What Is a CD? How a Certificate of Deposit Works

Short answer: What is a CD? A CD, or certificate of deposit, is a type of savings account offered by banks and credit unions. You generally agree to leave your money in it for a set length of time, called the term. Taking money out early usually means paying a penalty. CDs at insured banks and credit unions are federally insured up to $250,000 (CFPB, 2026).

What Is a Certificate of Deposit?

The Consumer Financial Protection Bureau (CFPB) describes a CD as "a type of savings account offered by banks and credit unions." The trade-off is time: you generally agree to keep the money in the CD without taking a withdrawal for a specified length of time.

Investor.gov, the SEC's site for individual investors, puts it this way: a CD is a savings account that holds a fixed amount of money for a fixed period of time, such as six months, one year or five years. It calls CDs one of the safest savings options.

Because early withdrawals usually cost a penalty, the CFPB suggests choosing a maturity based on when you expect to need the money. For cash you might need on short notice, see our guide to building an emergency fund.

How Does a CD Work?

Here's the basic cycle:

1. Pick a term. The CFPB suggests matching the CD's maturity date to when you expect to need the money.
2. Deposit your money. A CD holds a fixed amount for the full term.
3. Earn interest. Your disclosure statement should say whether the rate is fixed or variable and when interest is paid. Investor.gov notes interest may be paid by check or electronic transfer.
4. Cash it in. Investor.gov says that when you cash in or redeem a CD, you receive the money you originally invested plus any interest.
5. Avoid early withdrawals. If you take money out before maturity, you'll usually pay a penalty.

Before opening a CD, Investor.gov says the disclosure statement should tell you whether the rate is fixed or variable, when interest is paid, the maturity date and the early withdrawal penalty. Ask what happens to the money when the CD matures if the disclosure doesn't make it clear.

What Is the Penalty for Withdrawing From a CD Early?

It depends on your account. HelpWithMyBank.gov, run by the Office of the Comptroller of the Currency (OCC), says in guidance last reviewed in April 2021 the penalty depends on the terms of your account and that "federal law sets a minimum penalty on early withdrawals from CDs, but there is no maximum penalty."

The federal minimum applies to withdrawals made within the first six days after a deposit: the penalty must be at least seven days' simple interest. Beyond that minimum, the penalty depends on your account terms.

Investor.gov's brokered CD bulletin notes that a bank CD's terms may require you to pay a penalty or give up part of the interest you've earned if you withdraw early. When you compare CDs, the CFPB suggests looking at three things side by side: the term, the interest rate and the amount of the early withdrawal penalty.

Are CDs FDIC Insured?

Yes, when you buy them at an insured institution. The CFPB says CDs offered by banks are insured up to $250,000 by the Federal Deposit Insurance Corporation (FDIC), and CDs at credit unions are insured up to $250,000 by the National Credit Union Administration (NCUA).

The FDIC lists "time deposits, such as certificates of deposit (CDs)" among the deposit products it insures. As of 2026, its standard maximum is $250,000 per depositor, per insured bank, for each account ownership category. A few details matter:

• Coverage isn't per CD. Investor.gov points out that the $250,000 covers all accounts in your name at the same bank, not each CD or account separately.
• Separate banks are insured separately. The FDIC says deposits at different insured banks are insured separately, but deposits at different branches of the same bank are not.
• Investments aren't deposits. The FDIC says its insurance does not cover investments, even if you bought them at an insured bank.

If you're near the limit, our guide to FDIC insurance limits explains ownership categories in more detail.

What Is a Brokered CD?

A brokered CD is one you buy through a brokerage firm or deposit broker rather than directly from a bank. Investor.gov's 2023 bulletin says deposit brokers may be able to negotiate a higher rate by promising to bring a certain amount of deposits to a bank, but that brokered CDs are typically more complex and may carry more risks.

