Certificates of Deposit (CDs): How CDs Work and How to Build a CD Ladder

Types of CDs: Fixed-Rate, Bump-Up, and No-Penalty

There are several types of CDs designed for different needs. Fixed-rate CDs are the most common: you lock in a rate for the full term, and the rate never changes. If rates go up, you are stuck with your lower rate unless you break the CD (paying a penalty). If rates go down, you benefit from having locked in a higher rate. Bump-up CDs allow you to request a rate increase one time during the term if the bank raises rates on new CDs. These typically offer a slightly lower starting rate than fixed-rate CDs in exchange for this flexibility. No-penalty CDs allow you to withdraw your money early with no penalty — you only forfeit a small amount of interest (typically 60-90 days). These offer the most flexibility but usually the lowest rates. Jumbo CDs require a minimum deposit of $100,000 and may offer slightly higher rates. Step-up CDs have scheduled rate increases over the term, so your rate automatically rises at predetermined intervals.

The best type of CD depends on your outlook for interest rates. If you expect rates to fall, lock in a fixed-rate CD for as long as possible. If you expect rates to rise, choose a shorter term or a bump-up CD. If you are uncertain about when you might need the money, a no-penalty CD or CD ladder offers the best balance of yield and flexibility. See our CD ladder and money market guide for more detail.

How CD Laddering Works

A CD ladder is a strategy that spreads your money across multiple CDs with different maturity dates. This gives you regular access to some of your cash while still earning higher long-term rates on the rest. Here is how to build a CD ladder with $25,000. Divide your money into five equal parts of $5,000 each. Open CDs with maturities of 6 months, 1 year, 2 years, 3 years, and 5 years. When the 6-month CD matures, reinvest it into a new 5-year CD. When the 1-year CD matures, reinvest it into a new 5-year CD. After the first year, you have a ladder where one CD matures every 6-12 months, giving you regular access to cash while the rest of your money earns higher long-term rates.

The key benefit of a CD ladder is that you are never fully locked in. At any given time, 20% of your money is available within months (or less). The average yield across your ladder is roughly the average of all rungs, which typically beats short-term CD rates while avoiding the full commitment of a single long-term CD. In a falling rate environment, your longer-term rungs continue earning high rates even as new CDs offer less. In a rising rate environment, your shorter-term rungs let you reinvest at higher rates sooner.

Early Withdrawal Penalties: What You Need to Know

If you withdraw money from a CD before it matures, you pay an early withdrawal penalty. The penalty is typically a certain number of months of interest. For CDs under 12 months, the penalty is usually 3 months of interest. For CDs of 12 months or longer, the penalty is typically 6 months to 12 months of interest, though some banks charge up to 18 months for long-term CDs. Some banks may also forfeit all interest earned and charge a small principal penalty if you withdraw very early in the term. Always read the fine print before opening a CD.

Example: You open a 5-year CD with $10,000 at 4.5%. After 2 years, you need the money. You have earned approximately $920 in interest over 2 years. The early withdrawal penalty is 12 months of interest on the original deposit: $450. So you forfeit $450 of your $920 in interest, receiving your $10,000 principal plus $470 in net interest. You still come out ahead of most savings accounts, but it hurts. The lesson: only put money in CDs that you are confident you will not need before maturity, or use a no-penalty CD or ladder strategy to maintain access. Your emergency fund should not be in long-term CDs.

FDIC Insurance: How Your Money Is Protected

CDs are insured by the FDIC up to $250,000 per depositor, per insured bank, per ownership category. This means if your bank fails, the US government guarantees your CD principal and accrued interest up to $250,000. The same coverage applies to credit union CDs through the NCUA. FDIC insurance has never lost a penny of insured deposits since its creation in 1933.

You can have more than $250,000 in FDIC coverage at a single bank by using different ownership categories: individual accounts ($250,000), joint accounts ($250,000 per co-owner), retirement accounts ($250,000), trust accounts ($250,000 per beneficiary), and business accounts ($250,000). A married couple can have up to $1,000,000 in FDIC coverage at one bank by using individual accounts ($250,000 each), a joint account ($250,000 each), and trust accounts. For amounts beyond FDIC limits, spread CDs across multiple banks or use the CDARS (Certificate of Deposit Account Registry Service) network, which splits large deposits across many banks to maintain full coverage. See our complete FDIC insurance guide for details on maximizing your coverage.

CD Ladder Example with Real Numbers

Here is a concrete CD ladder example. Suppose you have $50,000 to invest and build a 5-year ladder. Rates as of mid-2026 are approximately: 1-year CD at 4.8%, 2-year at 4.6%, 3-year at 4.4%, 4-year at 4.3%, and 5-year at 4.2% (the yield curve is inverted, so short-term rates are higher than long-term rates). You put $10,000 into each rung. Year 1: you earn $10,000 x 4.8% = $480 on the 1-year CD, which matures. You reinvest that $10,000 plus $480 into a new 5-year CD at the prevailing rate (say 4.0%). Year 2: the 2-year CD matures, you reinvest in a new 5-year CD. Each year, one CD matures, and you reinvest the proceeds into the longest rung. Your average yield over the first year is approximately 4.46%, and over time it smooths out toward the average of all rates. The ladder provides regular liquidity: you always have one rung maturing within 12 months, while the rest earns intermediate-term rates.

What is the minimum deposit for a CD?

Most online banks require a minimum deposit of $500 to $1,000 to open a CD. Some credit unions and community banks offer CDs with as little as $100 minimum. Jumbo CDs typically require $100,000. The minimum is almost never a barrier — if you have $500 or more, you can start building a CD ladder. For very small amounts, a high-yield savings account or money market fund may be more practical.

How are CD earnings taxed?

CD interest is taxed as ordinary income at your marginal federal income tax rate, plus state and local income taxes where applicable. Unlike Treasury bills, CD interest is NOT exempt from state and local taxes. The bank will send you a Form 1099-INT if you earn more than $10 in interest during the year. You report the interest on your federal tax return as ordinary interest income. For investors in high-tax states, this makes CDs less attractive on an after-tax basis compared to T-bills or Treasury-only money market funds. See our tax planning guide for strategies to minimize the tax impact of CD interest.

Are CDs better than money market funds?

CDs and money market funds serve slightly different purposes. CDs offer FDIC insurance and guaranteed rates for a fixed term, making them ideal for money you will not need for a specific period. Money market funds offer daily liquidity (you can write checks or redeem at any time) but are not FDIC insured. Currently, short-term money market yields are roughly comparable to 1-year CD yields. For an emergency fund, use a money market fund or high-yield savings account for instant access and a CD ladder for the portion you can lock up. For a known future expense (like a down payment in 2 years), a CD is perfect because you know exactly when you need the money. Compare CDs vs money market funds in detail.

Can I lose money on a CD?

You cannot lose your principal on a CD if you hold it to maturity, as long as the bank is FDIC insured and you stay within the $250,000 limit. The only way to lose money on a CD is to withdraw early and pay a penalty that exceeds the interest earned. For example, if you open a 1-year CD at 5% with $10,000 and withdraw after 3 months (before earning much interest), the 3-month penalty could eat all your earned interest and possibly a small amount of principal. Always keep enough liquid cash in a savings account or money market fund so you never have to break a CD early. Read the FDIC insurance guide to understand how your deposits are protected.

Related Resources