CD Calculator

A certificate of deposit quotes an APY — annual percentage yield — which already includes the effect of compounding. That is what makes CDs unusually easy to compare: a 4.50% APY twelve-month CD pays 4.50% over the year regardless of whether the bank compounds daily, monthly or quarterly.

An APR would not tell you that, which is why deposit products are quoted in APY and loans in APR. When comparing two CDs, compare APY to APY and ignore the compounding frequency entirely — the bank has already done that arithmetic for you.

The trade for a fixed rate is a fixed term. Take the money out early and the bank charges a penalty, typically expressed as a number of months' interest: often three months on a one-year CD, six months on a three-year, and up to twelve on a five-year.

The penalty applies to interest, not principal — but if you withdraw in the first few months you can receive back less than you deposited, because the penalty exceeds the interest earned. Model the worst case before locking money you might need.

A ladder splits the money across several maturities — say a fifth each into one, two, three, four and five-year CDs. Each year one rung matures and is either spent or reinvested at the five-year rate, which is usually the highest on offer.

The result is a portfolio that eventually earns close to long-term rates while giving you access to a portion of the money every twelve months. It is the standard answer to the tension between wanting the higher long rate and not wanting to commit everything for five years.

A high-yield savings account is liquid and its rate floats — excellent when rates are rising, poor when they fall. A CD fixes the rate for the term, which is the right structure when you believe rates have peaked and you can genuinely spare the money.

Treasury bills deserve a look alongside both. They are backed by the federal government rather than FDIC insurance, are exempt from state and local income tax — which matters a great deal in California, New York and other high-tax states — and can be sold on the secondary market before maturity without a fixed penalty.

FDIC insurance covers $250,000 per depositor, per insured bank, per ownership category; credit union deposits are covered to the same limit by the NCUA. Balances above that at a single institution are not protected, so large cash positions should be split across banks or across ownership categories.

CD interest is taxed as ordinary income in the year it is credited, even if the CD has not matured and you have not touched the money. On a multi-year CD that means a tax bill on income you cannot yet spend — worth planning for, particularly on larger deposits.