A CD account offers savers a way to lock in a strong and predictable rate of return on their cash deposits. CD (short for “certificate of deposit”) accounts are interest-bearing deposit products most commonly offered by banks. (Credit unions may offer a similar product under the names “share certificate” or “certificate.”) A CD account’s rate won’t change over the time period it lasts, known as the term. For instance, a 12-month CD will pay the same interest rate in the first month as it does in the twelfth month. This is in contrast to most savings accounts, where the rate may be subject to change. Many savers like this stable, guaranteed return offered by CD accounts. Plus, CD accounts (often simply called “CDs”) appeal to savers because of their elevated interest rates in comparison to other categories of savings products.  

But there is a notable tradeoff savers must consider before tapping CD accounts and, in turn, their more muscular rates: generally, you are discouraged from accessing the funds in a CD account until it matures, which happens when it reaches the end of its term length. There might be a penalty fee incurred if you have to withdraw funds from a CD account prior to its maturity date. Check the product terms of a CD to better understand what would happen in the event you had to make an early withdrawal from it. 

CDs are a very safe, very low-risk vehicle for earning passive income. They’re low-risk in part because CD accounts held at FDIC member banks, as well as certificates held at credit unions backed by the NCUA, offer savers the protection of federal deposit insurance. Deposits in a CD account are insured against loss up to the applicable legal limit. You just don’t get that level of security from other types of investments, such as stocks or ETFs, which may lose value. For cash reserves you may not need access to for a while, a CD account is a great way in which to put that money to work without taking on much if any risk.

Interest rates on CD accounts, and dividend rates on credit union certificates, generally well exceed what financial institutions offer for liquid cash accounts like checking and savings accounts. For the opportunity to hold your funds for longer, predictable, uninterrupted spans of time, banks are willing to pay a premium in interest and credit unions are willing to issue a higher dividend.   

CD accounts come in a wide range of term lengths and, typically, the longer a CD’s term, the higher the interest rate. Here’s an illustration of that: on a monthly basis the FDIC tracks the average rates offered for a range of bank products, and in a recent set of published findings there was a 7x difference in the average rate comparing a 1-month CD to a 12-month CD (0.03% vs 0.21%). In this scenario, the patience to lock away cash for 11 additional months yields seven times the financial benefit. 

You can find banks offering CD accounts with relatively quick maturities (e.g., three months), all the way up to terms that last 5 or more years. Many savvy savers choose to buy CDs at a range of maturities so as to balance the competing needs to tap the highest yield and retain access to funds.  

A CD account works like this: you make a one-time, lump-sum deposit to open the account. You won’t be able to add more funds to the CD once it’s been established, so it’s best to fund a CD with the full amount of principal cash you wish to save at the outset of the account. A CD account will have a specific term length, like 12 months. Oftentimes, banks will have a range of options to choose from when it comes to the duration of a CD, or, in the case of credit unions, the duration of a certificate. Over the course of the term, your deposit is effectively locked in; you earn a steady return based on the CD or certificate’s rate, however the funds — both principal and any accrued earnings — are typically not accessible. 

In general, it’s only when the CD reaches maturity that you can freely access the combined principal and earnings without penalty. At maturity, CDs can be rolled over, which means the account is restarted for another term and locked in at whatever is the current advertised rate (which could be different from before). You can opt to change your investment — for example, switch from a 12- to a 60-month CD, redepositing all or part of your cash  — or simply pocket the original CD’s principal and earnings in the form of a payout, which in effect closes the original account. 

Some institutions may have default instructions in place, such as setting a CD to automatically rollover, for when it matures. In the case of SaveBetter, customers can visit their account dashboard and easily change their CD rollover preferences up until a CD is set to mature. Consult either the CD’s product terms and/or your financial institution to determine your options and set your preferences for when a CD matures. 

Withdrawals from a fixed-term CD account prior to its maturity may not be permitted or may be subject to a penalty fee in addition to lost earnings. Check with your bank to find out what it may cost you to access your funds early. If you acquired a CD through SaveBetter, you can refer to the CD’s product information sheet. SaveBetter Customer Service can also provide assistance in calculating early withdrawal penalties. 

There is a category of CD account known as a no penalty CD that offers more flexible terms with respect to early withdrawals. As the name suggests, you may be able to avoid early withdrawal penalties if you purchase a no penalty CD.

For most CDs, the ideal time to make a withdrawal from a CD account is at maturity. This is when there are no restrictions or penalties associated with accessing your cash. You can withdraw all the CD’s funds, closing the account, or take out some and roll over the rest.

With SaveBetter’s unique online marketplace, you can compare and access a curated selection of federally insured CDs and certificates with competitive rates and flexible features, all with a single one-time registration, all in one portfolio. 

The CDs and certificates curated by SaveBetter are a smart alternative to the standard savings account you may get through a local brick-and-mortar financial institution. It also pays to compare the rates your longtime bank is offering for CDs and what’s available through SaveBetter’s online marketplace. SaveBetter exclusively selects higher-earning products from its network of partner financial institutions. 

The way you use a CD account should be tailored to how it works. A CD account differs from, say, a money market account or a checking account foremost in accessibility of funds. With a CD, you cannot easily add or take out funds. So a CD doesn’t lend itself well to serving as a day-to-day savings account or the account to hold your emergency fund. A CD shines when it’s used to accelerate the growth of cash reserves you don’t expect to need to spend in the near future. If you are saving for college, CDs can help. If you foresee needing to purchase a car or putting a down payment on a house in a few years, CDs can help. 

If access to funds matters more to you than tapping the very best rate, look into no penalty CDs, which typically offer stronger rates than savings accounts but don’t come with early withdrawal penalties. Generally, no penalty CDs don’t pay quite as well as fixed-term CDs.