How to Pick the Right CD Term for Me

CDs come in a wide variety of maturities, all with their pros and cons

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Updated February 10, 2024
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One of the most important decisions you have to make when you invest in a certificate of deposit (CD) is how soon you want it to mature. CDs come in many different terms, from months to years. If you choose a term that's too short, you won't get as good an interest rate, but if it's too long, you may have to pay an early-withdrawal penalty if you need to get your money out before it matures. The key is to find the sweet spot, a CD term that works best for you.

Key Takeaways

  • Certificates of deposit (CDs) come in many different terms, or lengths to maturity.
  • A major consideration in selecting the right CD term is how soon you expect to need the money back.
  • If you have to cash in a CD before the end of its term, you may have to pay an early-withdrawal penalty, which could cost you all of your interest and even some principal.
  • Building a CD ladder can help you avoid penalties since it breaks up your investment into several CDs that mature at staggered dates.

Finding the Right CD Term Length for Your Needs

When choosing your CD term, you'll first want to consider how long you can lock up your money without touching it. You wouldn't put your emergency fund savings in a CD since you might need that money before the CD matures. Likewise, if you're saving for a down payment on a home that you know you won't be ready to buy for three to five years, you wouldn't choose a six-month CD when you could get a much higher interest rate on a three-year or five-year one.

If you're saving for retirement in a decade or two, you could invest in an even longer-term CD, especially if you're risk-averse and don't want to put all of your money in the stock market.

What CD Term Lengths Are Available?

CD terms typically vary from one month to 10 years, and sometimes longer.

The longer the term, the higher your interest rate is likely to be. How, the longer the term, the greater the penalty for early withdrawal may be, as well.

Getting the Best Interest Rates

Once you've decided on the CD term you want, it pays to shop around to find a bank or credit union that offers the best interest rate on one with that term. You should always make sure the bank or credit union is insured by either the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA). With either agency, your total deposits at that financial institution are insured for up to $250,000, and if you have joint accounts, that amount is doubled. The coverage is automatic.

As of January 2024, for deposits under $100,000, average CD rates nationally ranged from 0.23% for a one-month CD to 1.41% for a five-year CD. But rates can vary widely from one financial institution to another. Typically, online-only banks offer higher yields than brick-and-mortar ones.

Note, too, that some financial institutions pay higher interest rates on CDs over a certain size, such as $10,000. Some also offer jumbo CDs, typically for deposits of $100,000 or more, which offer their highest rates.

Minimum Deposit Requirements

You'll also want to check on the bank or credit union's minimum deposit requirements. Most require a minimum deposit of at least $500 to buy a CD and many want $1,000 or more. Bear in mind that, unlike a savings account, you typically fund a CD just once, when you open it. (There is a specialty type of CD that allows for additional deposits, called an add-on CD, but it is much less common.)

Early Withdrawal Penalties

Another provision to check is whether the CD has an early-withdrawal penalty, in case you need to get your money out early—and, if so, how it is computed.

These fees vary, depending on your particular CD, its term, and the issuer. The longer the CD's term, the larger the penalty will normally be. So, for example, the penalty on a five-year CD is way steeper than for a three-month one. Some issuers will charge you all of the interest you've earned and even subtract some of your principal if you haven't earned enough interest to cover the whole penalty.

If you're uncertain about how long you'll be able to leave your CD untouched, note that some banks offer liquid CDs or no-penalty CDs, although they pay less interest as a trade-off.

Taking Advantage of CD Laddering

One way to enjoy the advantages of both short-term and long-term CDs is with a CD ladder. Laddering is a strategy that involves splitting your cash among several CDs with different terms.

For instance, instead of buying a single five-year CD with $5,000, you might put $1,000 each into one-, two-, three-, four-, and five-year CDs. This way, you will always have a CD maturing within a year, while earning a higher rate on at least a portion of your money. When your one-year CD matures, you invest the money in a new five-year CD. A year later, you invest your matured two-year CD's proceeds in a new five-year CD, and so forth.

A ladder can also keep you from locking all of your money in at a low rate.

What Happens When a CD Matures?

By law, if your CD has a term of a year or more and you haven't elected to renew it automatically, the financial institution should notify you when it is about to mature. At that point, you will have the option of rolling the money into another CD, transferring it into a different account, or simply taking it in cash. If you take no action before the deadline the financial institution gives you, it will typically put the money into a new CD, locking it in until that CD matures.

What Is a Brokered CD?

Brokered CDs are certificates of deposit issued by banks but sold by brokerage firms and independent sales representatives. They may pay higher rates than CDs sold directly by banks and credit unions but can also be riskier. Before buying one, be sure you're dealing with a reputable firm. Also, make certain that the CD is federally insured.

What Is a Callable CD?

Some certificates of deposit, like some bonds, have a provision allowing the issuer to call them in before they mature. An issuer might do that, for example, if you have a long-term CD with a high-interest rate and interest rates have fallen since you bought it. You'll get your money back and any interest you've earned to that point, but you will have to invest the money elsewhere, probably at a lower rate. So when you buy a CD, it's worth asking if it's callable.

The Bottom Line

CDs are available in a wide variety of terms, or lengths. The trick in choosing one is to find the right balance between a short-term CD (which allows you to get your money out sooner) and a long-term CD (which will pay a higher interest rate). You can also divide your investment among several CDs of different terms to hedge your bets.

Article Sources
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  1. Federal Deposit Insurance Corporation. "Deposit Insurance FAQs.”

  2. National Credit Union Administration. "How Your Accounts Are Federally Insured.”

  3. Federal Deposit Insurance Corporation. "National Bank Rates and Rate Caps."

  4. Office of the Comptroller of the Currency. "My Certificate of Deposit (CD) Matured, but I Didn't Redeem It. What Happened to My Funds?"

  5. U.S. Securities and Exchange Commission. "High-Yield CDs: Protect Your Money by Checking the Fine Print."

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