What Is a Certificate of Deposit (CD)?
A Certificate of Deposit is a savings product offered by banks and credit unions that pays a fixed interest rate for a set period (the term). In exchange for locking your money for 3 months to 5+ years, CDs typically offer higher rates than regular savings accounts. CDs are FDIC-insured up to $250,000, making them one of the safest investments available. In 2026, top CD rates range from 4.5% to 5.25% APY depending on the term.
- 1Interest earned: $10,000 x 5.0% = $500 (approximate for 1 year)
- 2With daily compounding: $10,000 x (1 + 0.05/365)^365 = $10,512.67
- 3Actual interest earned: $512.67
- 4After estimated 24% federal tax: $512.67 - $123.04 = $389.63 net
- 5Effective monthly interest: $42.72/month
CD Rate Comparison Table (2026)
| Term | Typical APY | Interest Earned | Maturity Value |
|---|---|---|---|
| 3 months | 4.75% | $118 | $10,118 |
| 6 months | 5.00% | $248 | $10,248 |
| 1 year | 5.00% | $512 | $10,513 |
| 18 months | 4.75% | $729 | $10,729 |
| 2 years | 4.50% | $920 | $10,920 |
| 3 years | 4.25% | $1,329 | $11,329 |
| 5 years | 4.00% | $2,167 | $12,167 |
CD Ladder Strategy
A CD ladder involves splitting your savings across multiple CDs with staggered maturity dates. For example, with $50,000, you could open five $10,000 CDs maturing in 1, 2, 3, 4, and 5 years. As each CD matures, you reinvest into a new 5-year CD. This provides regular access to your money (one CD matures each year) while earning the higher rates of longer-term CDs.
Split $50,000 into five $10,000 CDs: 1-year (5.0%), 2-year (4.5%), 3-year (4.25%), 4-year (4.0%), 5-year (4.0%). After year 1, the 1-year CD matures and you reinvest into a new 5-year CD. Within 5 years, all CDs are 5-year CDs maturing annually, giving you both high rates and regular liquidity.
CDs vs. Other Savings Options
| Feature | CD | High-Yield Savings | Treasury Bills |
|---|---|---|---|
| Current Rates | 4.0-5.25% | 4.25-5.0% | 4.3-5.1% |
| FDIC Insured | Yes ($250K) | Yes ($250K) | Government-backed |
| Liquidity | Penalty for early withdrawal | Instant access | Sell on secondary market |
| Rate Lock | Fixed for term | Variable | Fixed for term |
| Minimum | Often $500-$1,000 | Usually $0 | $100 (TreasuryDirect) |
| State Tax | Taxable | Taxable | State tax exempt |
When CDs Make Sense
- You have a savings goal with a specific date (wedding, down payment, vacation)
- You want to lock in current high rates before potential rate cuts
- You want guaranteed returns with zero risk of loss
- You tend to dip into savings and need the discipline of a locked account
- You are building a CD ladder for regular income in retirement
- You want state tax exemption (consider Treasury Bills instead for this benefit)