FDIC Insurance: CD deposits at FDIC-member banks are insured up to $250,000 per depositor, per bank for individual accounts, and $500,000 for joint accounts. CD interest is taxed as ordinary income and reported on Form 1099-INT.
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Understanding CDs: What You Need to Know
A Certificate of Deposit (CD) is a savings product offered by banks and credit unions that typically offers a higher interest rate than a standard savings account in exchange for leaving your money on deposit for a fixed term.
How CD Interest Compounds
Most CDs compound interest daily or monthly, though some compound quarterly or annually. More frequent compounding produces slightly higher returns. The difference between a stated APR and the effective APY (Annual Percentage Yield) reflects the compounding effect. When comparing CDs, always compare APY rather than APR for an accurate picture of your actual yield.
Early Withdrawal Penalties
Most CDs charge an early withdrawal penalty if you access your funds before maturity. Typical penalties:
- 3-month CD: 1 month of interest
- 6-month CD: 3 months of interest
- 1-year CD: 6 months of interest
- 2-year CD: 6–12 months of interest
- 5-year CD: 12–18 months of interest
CD Ladder Strategy
A CD ladder involves splitting your deposit across multiple CDs with different maturity dates (e.g., 1-year, 2-year, 3-year, 4-year, and 5-year). As each CD matures, you reinvest in a new long-term CD. This strategy provides both higher yields (from longer-term CDs) and regular access to a portion of your funds each year.
Tax Note: CD interest is taxed as ordinary income in the year it is credited to your account (not when the CD matures for multi-year CDs). Your bank will send a Form 1099-INT each January for interest earned the prior year, including interest accrued on multi-year CDs.