What is a CD?
A certificate of deposit (CD) is a savings account with a fixed term and a fixed rate. You deposit money once, leave it for the term, from a few months to five years or more, and the bank pays a higher rate than a regular savings account. This CD calculator shows how much your certificate of deposit is worth at maturity, how much interest it earns and what is left after tax.
How CD interest is calculated
A CD earns compound interest: the interest is added to the balance and earns interest itself until the CD matures.
- End balance: A = P × (1 + r / n)n × t, where P is the deposit, r the yearly rate, n the number of compounding periods a year and t the term in years.
- APY: (1 + r / n)n − 1, the yearly yield with compounding included.
- With an APY: A = P × (1 + APY)t.
Example
A $10,000 CD at 5% APY for 3 years grows to $10,000 × 1.053 = $11,576.25, so it earns $1,576.25 of interest. If 5% is the rate compounded monthly instead, the CD ends at $11,614.72. With a 22% tax on the interest, you pay $341.28 of tax and keep $11,209.99.
CD interest by term and rate
The interest a $10,000 CD earns by maturity, with the rate as the APY:
| Term | 3% APY | 4% APY | 5% APY |
|---|---|---|---|
| 6 months | $148.89 | $198.04 | $246.95 |
| 1 year | $300.00 | $400.00 | $500.00 |
| 2 years | $609.00 | $816.00 | $1,025.00 |
| 3 years | $927.27 | $1,248.64 | $1,576.25 |
| 5 years | $1,592.74 | $2,166.53 | $2,762.82 |
APY and APR
Banks usually advertise a CD's APY, the yearly yield that already includes compounding. If you have the APY, choose Annually (APY). If you have the rate before compounding, choose how often the bank compounds it, often monthly or daily. A 5% rate on $10,000 for 3 years:
| Compounding | APY | Interest |
|---|---|---|
| Annually | 5.000% | $1,576.25 |
| Quarterly | 5.095% | $1,607.55 |
| Monthly | 5.116% | $1,614.72 |
| Daily | 5.127% | $1,618.22 |
To compare CDs from different banks, compare the APY. A CD that pays its interest out instead of adding it to the balance earns simple interest; the simple interest calculator works it out.
Taxes and inflation
Interest on a CD is taxed as ordinary income in the year it is earned, even if you leave it in the CD until it matures. The bank reports it on Form 1099-INT. Enter your marginal tax rate to see what you keep. CDs held in an IRA grow tax-deferred, or tax-free in a Roth IRA. With a 22% tax and 3% inflation, a 5% CD earns a real return of about 0.87% a year.
Early withdrawal penalty
If you take money out before the CD matures, the bank usually charges a penalty of a few months of interest, often more for longer terms. A penalty of 6 months of interest on the example CD costs about $246.95. If you withdraw soon after opening the CD, the penalty can be larger than the interest earned and take part of the deposit. You can deduct an early withdrawal penalty on your federal tax return.
Types of CDs
- Traditional CD: a fixed rate for a fixed term, with a penalty for early withdrawal.
- No-penalty CD: you can withdraw early without a penalty, for a slightly lower rate.
- Bump-up CD: you can raise the rate once or twice if the bank's rates go up.
- Jumbo CD: a higher minimum deposit, often $100,000, sometimes for a higher rate.
- Brokered CD: bought through a brokerage and can be sold before maturity, at the market price.
- IRA CD: a CD held in an individual retirement account.
CD ladder
A CD ladder splits your money into several CDs that mature at different times. For example, $10,000 goes into five CDs of $2,000 with terms of 1 to 5 years. Each year one CD matures, and you either use the money or put it into a new 5-year CD. You get some cash every year and most of your money earns long-term rates.
CD, savings account or Treasury bills
- High-yield savings account: you can withdraw at any time, but the rate can change; see the savings calculator.
- CD: a locked rate for the term, with a penalty for early withdrawal.
- Treasury bills and notes: backed by the U.S. government and free of state income tax; see the bond calculator.
CDs at banks insured by the FDIC and at credit unions insured by the NCUA are protected up to $250,000 per depositor, per institution and per ownership category. For regular deposits over time, use the compound interest calculator.