By Jozsef Huszar • Updated: October 6, 2026

A certificate of deposit (CD) is a simple deal: you lend a bank or credit union a set amount for a fixed term, and it pays you a fixed rate. In exchange for locking your money away, you usually earn more than the national average. CD rates in 2026 range from under 2% at average banks to 4%–5% APY at top online banks and credit unions, so where you open one matters. This guide explains how CDs work, what the rules protect, how they are taxed, what is changing in 2026 and how to avoid the common traps.

What Is a Certificate of Deposit (CD)?

A CD is a time deposit. You choose a term, commonly from three months to five years, deposit a minimum amount, and the institution agrees to pay a specific rate until the CD matures. At maturity you get your principal plus interest. Credit unions offer the same product, often called a share certificate.

Key CD Terms

• APY (annual percentage yield): your yearly return including compounding. It is the fair way to compare CDs of different terms.
• Term: how long the money is locked in.
• Maturity date: the day the term ends and you can withdraw without penalty.
• Early withdrawal penalty: the charge for taking money out before maturity.
• Grace period: a short window after maturity, often a week to ten days, when you can withdraw or change the CD without penalty.
• Auto-renewal: many CDs renew automatically for a new term at whatever rate the bank then offers.

How safe is a CD?

CDs at FDIC-insured banks are insured up to $250,000 per depositor, per bank, per ownership category. Credit union share certificates are insured the same way by the NCUA. Insurance covers principal plus accrued interest, and it adds together all your deposits in the same ownership category at the same institution, so a large maturing CD plus interest can push you over the limit.

Some practical points:

• Joint CDs are insured at $250,000 per co-owner.
• A CD with a payable-on-death beneficiary is treated as a revocable trust account, insured up to $250,000 per beneficiary, with a maximum of five beneficiaries per bank.
• IRA CDs have their own $250,000 category for retirement deposits.
• “Jumbo” CDs (a term for larger deposits, often $100,000 or more) have no extra insurance. The $250,000 limit still applies.
• Verify any institution on the FDIC’s BankFind tool before you deposit. The FDIC also limits the rates that banks that are not well capitalized may pay, so rates far above the market deserve a closer look at who is offering them.

The law behind CDs

• Truth in Savings Act (Regulation DD): requires banks to disclose the APY, term, minimum balance, early withdrawal penalty and renewal terms before you open a CD. For CDs with terms longer than one year that renew automatically, the bank must send you a notice before maturity. For terms of one year or less, the renewal terms are in your initial disclosure, so mark the maturity date on your calendar.
• Regulation D (Federal Reserve): defines a time deposit and requires a minimum penalty if you withdraw within the first six days after depositing. Beyond that, banks set their own early withdrawal penalties and must disclose them.
• Account agreement: the contract states the penalty formula, the grace period and what happens at renewal. It is where the real terms live.
• Bank Secrecy Act and USA PATRIOT Act: banks must verify your identity, so you will need an SSN or taxpayer ID.

Early withdrawal penalties are typically a number of days or months of interest, and the rule of thumb is that longer terms carry larger penalties. A penalty can exceed the interest you have earned, in which case the bank can take it from your principal. Banks generally waive penalties on the owner’s death, and the details are in your agreement.

Taxes on CD interest

• Interest is ordinary income, taxed at your regular federal rate. Banks generally send Form 1099-INT if you earned $10 or more. You must report all interest even without a form. If taxable interest exceeds $1,500, you also complete Schedule B.
• Timing: for CDs with terms of one year or less, you generally report the interest in the year the CD matures. For longer terms, the interest generally must be reported each year as it accrues, even if you cannot withdraw it yet. This can mean owing tax on money you have not received.
• Early withdrawal penalties are deductible. The penalty is reported on Form 1099-INT and can generally be deducted on your federal return, as an adjustment to income.
• State taxes: most states tax CD interest. A few have no income tax.
• Retirement accounts: a CD inside a traditional IRA grows tax-deferred, and inside a Roth IRA it can be tax-free when the rules are met. IRAs have their own contribution limits and withdrawal rules.
• Backup withholding: if you do not provide a valid taxpayer ID, the bank may withhold 24% of interest.
• An illustration: $10,000 at 4.50% APY for a year earns roughly $450 before tax. At a 24% federal bracket, free-stock-screener-and-financial-insights $108 goes to federal tax, leaving free-stock-screener-and-financial-insights $342.

