Certificates of Deposit (CDs)

A certificate of deposit (CD) is a time deposit offered by banks and credit unions. You agree to leave a specific capital allocation untouched for a fixed term (ranging from 1 month to 5 years) in exchange for a locked-in, guaranteed interest rate. Like MMAs, CDs are FDIC-insured up to $250,000.

The primary friction of a CD is illiquidity: withdrawing principal before maturity triggers an early withdrawal penalty (EWP). The EWP is typically calculated as a set number of days of interest (e.g., 90 days of interest for a 1-year CD, or 180 days for a 3-year CD). If you withdraw early in a rising rate environment, the penalty can exceed the interest earned, eating into your original principal. Interest on CDs is taxed as ordinary income in the year it accrues, even if it is reinvested in the CD and not paid out in cash.

Above a few hundred thousand dollars, buy brokered CDs through the brokerage account instead of walking into branches. They are the same FDIC-insured bank deposits, issued through the broker in $1,000 pieces from dozens of banks, so one account spreads a seven-figure cash position across enough institutions to keep every dollar inside the $250,000 limit (section “FDIC Insurance Optimization” covers the ownership-category and trust-beneficiary multipliers that stretch the limit at a single bank). There is no early-withdrawal penalty; instead a brokered CD trades on a secondary market, so leaving early means selling at whatever a rising-rate market will pay — below par — which is a market loss instead of a forfeited coupon. Check for a call feature before buying: callable brokered CDs pay a touch more and hand the bank the right to refinance you out when rates fall.