate, the $465.00 of interest on a top 1-year CD costs $102.30 in federal tax, leaving $362.70 after tax.

What CDs Pay in November 2026

The Federal Deposit Insurance Corporation (FDIC) publishes national average deposit rates every month. Its October 2026 release puts the national average CD rates at the levels below.

CD term	FDIC national average (Oct 2026)	Interest on $10,000 for the full term
1 month	0.23%	$1.92
3 months	1.14%	$28.38
6 months	1.39%	$69.26
12 months	1.76%	$176.00
24 months	1.55%	$312.40
36 months	1.39%	$422.82
48 months	1.31%	$534.39
60 months	1.41%	$725.16

Two things stand out. First, the curve is nearly flat: a 5-year CD at the national average pays only 1.41% APY, less than a 1-year CD at 1.76%. Locking money away for five extra years earns almost nothing extra at an average bank. Second, the averages are far below what the best banks pay — and that gap is the whole opportunity in CDs right now.

The top nationally available rates in November 2026, from NerdWallet's November 2026 survey, are far higher: CFG Bank pays 4.65% APY on a 1-year CD, 4.82% on a 3-year CD and 4.82% on a 5-year CD, with a $500 minimum. Sallie Mae Bank pays 4.60% on a 1-year CD and 5.00% on a 5-year CD, with a $2,500 minimum. Popular Direct pays 4.60% on a 1-year CD and 5.00% on a 5-year CD, with a $10,000 minimum. Marcus by Goldman Sachs pays 4.50% on a 1-year CD with a $500 minimum. These are November 2026 snapshots — rates move weekly, so confirm the current figure on the bank's own site before you open an account.

Online banks have no branch network to fund, so they pass the savings to depositors — shopping around is where most of the return comes from.

Worked Example: $10,000 at the National Average vs a Top Rate

Take $10,000 in a CD. At the FDIC national average, a 1-year CD pays $176.00 of interest. At the top 1-year rate of 4.65% APY, the same deposit pays $465.00 — $289.00 more for the identical deposit and term.

Term	FDIC national average	Value after term	Top rate (Nov 2026)	Value after term	Extra from the top rate
1 year	1.76% APY	$10,176.00	4.65% APY	$10,465.00	$289.00
3 years	1.39% APY	$10,422.82	4.82% APY	$11,516.82	$1,093.99
5 years	1.41% APY	$10,725.16	5.00% APY	$12,762.82	$2,037.65

The 5-year row carries a warning. The top 5-year rate of 5.00% APY is the best deal on the page only if you hold to maturity. Break it in year two and the early-withdrawal penalty eats the advantage. The 1-year top rate gives up only 0.35 points of APY and returns your money in twelve months.

The Catches: Early-Withdrawal Penalties

The first catch is the penalty. Withdraw before maturity and the bank charges an early-withdrawal penalty, almost always measured as a number of days of simple interest on the amount withdrawn. Federal regulation sets only a floor of seven days of simple interest on withdrawals within the first six days; beyond that, each bank sets its own schedule, and the penalty grows with the term.

Typical schedules run 60 to 90 days of interest on CDs of one year or less, 90 to 180 days on terms of one to three years, and 150 days to a full year of interest on four- and five-year CDs. The penalty comes out of the interest you have earned first; if it is larger than the interest earned so far, the rest comes out of your principal.

CD term	Typical penalty	Penalty on $10,000 at 4.65% APY	What it wipes out
3 to 6 months	60 to 90 days of interest	$76.44 to $114.66	About 2 to 3 months of earnings
1 year	90 days of interest	$114.66	3 months of earnings
2 to 3 years	180 days of interest	$229.32	6 months of earnings
5 years	180 to 365 days of interest	$229.32 to $465.00	6 to 12 months of earnings

Here is the penalty in practice. Put $10,000 in a 1-year CD at 4.65% APY with a 90-day interest penalty, then withdraw after three months because a car repair cannot wait. In three months the CD has earned about $114.66 of interest — and the 90-day penalty is $114.66. You walk away with your $10,000 and essentially nothing for the three months it was locked up. Only deposit money you will not need before maturity.

There are narrow exceptions: banks may waive the penalty when an account owner dies or is declared legally incompetent, and IRA CDs allow penalty-free withdrawals in limited cases, such as after age 59½. The penalty schedule is in the Truth in Savings disclosure the bank must give you, and it varies more between banks than the rate does.

How to Build a CD Ladder

A CD ladder solves the lockup problem without giving up the rate. Instead of putting all your money in one CD, you split it across several CDs with staggered maturity dates, so part of your money comes due regularly while the rest keeps earning a longer-term rate.

Take $25,000. Split it into five $5,000 CDs with terms of one, two, three, four and five years, all at the FDIC national average rates for those terms. The 1-year rung matures at $5,088.00, the 2-year rung at $5,156.20, the 3-year rung at $5,211.41, the 4-year rung at $5,267.19 and the 5-year rung at $5,362.58. Across the five rungs you earn $1,085.39 of interest in the first five years, and one rung matures every year.

The ladder gets better after the first cycle. When the 1-year rung matures, roll it into a new 5-year CD at the then-current rate. A year later, do the same with the original 2-year rung. After four years of rolling, every rung in the ladder is a 5-year CD earning the longest-term rate, yet one still matures every twelve months.

That flexibility has a price. The same $25,000 in a single 5-year CD at the national-average 1.41% APY would grow to $26,812.91 — $1,812.91 of interest, more than the ladder's $1,085.39, because every dollar earns the 5-year rate from day one. A ladder of average-rate CDs is a ladder of average returns — pick the bank first, then build the ladder.

Types of CDs

Traditional CD. Fixed rate, fixed term, penalty for early withdrawal — the default, with the highest rates for any given term.

