CD Calculator
What is a Certificate of Deposit (CD)?
A CD is a type of savings account offered by banks and credit unions. It differs from a regular savings account in one key way: You lock your money away.
When you open a CD, you agree to leave your lump sum of money with the bank for a specific period (The "Term"), usually ranging from 6 months to 5 years. In exchange for your patience, the bank pays you a guaranteed interest rate that is typically much higher than a standard savings account.
APY vs. Interest Rate
When shopping for a CD, you will see the acronym APY (Annual Percentage Yield). This is the number that matters.
- Interest Rate: The simple percentage the bank pays.
- APY: The real return, including the effect of Compounding.
Compounding means earning interest on your interest. If the bank pays you interest monthly, that money gets added to your balance, and the next month you earn interest on a larger total. APY reflects this growth, making it the best number to use for comparisons.
The "CD Ladder" Strategy
The downside of a CD is that your money is stuck. If an emergency happens, you usually have to pay a penalty to withdraw it early (often 3 months of interest).
Smart investors use a "Ladder" strategy to maintain liquidity while getting high rates:
Instead of putting $10,000 into one 5-Year CD, split it into five $2,000 CDs:
• CD 1: 1-Year Term
• CD 2: 2-Year Term
• CD 3: 3-Year Term
• CD 4: 4-Year Term
• CD 5: 5-Year Term
Every year, one CD matures. You can take the cash if you need it, or reinvest it into a new 5-Year CD.
CD vs. High-Yield Savings (HYSA) vs. Stocks
Where should you put your money? It depends on your timeline and risk tolerance.
| Investment | Risk Level | Return Potential | Access to Money |
|---|---|---|---|
| Savings Account | Zero (FDIC Insured) | Low (0.5% - 4%) | Instant |
| CD (Certificate) | Zero (FDIC Insured) | Medium (4% - 6%) | Locked (Penalty fee) |
| Stock Market | Moderate to High | High (7% - 10% avg) | Liquid (But risky) |
Tax Implications
Is CD interest tax-free? No.
The IRS considers interest earned from CDs as "Ordinary Income." At the end of the year, your bank will send you a 1099-INT form, and you must report those earnings on your tax return. If you are in a high tax bracket, this can reduce your effective return. (See our Income Tax Calculator to estimate the hit).