What is the CD?
A certificate of deposit locks money for a fixed term at a fixed rate, insured by the FDIC up to $250,000 per depositor per bank. Withdrawing early triggers a penalty, typically 3–12 months of interest.
CD interest is fully taxable as ordinary income in the year earned, even if you do not withdraw it — which meaningfully reduces the real return for higher earners.
Formula & worked example
APY = (1 + r/f)f − 1
Worked example: $25,000 at 4.35% compounded monthly for 24 months matures at about $27,270, earning $2,270 in interest. At a 22% tax rate you keep roughly $1,771 — an effective after-tax return closer to 3.4%.
How to use this cd calculator
- Enter your deposit and the advertised APY.
- Select the compounding frequency; daily compounding yields marginally more.
- Enter the term in months.
- Set your tax rate — CD interest is taxed as ordinary income.
Smart tips
- Build a CD ladder — several CDs maturing at intervals — for liquidity without sacrificing longer-term rates.
- Compare against Treasury bills, which are exempt from state and local tax and often yield similarly.
- FDIC insurance covers $250,000 per depositor per bank; spread larger sums across institutions.
- No-penalty CDs give flexibility at a slightly lower rate, useful when rates may fall.
- In a high-rate environment, locking a longer term protects your yield if rates decline.
Frequently asked questions
What is APY?
Annual Percentage Yield — the effective annual return including compounding, which makes CDs directly comparable regardless of compounding frequency.
Is CD interest taxable?
Yes, as ordinary income in the year it is earned, even if you do not withdraw until maturity.
What happens if I withdraw a CD early?
You forfeit a penalty, typically 3 months of interest on short terms and 6–12 months on longer ones.
Are CDs better than a high-yield savings account?
CDs lock in a rate, which helps when rates are falling. Savings accounts stay liquid and are better when rates are rising.
Want the theory behind the numbers? Read our savings guides on the Money Blog.
Written by Gurjeet Singh, Sharpen Solutions. Last reviewed 8 Sep 2026. How we check these numbers.