What is a Certificate of Deposit?

A certificate of deposit, also called a "CD," is a savings tool that offers low risk while increasing earnable interest. CDs generally offer higher interest rates than savings accounts, so you can earn more on your money.

CDs have been used by commercial banks in the U.S. since 1922, becoming available to the general public in the 1950s. The CD is thought to be a tried-and-true investment practice. Follow along in this article as we take a detailed look at CDs, what they are and how they work. Plus, we'll show you how to get started with your own new CD account.

How do CDs work?

There are many varieties of CDs, each with its own benefits, interest rates, and nuances. They're all good for earning interest without assuming much risk. But it's important to understand CD basics before you choose one to invest in. 

With a CD, a financial institution accepts your deposit for a fixed period, called "the term." That term might be as short as 30 days, or as long as perhaps 10 years. Because money is deposited for a longer term, the bank pays a higher interest rate. Those rates are based on the federal funds rate, the basic lending rate set by the U.S. Federal Reserve system. The fed funds rate guides most other rates for lending or interest-bearing instruments, like a CD or savings account.

The CD matures when the term is up. At that time, you get back your original investment plus interest. You can withdraw your funds then to use as you wish. But you could reinvest your initial deposit plus earned interest into a new CD account for another set term.

The CD ladder

Some investors opt to create CD ladders. That's when an initial investment is divided into equal amounts, and each amount invested in separate CDs matures every year. It's easier to visualize in an example:

Let's say you had $5,000 to invest in CDs. To build a CD ladder, you'd invest $1,000 in five different CDs. But each will have different terms: a one-year, two-year, three-year, four-year, and a five-year CD. As each CD matures, two options become available. You can take the cash and use it for whatever needs you have. Or you could reinvest the money in a new five-year CD. That way, every year going forward, you'll have one CD that matures. 

Differences in account types

There are some other important differences between CDs, savings accounts and money market accounts:

  1. CDs have fixed terms. Withdrawing funds before the term's maturity date often results in an early withdrawal penalty. This penalty rarely eats into your original investment, but it may cost some —or all—interest earned. Most savings accounts and money market accounts don't have the same withdrawal penalties

  2. CDs have a fixed interest rate, set when the account is opened. Savings accounts usually have lower and often variable interest rates. But money market earnings depend on bond or stock market performance—so interest/return rates are variable

  1. While savings accounts often require only a minimal balance, CDs typically have larger minimum balance requirements to maintain accounts

  2. Savings accounts usually pay a set interest rate regardless of the amount deposited. But many CDs offer higher interest rates when more money is invested

Benefits of a CD account

As with other deposit accounts at a bank, a CD is covered by federal deposit insurance. The government insures up to $250,000 per depositor, per insured bank, for each account ownership category. Here are a few other features that CDs offer:

  1. With a set interest rate and fixed term, it's easy to calculate in advance how much you'll earn when the CD matures

  2. If you'd like to save for retirement, you can also open an IRA CD. That way your earnings are compounded and not taxed until you start making withdrawals

  1. Though CDs feature a set interest rate, the earnings are compounded over time. That's where the term annual percentage yield (APY) comes into play. It's how much total interest you'd earn annually if left in a CD for a year. APY should exceed the base interest rate

What to consider

Before opening a CD, consider these factors so you choose a CD that's right for you:

  1. Best interest rate. Consider looking for a CD with fixed rate that's the highest you can find. A higher interest rate equals more money in your pocket

  2. Term length that fits your strategy. Avoid tying up funds in a long-term CD that you might need sooner. You might consider keeping a separate emergency fund you can dip into if unexpected expenses arise

  3. Minimum deposit. The minimum starting deposit for any CD you're interested in should be within your financial reach. If it's a strain to come up with the deposit money, look for other CDs that have lower requirements

  4. Fees. When you calculate how much interest you would make with a given CD, remember that you must subtract any fees or maintenance charges. There are plenty of no-fee or low-fee CDs out there to choose from

  1. Bump-up options. If you get a CD from a bank where you have another account, you might qualify for an increase, or "bump," in interest rates

  2. Types of CDs available. By knowing about the different types of CDs available, you can judge whether a particular bank offers the best option for your circumstances. Balance your choice of CD terms, interest rate, and other features to find the best option

  3. Federally insured. All FDIC banks provide a measure of security for your certificate of deposit, but other institutions may not be

Accounts offered at TD

There are three great CD options at TD Bank. Each offers its own benefits.

  1. TD Choice Promotional CDs
    With a variety of terms and competitive interest rates, a TD Choice Promotional CD1 can be a good option. The CD's tiered interest rates increase along with the balance amount. If you have an eligible TD checking account, TD offers a "bump rate"2 to increase your CD's interest rate. There's a low, $250 minimum deposit needed to open and maintain the account. 

  2. TD No-Catch CDs
    The No-Catch CD from TD Bank provides the security of a CD while adding flexibility. One, no-penalty withdrawal is allowed per term. It's a nice option in case unexpected expenses pop up. Terms of 6 and 12 months are available. A deposit of only $250 is needed to open and keep the account.

  1. TD Step Rate CDs
    With interest rates guaranteed to increase every year, a TD Step Rate CD can be an attractive option. It also includes one optional penalty-free withdrawal every year. There's a 10-day grace period to do so on the anniversary of the account opening. Either 3-year or 5-year terms are available with TD's Step Rate CDs. 

Open an account today

Don't wait to set yourself up with a CD account and take advantage of the safe, secure options they provide. Start earning interest today, and lock in the current rates.

You can easily apply online at TD Bank and open an account in minutes. If you'd like to talk to a TD banking specialist, they're available to assist you, 24/7, at 1-888-751-9000, or visit the TD Store Locator to find a TD location near you.

Your TD account comes with more than just a great rate

  • Mobile Banking

    Bank anytime, anywhere—right from your phone with the TD Bank app.

  • TD Overdraft Relief3

    Overdrafts happen. When they do, TD Overdraft Relief gives you flexibility and options to avoid fees.

  • TD Checking Accounts

    Find an account that meets your needs – and has the perks you want.

  • TD Savings Accounts

    Whether you're saving for a rainy day or with a goal in mind, start today.

This article is based on information available in June 2023. It is for general informational purposes only. It is not intended to provide specific financial, investment, tax, legal, accounting, or other advice and should not be acted or relied upon without the advice of a professional advisor. A professional advisor will recommend action based on your personal circumstances and the most recent information available. For specific advice about your unique circumstances, consider talking with a qualified professional.

1TD Choice Promotional CDs will automatically renew at maturity to the same term at the non–promotional TD Choice CD interest rate and APY in effect at the time of renewal unless we notify you otherwise.

2To qualify for the relationship bump rate, customers must own an eligible TD Bank personal checking account in good standing at the time of CD account opening or renewal. See the Personal Deposit Account Agreement for more details about eligibility.

3Overdraft Services do not apply to TD Essential Banking Accounts. We may decline or return transactions that would result in an overdraft. Transactions that you make may cause your Account to overdraw but we will not assess your TD Essential Banking Account an overdraft fee or return item fee. For example, preauthorized transactions and other transactions may post to your Account even when the available balance in your Account is not sufficient to pay the transaction.

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