How CD interest is calculated
Banks advertise CDs by APY, which already includes the effect of compounding. That makes the math simple: your balance grows by the APY each year.
If you know the rate (APR) instead: APY = (1 + APR ÷ n)^n − 1, where n = compounding periods per year
Example: $10,000 in a 12-month CD at 4.25% APY earns $10,000 × 0.0425 = $425. At a 22% tax rate you keep $331.50, an after-tax yield of 3.32%.
For an 18-month CD at the same APY: $10,000 × 1.0425^1.5 = $10,644.23, so $644.23 of interest.
How much interest will $10,000 earn in a CD?
| APY | 6 months | 1 year | 2 years | 3 years | 5 years |
|---|---|---|---|---|---|
| 3.00% | $148.89 | $300.00 | $609.00 | $927.27 | $1,592.74 |
| 3.50% | $173.49 | $350.00 | $712.25 | $1,087.18 | $1,876.86 |
| 4.00% | $198.04 | $400.00 | $816.00 | $1,248.64 | $2,166.53 |
| 4.50% | $222.52 | $450.00 | $920.25 | $1,411.66 | $2,461.82 |
| 5.00% | $246.95 | $500.00 | $1,025.00 | $1,576.25 | $2,762.82 |
APY vs. interest rate
The interest rate (sometimes called APR or the nominal rate) is the rate before compounding. The APY is what you actually earn in a year once interest is added to your balance and starts earning interest itself. A 4.20% rate compounded daily equals a 4.29% APY. Always compare CDs using APY — US banks are required to disclose it under the Truth in Savings Act.
Early withdrawal penalties
A CD locks your money up for the term. If you withdraw early, the bank charges a penalty, usually expressed as a number of months of interest:
| CD term | Typical penalty |
|---|---|
| Under 1 year | 60–90 days of interest |
| 1–2 years | 90–180 days of interest |
| 2–5 years | 180–365 days of interest |
| Over 5 years | 1–2 years of interest |
If you withdraw very early, the penalty can exceed the interest you've earned and eat into your principal. Use the "Early withdrawal" section above to check. If you might need the cash, consider a no-penalty CD or a high-yield savings account instead.
CD ladders
A CD ladder splits your money across several terms — for example $5,000 each in 1-, 2-, 3-, 4- and 5-year CDs. Each year one CD matures; you either use the cash or roll it into a new 5-year CD. You get some money back every year while most of your savings earns longer-term rates, and you reduce the risk of locking everything in right before rates rise.
Are CDs safe? How are they taxed?
- Insurance: CDs at FDIC-insured banks and NCUA-insured credit unions are protected up to $250,000 per depositor, per institution, per ownership category.
- Taxes: CD interest is taxed as ordinary income in the year it's credited — even if the CD hasn't matured — and reported on Form 1099-INT. It's subject to both federal and state income tax. Treasury bills and notes, by contrast, are exempt from state tax, which can make them better after tax in high-tax states.
- Brokered CDs bought through a brokerage can be sold before maturity instead of paying a penalty, but their market price can fall if rates rise.
Frequently asked questions
How much interest will I earn on $10,000 in a 1-year CD?
Multiply by the APY. At 4% APY you earn $400; at 4.5% APY, $450 (before tax).
Is interest on a CD compounded?
Yes, most CDs compound daily or monthly. The advertised APY already includes compounding, so you can multiply your deposit by the APY to find a year's interest.
What happens when my CD matures?
You get a grace period — usually 7 to 10 days — to withdraw or move the money. If you do nothing, most banks automatically renew it for the same term at whatever rate they're offering then.
Can you lose money in a CD?
Not at an insured bank if you hold to maturity. You can lose part of your principal if you withdraw very early and the penalty exceeds the interest earned, or if you sell a brokered CD after rates have risen.
CD or high-yield savings account?
A CD locks in a rate, which helps if rates are expected to fall. A high-yield savings account lets you withdraw at any time but its rate can change. Use CDs for money you know you won't need before the term ends.