Certificate of deposit

A certificate of deposit (CD) is a debt instrument issued by a bank or a credit union. A CD earns its stated interest for the stated term. Some CDs pay interests at varying frequencies (monthly, quarterly, annually, etc).

Role in a portfolio

 * General savings vehicle. If you know the date on which you need a large amount of cash (car, college tuition, vacation, etc), you might consider opening a CD such that it will mature just before the date.
 * A part of fixed income allocation in a retirement portfolio. A common method of holding CDs in a portfolio is laddering.

Credit risk
CDs from qualified banks are insured by Federal Deposit Insurance Corporation (FDIC). CDs from qualified credit unions are insured by National Credit Union Administration (NCUA). Make sure the institution you are buying from is covered by FDIC or NCUA. Check their status:
 * FDIC: Bank Find
 * NCUA: Is My Credit Union Federally Insured?

For an amount exceeding the FDIC or NCUA limit, credit risk is a serious issue. You might consider diversifying your CDs at several banks or credit unions to avoid possible loss of principal. See FDIC: Insuring Your Deposits and NCUA Share Insurance Toolkit for details on coverage.

Early withdrawal penalty
If you need money in your CD before it matures, you may be subject to early withdrawal penalty. This penalty is deductible on a federal income tax return.

Inflation risk
While CDs are usually safe, money invested in a CD may not beat inflation after taxes are taken out.

Taxation
CDs are not tax efficient. If used as part of fixed income allocation in a long-term investment portfolio, CDs should be placed in a tax deferred account. If held in a taxable account, interest from CDs is taxed as ordinary income for federal income tax. Unlike money market funds, there are no tax-exempt CDs. Taxation at the state level vary. Some states, including Massachusetts, may exempt interest from in-state banks.

Where to Buy?
You can buy CDs directly from a bank or a credit union. Many members of the Bogleheads forum like Pentagon Federal Credit Union. You can also buy CDs through a brokerage account (see Brokered CDs). These websites list good CD rates offered by different banks or credit unions:
 * Bankrate.com
 * Bank Deals blog
 * FatWallet CD thread

CD rates offered through brokerage firms:
 * Vanguard Brokerage Service
 * Fidelity
 * Charles Schwab