Certificate of deposit

From Bogleheads

A certificate of deposit (CD) is a debt instrument issued by a bank or a credit union. A CD has a fixed interest rate, for a fixed period, and paid monthly, quarterly, or annually. CDs at credit unions are sometimes called money market certificates. Unlike a money market fund, there is no credit risk with a money market certificate as long as you stay within the deposit insurance guarantee.

You can also consider CDs as a form of bond. For more on this, see CDs vs bonds.

Role in a portfolio

The main reasons you might use CDs are:

  • A general savings account. If you know the date on which you need a large amount of cash (for example, to buy a car, for college tuition, for a vacation, and so on), you might consider opening a CD that will mature just before that date.
  • A part of your fixed income allocation in a retirement portfolio. CDs are simply bonds with special characteristics; see CDs vs bonds for more. Laddering is a common way to hold CDs in a portfolio.


Credit risk

If you use them correctly, CDs do not have credit risk. Only bank accounts and treasury bonds share this enormously valuable feature of a government guarantee.

The Federal Deposit Insurance Corporation (FDIC) insures CDs from qualified bank. The National Credit Union Administration (NCUA) insures CDs from qualified credit unions. You can verify that the institution you are buying from is covered by FDIC or NCUA by checking their status:

The standard insurance amount is $250,000 per depositor, per insured bank, for each account ownership category.[1]

If you want to safely invest more than $250,000 at the same institution, you can do this using payable-on-death (POD) labeling. For example, a couple with two children can insure $2.5 million. They would hold a joint CD with $500,000, an individual CD each, three CDs for her POD for each of him, child one and child two; and three CDs for him POD each of her, child one and child two. Details are at the Bankdeals blog and the FDIC. The FDIC Insurance Electronic Deposit Insurance Estimator (EDIE) can help make sure you do this right.

Banks fail regularly and so it is critical to take these rules seriously. Do not ever buy CDs greater than the insurance guarantee or at a non-guaranteed institution. In particular, there are a small number of credit unions that are not insured by the NCUA. Even if these credit unions offered slightly higher rates on their CDs (and they generally do not), it is not worth losing the government guarantee. If you have large amounts of money to invest in CDs, investigate the private IntraFi Network,[note 1] which automatically distributes your money across a large number of institutions.

Inflation risk

CDs are effectively nominal bonds and have inflation risk. The bank promises that you will receive the stated interest payments for the life of the CD, and the principal at maturity, but there is no guarantee that the future dollars will be worth as much as present dollars. (Also, in the case of bank failure, the FDIC only guarantees return of your principal and accumulated interest; sometimes the new bank that takes over the CD cuts the interest rate.)

You can partially mitigate inflation risk by redeeming CD prior to its maturity date. Early redemption creates a penalty, in the form reduction in the accrued interest. However, depending on market conditions, such as higher interest rates, it can be beneficial for you to redeem an existing CD early (known as "breaking" the CD) so that you can then use a more attractive alternative. For more, see: Comparing CDs.

Early withdrawal penalty

Figure 1. Form 1099-INT

If you need money in your CD before it matures, or wish to redeem the CD early to reinvest at higher rates, you may have to pay an early withdrawal penalty. According to a survey conducted by Bankrate.com,[2] early withdrawal penalties vary widely. The most common penalties are three months and six months of interest.

Usually you report the full interest payment from a CD as taxable income. The early withdrawal penalty is deductible as an adjustment to income on a federal income tax return. Box 2 of your 1099-INT form (see Figure 1) will show the early withdrawal penalty.


If you hold them in a taxable account, interest from CDs is taxed federally as ordinary income. Unlike money market funds, there are no tax-exempt CDs. Taxation at the state level varies. Some states may exempt interest from in-state banks.

Buying CDs

When buying CDs, there is a trade-off between convenience and yield. You have a few options.

