What Is a Certificate of Deposit?
A certificate of deposit is an interest-bearing savings account issued by banks and credit unions that requires you to set aside cash for a specific term in exchange for a fixed interest rate. Investors like CDs because they tend to offer higher interest rates than high yield checking or savings accounts. Unlike withdrawals from these accounts, however, withdrawing your funds before the term on a CD can result in penalties and fees.
The term "certificates of deposit" comes from the literal piece of paper banks used to hand their clients to document the cash exchange for a set deposit amount, term, type of certificate of deposit, interest rate, and financial institution. Like virtually all modern online banking, you can sign up for a certificate of deposit al la carte with your bank or credit union.
CDs can boost your interest income and reward savers ready to part with their savings. There are many different types of CDs. Read more about Smart Money's picks for the best CDs below.
Best Certificate of Deposit Accounts
Focusing on Yield:
Member FDIC
Quontic 6 Month CD
Smart Money Rating: 5/5
APY: 5.10%
Required Minimum Balance: $500
Member NCUA
Alliant Credit Union CD
Smart Money Rating: 5/5
APY: 5.10 % (Terms Apply)
Required Minimum Balance: $1,000
Member NCUA
Consumer Credit Union CD
Smart Money Rating: 5/5
APY: 5.00% on 13 month Certificate (Terms Apply)
Required Minimum: $250
When to Get a CD
CDs are savings products designed to reward savers for deferring their spending with interest income. Certificates of Deposits can be used as part of your cash and cash equivalents allocation in your overall investment portfolio across an array of asset classes.
Many investors and regular savers use CDs to:
- Save Excess Cash
- Earn Interest on a Cash Windfall
- Tuck Aways Savings for Large Purchases
For beginner investors dipping their toes into the world of CDs, you might try a shorter-term CD, say 6 months. Alternatively, you could make a CD ladder and stagger your CD maturities to earn cadenced interest continuously.
Do CDs Make Good Investments?
Investing in a certificate of deposit puts your money to work. Additionally, many people use the CD terms to help them avoid excessive spending or resist the urge to make a major purchase. CDs give you the certainty of a virtually guaranteed fixed rate of return.
Investing in a CD can make perfect financial sense for savers who want to stash away their cash to hedge against inflation and keep their fund’s purchasing power. If you aren’t sure, consult your financial advisor or robo-advisor about your portfolio allocation to see how CD terms fit into your risk appetite and investment timeline.
Are CD’s Insured?
Most certificate of deposits issued by a bank are insured by the Federal Deposit Insurance Corporation (FDIC) or by the National Credit Union Administration (NCUA) up to $250,000 per institution.
Is Interest from CDs Taxed?
Just like with interest from a savings or checking account, interest earned from your CD is taxable income. Luckily, banks, credit unions, and online brokerage accounts have streamlined the reporting process to issue account holders information for their Form-1099-INT, which is a summary of your interest income to be filed with the Internal Revenue Service.[1]
The good news is that you only must report earned income on a CD.[2] Therefore, if you have a longer-term CD, you will only report the interest income once the CD fully matures at term. Learn more about how to file your taxes in 7 steps.
(1) Internal Revenue Service. About Form 1099-INT, Interest Income. Last Accessed January 14, 2025.
(2) Internal Revenue Service. Investment Income and Expenses. LLast Accessed January 14, 2025.
