Certificate of Deposits (CDs) Explained in 2025

How do CDs work and grow over time?

Opening a CD is much like opening a traditional savings account, with some unique differences. When you deposit your money at account opening in a traditional CD, you agree to leave it in the account for a set period, which can range from a few months to a number of years. In exchange, you’ll receive a guaranteed return (often) at a higher interest rate.

CDs pay compound interest, ensuring your earned interest earns more interest. Typically, they compound daily or monthly. Either way, the APY takes the effect of compounding into account.

Say you put $10,000 into a one-year CD that pays 1% annual interest. Without compounded interest (i.e. with simple interest), you would have $10,100 when your CD matures. That's a total return of $100.

Now let’s see what happens when the interest rate is set at 5% and your CD compounds monthly. Your $10,000 one-year CD would return $511.62. Of course, your return will be greater the longer your term. A $10,000 five-year CD earning 5%, for example, would collect $2,833.59 in compounded interest by the end of its term. The same CD earning 5% simple interest would return just $2,500.

Evaluating the benefits and limitations of CDs for savings

It’s no surprise that CDs are a popular choice. A low-risk product that offers a strong return on your money - the value is obvious. But are they right for your investment portfolio?

To answer that question, you’ll need to delve a bit deeper into the pros and cons of CDs, so let’s start with the good stuff.

Advantages of choosing a CD

Safety and security

CDs provide a secure way to save money, shielding you from decreasing market rates. With the reassurance of fixed interest rates, CDs offer peace of mind for those averse to risk. Additionally, the safeguard of FDIC and National Credit Union Administration (NCUA) insurance adds an extra layer of protection in case of bank failure.

Guaranteed returns

Even if rates are declining, you need not worry. Opting for a fixed-rate CD ensures you'll consistently earn returns on your investment.

Laddering strategies

When you buy multiple CDs with different maturity terms and interest rates, that’s called laddering. Since CDs mature at different times, laddering offers flexibility, helping you leverage changing interest rates while maintaining some liquidity.

No monthly maintenance fees

Most CD accounts do not charge monthly maintenance fees.

Tips to consider before opening a CD

There's a lot to think about before opening a CD account. The following factors are important to consider:

Strategically align your choice of CD term to fit your personal savings

Terms generally range from three months to five years. Look for a term that fits with your financial aspirations. Are you planning on taking a vacation? Are you looking to buy a house and need money for a down payment? Figure out what you’ll need – and when you’ll need it by - to choose a CD with the right term.

Maximize savings return through competitive interest rates

Do your research and search for a competitive rate to get the most out of your investment.

Exploring options to minimize fees

Financial institutions often impose fees for opening and maintaining CD accounts, such as early withdrawal fees, monthly maintenance fees, and broker fees, which can impact your earnings. Avoiding withdrawal fees is possible by refraining from accessing your funds until CD maturity. Alternatively, you can seek CDs with shorter terms if you anticipate needing the money sooner.

Evaluate renewal policies

Some banks will automatically renew your CD for another term, equal to your CDs current term. It’s possible that the renewal rate will differ from the one you had initially (the CD will renew at the standard rate currently available). You can explore CD renewal terms and rates as your current CD matures and make changes during the grace period.

Tax Implications of CDs

By now we know that CDs typically offer higher interest rates than other deposit accounts (e.g., checking, savings, or money market accounts). The downside to that benefit is that the yield paid out to an investor is considered taxable on both state and federal levels. Plus, that amount is taxed as interest income, not capital gains.

That interest will be applied to your account at regular intervals (monthly, quarterly, etc.) or at maturity and counted as earned interest. Your financial institution will provide you with a 1099-INT form detailing how much interest you earned for the year.

You then report it as income when you file your tax return. And remember those early withdrawal penalties? They’re also included on a 1099-INT. But you may be able to deduct the amount charged from earned interest to reduce your tax obligation.

The only way to avoid paying taxes on the interest accrued by a CD is to purchase it in a tax-advantaged account, such as an individual retirement account (IRA) or a 401(k) plan, when tax-deferral rules apply. Although interest is being earned, a 1099-INT is not issued until distributions are taken from the account (typically during retirement when you’ll be in a lower tax bracket).

What Happens to a CD at Maturity?

As your CD’s maturity date approaches, your financial institution will send you a reminder of the upcoming end date. They will also send you instructions on how, and by when, to direct them on next steps. Don’t forget that you usually have less than two weeks to let them know. Otherwise, they’ll make that decision for you.

The three most common options include:

Rolling over into a new CD

Your CD will roll over into a new CD that most closely matches the term of your maturing CD. If you have a 2-year CD, for instance, it will probably roll into another 2-year CD.

Transfer funds into another bank account

You can opt instead to put your money into a different sort of vehicle, such as a new savings, checking or money market account.

Withdraw your earnings

Your proceeds from the CD may be transferred to another deposit account at your current bank, mailed to you as a check, or sent to an external bank account. Please note that external bank transfers vary depending on the financial institution.

How to open a CD 

You weighed the pros and cons. You considered your financial needs and goals. And you’re ready to open a CD. But now it’s a question of “how do I start?” 

The good news is CDs are easily available. You can find them online, at almost any bank or credit union. The following steps can help you open your CD at BMO. 

Step 1: Choose the right CD product for your personal savings goals

Before putting your money anywhere, look to your future and determine what you’d like it to look like. Then, based on your current financial situation and those goals, search for a CD product that works for you. 

Step 2: Gather required identification documents for opening a CD account

Documents that you should have ready include:

• Government-issued ID (e.g., driver's license or passport)
• Social Security Number or Taxpayer Identification Number
• Proof of physical address (e.g., utility bill or bank statement)

Step 3: Open the account by applying online or by visiting a BMO branch

Step 4: Fund the CD account with a minimum deposit of $1,000.00 USD

Key Takeaways

As one of the safest and most profitable ways to save money, CDs are a low-risk savings option that offer higher interest rates than savings and money market accounts. Favorable rates aside, CDs offer other benefits too, including guaranteed returns and FDIC insurance.