Your local bank or credit union

When you save money for a specific future cash need, it can be simplest to purchase a CD with money from your checking account. These rates are always better than checking account interest, but often are not very good. Also, beware of "teaser" rates that automatically roll-over into much lower yielding CDs when they mature. You often have just ten days or so to stop a roll-over, so be sure to mark your calendar.

Out of town banks or credit unions

Different banks and credit unions around the country are constantly offering special deals to attract new customers. If you are willing to fill out the paperwork, you can get the highest yield CDs by moving your money to whichever bank is offering the best deal as your old CD matures. Many banks now offer online setup and ACH money transfers, although the paperwork to move an IRA is often more difficult.

The best source for finding bank deals is at DepositAccounts.com. There, you can see a list of all deals available for the length CD you want. Many deals are only for residents of certain states or cities, or people affiliated to some employer or group.

Brokered CDs

Brokers sometimes negotiate a higher interest rate on bank-issued CDs because they can bring a large amount of deposits to the bank. But CDs sold by brokers can be complex, and may carry more risks than traditional CDs sold directly by banks, especially your ability to lock in an attractive interest rate or get your money back early.[3][4]

Federal deposit insurance is limited to a total aggregate amount of $250,000 for each depositor in each bank or thrift institution. It is therefore very important that you know which institution issued your CD. Find out where your broker plans to deposit your money; they might put it into a bank or thrift where you already have CDs or other deposits. If the brokered CD increases your total deposits with that institution above the $250,000 federal deposit insurance limit, you would no longer be fully insured.[4]

Good account records by your deposit broker can ensure your CD will have federal deposit insurance and, if a bank closes, you will be paid quickly. Unlike traditional bank CDs, brokered CDs are sometimes held by a group of unrelated investors. Instead of owning the entire CD, each investor owns a portion of the total. Confirm with your broker how your CD is held, and be sure to ask for a copy of the exact title of the CD. If several investors own the CD, the deposit broker will probably not list each person's name in the title. But you should make sure that the account records reflect that the broker is merely acting as an agent for you and the other owners (for example, "XYZ Brokerage as Custodian for Customers"). This will ensure that your portion of the CD qualifies for full federal deposit insurance coverage.[4][5]

A brokered CD may not reinvest the interest payments, such as depositing the money into a separate money market account. In this case, the CD's interest rate is calculated as simple interest (the same amount every payment period). The total return of the CD should include the interest paid by the separate account.

Vanguard Brokerage Services

Vanguard and other brokerage firms offer brokered CDs from hundreds of different banks. All CDs available through Vanguard Brokerage Service are FDIC or NCUA insured (though you must stay below the limits). Brokers deposits interest payments (which are often made monthly) into the money market linked to your brokerage account.

The downside is that the very best deals are not available as brokered CDs. You will generally do better than your local bank, but not as well as if you search out the very best deals.

See also


  1. Formerly Certificate of Deposit Account Registry Service (CDARS). Reconfigured into IntraFi Network in 2021.
  2. Consider the maturity date carefully when purchasing a brokered CD for an IRA. If you have to make a Required Minimum Distribution before maturity, you would need to sell the CD. See this Bogleheads forum post: "Re: Can you lose money by buying CDs?", LadyGeek. September 7, 2019.


  1. "FDIC: Understanding Deposit Insurance". FDIC. Retrieved August 26, 2023.
  2. "CD early withdrawal penalties survey". Bankrate.com. December 8, 2006. Archived from the original on January 2, 2007.
  3. "When a Broker Offers a Bank CD: It Pays to Do Some Research". FDIC. Archived from the original on March 31, 2023.
  4. 4.0 4.1 4.2 "High-Yield CDs – Protect Your Money by Checking the Fine Print". SEC. December 3, 2008. Retrieved August 26, 2023. See the Special Considerations for Brokered CDs section.
  5. Bogleheads forum topic: "Brokered Deposits / CDs -- Proper Documentation". January 23, 2010

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