	Bank CD	Brokered CD
Where you buy it	Directly from a bank or credit union	Through a brokerage firm or deposit broker
Typical term	Six months, one year or five years are common examples (Investor.gov)	Maturities may range from six months to thirty years (Investor.gov)
Getting out early	Usually an early withdrawal penalty set by the bank	Generally no early withdrawal penalty, but you may have to sell on the secondary market, possibly at a loss
Call features	Check your account terms	May have call features that let the bank end the CD early
Interest	Set out in the disclosure statement	Usually simple interest paid at regular intervals
Deposit insurance	FDIC or NCUA, up to $250,000	Can be FDIC-insured if the issuing bank is insured; confirm where your money is deposited

The key risks Investor.gov describes:

• Market price changes. You can generally sell a brokered CD on a secondary market, but if interest rates have risen since you bought it, you may have to sell at a discount and lose some of your original deposit. Depending on market conditions, some brokered CDs may not have a secondary market.
• Call features. The bank may be able to call the CD after a set period. That right belongs to the bank, not to you. If the CD is called, you receive your principal and the interest earned to that date.
• Fees. Your deposit broker may charge a fee to sell your CD on the secondary market, which can reduce your return.
• Who you're dealing with. Investor.gov says deposit brokers are not licensed or certified, and no state or federal agency approves them. Check the broker's background before you buy, and confirm in writing which bank holds your money.

What Are the Pros and Cons of a CD?

Pros	Cons
Considered one of the safest savings options (Investor.gov)	Your money is tied up for the term
Federally insured up to $250,000 at insured banks and credit unions	Early withdrawals usually cost a penalty, with no federal maximum
Terms are set out in a disclosure statement before you open it	Inflation may grow faster than your money (Investor.gov)
You can pick a maturity to match when you'll need the money (CFPB)	Brokered CDs add market price, call and fee risks

Investor.gov says the risk with CDs is that inflation will grow faster than your money and lower your real returns over time.

CD vs. Savings Account vs. Money Market Account

A CD trades access for a fixed term. Investor.gov's brokered CD bulletin notes that CDs typically pay more than a regular savings account. Our guides to checking vs. savings accounts and money market vs. savings accounts compare those options. If you're deciding where to open an account, see credit union vs. bank. For saving toward bills you know are coming, see our guide to sinking funds.

Questions to Ask Before You Open a CD

• How long is the term, and when exactly does it mature?
• Is the rate fixed or variable, and when is interest paid?
• How is the early withdrawal penalty calculated?
• Is the bank FDIC-insured or the credit union NCUA-insured?
• For a brokered CD: Which bank issues it? Can it be called? What fee would I pay to sell it early?

The Bottom Line

A CD is a simple, insured way to set money aside for a fixed period in exchange for giving up easy access to it. Before you open one, compare the term, the rate and the early withdrawal penalty, and match the term to when you expect to need the money. If you're buying through a brokerage, read the terms closely: brokered CDs can have longer maturities, call features and market price risk that a CD from your local bank does not.

This article is general education, not individualized financial advice.

Frequently asked questions

What is a CD in banking?

A CD, or certificate of deposit, is a type of savings account offered by banks and credit unions. You generally agree to keep the money in the CD without taking a withdrawal for a set length of time, such as six months, one year or five years.

Can you lose money in a CD?

A CD at an insured bank or credit union is insured up to $250,000, so your deposit is protected if the institution fails. You can still come out behind if you pay an early withdrawal penalty, and Investor.gov says the risk with CDs is that inflation will grow faster than your money. A brokered CD sold before maturity can also lose some of your original investment if its market price has fallen.

What happens if I take money out of a CD early?

You usually pay a penalty, set by the terms of your account. Federal law sets a minimum penalty for withdrawals in the first six days after a deposit but no maximum, so check your account agreement.

Are CDs FDIC insured?

Yes. As of 2026, CDs at FDIC-insured banks are covered up to $250,000 per depositor, per insured bank, for each account ownership category. CDs at federally insured credit unions are covered by the NCUA up to $250,000. Coverage applies to all your deposits in the same ownership category at the same bank, not to each CD separately.

What is a brokered CD?

A brokered CD is a CD you buy through a brokerage firm or deposit broker instead of directly from a bank. Investor.gov says brokered CDs are typically more complex and may carry more risks, such as longer maturities, call features and market price changes if you sell early.

Sources

1. CFPB: What Is a Certificate of Deposit (CD)?
2. HelpWithMyBank.gov (OCC): What Are the Penalties for Withdrawing Money Early From a CD?
3. Investor.gov (SEC): Certificates of Deposit (CDs)
4. Investor.gov (SEC): Brokered CDs — Investor Bulletin (2023)
5. FDIC: Your Insured Deposits

This guide is general information, not personal advice. Your situation may differ, so consider talking with a qualified professional, such as a fiduciary financial adviser, CPA or licensed agent, before making a decision.