CD Rates in 2026: What Is Changing

Rates turned up. CD rates fell as the Fed cut rates through 2025. On September 16, 2026, the Federal Reserve raised its target range by 0.25 percentage points to 3.75%-4.00%, its first increase in more than three years. CD rates on new deposits have remained around or above 4% at the top, but nobody can promise what comes next. If rates keep rising, a long CD locks you into today’s rate while new CDs may pay more. If rates fall, the opposite is true. This is called reinvestment risk and opportunity cost.

The CFPB’s uncertain future. The Consumer Financial Protection Bureau writes and enforces much of Regulation DD, the disclosure rule that governs CDs. As of October 2026 the bureau still exists, but it has been under heavy pressure. Courts have ordered it to keep requesting funding from the Federal Reserve, and a large staff cut has been paused until a permanent director is confirmed. Mark Paoletta is the acting director, enforcement has slowed sharply and many cases have been dropped. The rules still apply, but federal enforcement is weaker, so state attorneys general and your bank’s primary regulator matter more. Read your disclosures and keep copies.

Deposit insurance is unchanged. The $250,000 limit has not changed, and proposals to raise coverage for some business accounts remain proposal

Types of CDs Compared

Type	How the rate works	Early access	Best for	Main catch
Traditional	Fixed for the term	Penalty applies	Money you will not need until maturity	Penalty and opportunity cost
No-penalty	Fixed, often slightly lower	Withdraw after a short initial period without penalty	Flexibility if you might need the money	Lower rate than traditional
Bump-up	You may request a higher rate once or twice	Penalty applies	If you expect rates to rise	Starting rate is usually lower
Jumbo	Fixed	Penalty applies	Large deposits	Not extra insured, rate not always higher
Brokered	Fixed, bought through a broker	Sell on a secondary market	Access to many banks in one account	Sale price can fall below what you paid, callable features
IRA CD	Fixed, inside a retirement account	Penalty applies, plus possible IRA tax rules	Retirement savings	Withdrawal rules and taxes

Brokered CDs

Deserve a special note. They are CDs issued by banks but sold through brokerage firms. They are generally FDIC insured, up to the limit at each issuing bank, but you should confirm the issuing bank and remember that your insurance is based on the bank that issued the CD, not the broker. They are often not redeemable early by the issuer, so you sell them on a secondary market, where the price depends on current interest rates. Some are callable, meaning the issuer can end the CD early if rates fall. The insurance protects you if the bank fails, but not from a lower resale price.

CD vs. High-Yield Savings Account

A CD gives you a fixed rate, while a high-yield savings account (see the High-Yield Savings section) has a variable rate that can rise or fall. A CD is better when you are sure you will not need the money and want certainty. A savings account is better when you need flexibility or expect rates to rise. You can also compare with U.S. Treasury bills, which are backed by the U.S. government and whose interest is exempt from state and local income tax, though they are not FDIC insured and are bought through TreasuryDirect or a broker.

CD Ladder: How It Works

Spreads your money across CDs with different maturities, for example one, two, three, four and five years. As each CD matures, you can spend the money or reinvest it in a new long-term CD. This gives you regular access to cash and reduces the risk of locking everything in at the wrong time.

How to Get the Best CD Rates and Avoid Common Mistakes

• Compare APY and the early withdrawal penalty, not just the headline rate.
• Never put your emergency fund in a CD. Keep that in a liquid account.
• Match the term to the goal. If you know you need money for a tuition payment in 18 months, an 18-month CD fits.
• Consider a ladder if you want both rate and access.
• Stay within insurance limits by spreading large amounts across banks and ownership categories.
• Know the maturity date and grace period, and set a reminder. Auto-renewal at a poor rate is the most common CD mistake.
• Check minimum deposits, funding rules and fees before you open.
• Plan for taxes. Interest on longer CDs may be taxed before you receive it.
• Be careful with unsolicited offers. Verify the institution yourself, and be wary of anyone who pressures you to move money quickly or claims a non-bank product is FDIC insured.

The bottom line

A CD trades flexibility for certainty. The rules are clear, the insurance is strong, and the main risks are choosing the wrong term, paying an early withdrawal penalty or missing an auto-renewal. With the Fed’s September 2026 move and uncertainty over federal oversight, read your disclosures, keep records and match the term to your goal. The next section looks at where the best accounts live: Best Online Banks.

Official sources

FDIC (fdic.gov), NCUA (ncua.gov), Federal Reserve (federalreserve.gov), CFPB (consumerfinance.gov), IRS (irs.gov), TreasuryDirect (treasurydirect.gov).