The Best Certificates of Deposit

A certificate of deposit (CD) is a type of savings account that comes with a fixed rate of return and a fixed withdrawal date (known as a maturity date). The bank agrees to give you an interest rate higher than a regular savings account in return for keeping your cash with them for a certain period of time (known as a term length). This term length can be as short as one month or as long as ten years.

CDs, savings accounts, and money market accounts are typically insured by the FDIC or NCUA. We do not recommend using these products with any banks or credit unions not covered by these government agencies. While funds in a CD are generally untouchable without penalty, you can add funds and withdraw funds freely from savings accounts and money market accounts (the exception being Schedule D, a federal rule that says you can’t make more than six transfers or withdrawals from an account per statement cycle). Though the APYs of CDs often vary from week to week, once you’ve opened an account, you’d typically have the same fixed interest rate throughout the term, whereas the interest rate for your savings account or money market account will change regularly.

CDs must remain with the bank for the specified time period, otherwise you risk early withdrawal penalties that could eat into your interest and possibly your initial deposit. “If you cash out prior to maturity, the penalty could involve some initial loss of your investment, so be very careful about what maturity you invest in,” says Greg McBride, CFA, who is Senior Vice President, Chief Financial Analyst of Bankrate. “In other words, if you need the money in a year, don’t put it into a two-year CD. You’re not going to come out ahead.” You also usually aren’t able to add money to the principal of the CD mid-way through, either; you would instead need to buy another CD.

CDs are valuable for people who are looking to save for specific goals, like a mortgage or a child getting married. CDs are essentially risk-free because they’re insured by the FDIC or NCUA, meaning you won’t lose your money if the institution goes under. You won’t experience any of the volatility that comes with investing in the stock market, since you receive a guaranteed and fixed interest rate (APY).

One strategy that people use with CDs is called laddering. With a CD ladder, you buy multiple CDs with different maturity dates, which allow you to take advantage of multiple interest rates and multiple opportunities to withdraw cash if you need it. “The laddered structure smooths out peaks and valleys in interest rates and provides a more predictable stream of interest income,” McBride says.

Barclays, which we awarded “Best Online Tools,” has a useful CD Ladder calculator on its website. You would input your ladder term (number of years that the money will be invested) and your initial deposit amount, and from there, you’re given a basic CD ladder strategy that includes which CD lengths you’d need to invest in initially and how much interest you would make at the end of the ladder term. (In our example case, if we invested $10,000 into Barclays CDs for three years using the recommended strategy, we would have $10,784.67 at the end of the term length, or $784.67 in earnings.)