No-penalty CD. Also called a liquid CD. After a short initial lockup — usually the first six days required by federal regulation — you can withdraw the full balance with no penalty. The trade is a lower rate than a traditional CD of the same term.

Bump-up CD. Lets you raise your rate once (sometimes twice) during the term if the bank's rates go up.

Callable CD. The bank can close the CD early if rates fall, returning your deposit plus interest earned to date. You take the reinvestment risk: the bank calls exactly when good replacement rates have disappeared.

Brokered CD. Bought through a brokerage account rather than directly from a bank. There is usually no early-withdrawal penalty because there is no early withdrawal: you sell the CD on the secondary market, like a bond. If rates have risen since you bought it, you sell at a loss; if rates have fallen, you may sell at a gain.

IRA CD. A CD held inside an individual retirement account. The interest grows tax-deferred until withdrawal, and the IRA's own withdrawal rules apply on top of the CD's penalty.

CD vs High-Yield Savings Account vs Money Market Account

A CD is not the only place for cash, and for many savers it is not the best one.

Feature	Certificate of deposit	High-yield savings account	Money market account
Rate	Fixed for the full term	Variable — can change any time	Variable — can change any time
Top APY, Nov 2026	4.65% to 5.00%	Up to about 4.40%	Up to about 4.00%
National average APY	1.76% (1-year, FDIC)	0.38% (FDIC savings average)	0.63% (FDIC)
Access to money	Locked until maturity; penalty to exit early	Any time, no penalty	Any time; checks and debit card at many banks
FDIC / NCUA insured	Yes, up to $250,000	Yes, up to $250,000	Yes, up to $250,000
Best for	Money you will not need for the full term	Emergency fund, short-term goals	Cash you want to spend from directly

The emergency fund belongs in a high-yield savings account, not a CD — that is the subject of our guide to how much emergency fund you need. A CD suits money with a known date: a house deposit in eighteen months, a car purchase next year, tuition due in three years. Match the CD term to the date you need the money. See also our guides to what a high-yield savings account is and setting a savings goal.

Is a CD Safe? FDIC Insurance Explained

A CD at an FDIC-insured bank is covered by federal deposit insurance up to $250,000 per depositor, per bank, for each ownership category — principal plus interest accrued through the day the bank closes. The coverage is automatic: no sign-up, no fee.

The limit is per bank, not per CD. Two $150,000 CDs at the same bank in your individual name total $300,000, so $50,000 sits outside the insurance. The same two CDs at two different banks are each fully covered. Joint accounts are insured separately per owner, so a joint CD can carry $500,000 of coverage. If your deposit is above $250,000, spread it across banks or ownership categories.

What insurance does not cover matters too. It does not protect against the penalty for early withdrawal, against inflation eating the real value of a fixed return, or against being locked in while rates rise.

Common Mistakes With CDs

Opening a CD at your own bank without shopping. The bank where you keep your checking account may pay 0.50% while an online bank pays 4.65% on the same term. The rate gap is the return.

Choosing the longest term for the highest rate. A 5-year CD pays more only if you hold it for five years. Break it in year two and the penalty can erase the advantage over a 1-year CD.

Ignoring the penalty schedule. Two CDs can advertise the same APY and carry very different penalties — read the disclosure.

Frequently Asked Questions

What is a certificate of deposit (CD)?

A certificate of deposit is a savings account where you deposit a lump sum for a fixed term — from a few months to five years or more — at a fixed interest rate. You get your deposit back plus interest at maturity.

How much does a $10,000 CD earn in one year?

At the FDIC national average 1-year rate of 1.76% APY (October 2026), a $10,000 CD earns $176.00 in one year. At the top 1-year rate of 4.65% APY in November 2026, the same deposit earns $465.00 — $289.00 more.

Can I withdraw money from a CD before it matures?

Usually yes, but you pay an early-withdrawal penalty — typically 90 days of interest on a 1-year CD and 180 days on longer terms, deducted from your interest first.

Are CDs safe?

CDs at FDIC-insured banks are among the safest places for cash: principal plus accrued interest is insured up to $250,000 per depositor, per bank, per ownership category.

Is a CD better than a high-yield savings account?

A CD pays more when you can leave the money untouched for the full term — the rate is fixed and usually higher — top CDs pay 4.65% to 5.00% APY in November 2026 against up to about 4.40% for the best high-yield savings accounts. A high-yield savings account is better for money you may need any time, with no penalty for withdrawal.

What happens when a CD matures?

Most banks open a grace period of seven to ten days. During that window you can withdraw the money, move it to savings, or roll it into a new CD at the current rate.

Sources: FDIC National Rates and Rate Caps, October 2026 (as of 19 October 2026; 12-month CD national average 1.76%, 60-month 1.41%, savings 0.38%, money market 0.63%); NerdWallet Best CD Rates of November 2026 (CFG Bank, Sallie Mae Bank, Popular Direct, Marcus by Goldman Sachs); Bankrate Best CD Rates of November 2026 (national average APYs as of 13 November 2026: 1-year 2.12%, 3-year 1.74%, 5-year 1.78%; top CDs up to 5.00% APY); Experian, What Is a CD Ladder (minimum deposits commonly $500 to $2,500; jumbo CDs $100,000 or more; grace period seven to ten days); FDIC Deposit Insurance at a Glance ($250,000 per depositor, per bank, per ownership category); IRS Topic No. 403, Interest Received (interest taxed as ordinary income; Form 1099-INT for $10 or more); 12 CFR 204.2 (seven days simple interest minimum penalty within the first six days). All rate benchmarks are November 2026 snapshots — check the current figure before you open an account.

This article is general educational information, not financial advice for your situation. Rates, terms and penalties change often; confirm the current terms with the bank before you open a CD.