The Certificate of Deposit (CD) Calculator helps you estimate your interest earnings over time, factoring in taxes for a more precise calculation of your returns.

What is a Certificate of Deposit (CD)?

A Certificate of Deposit (CD) is a fixed-term deposit agreement that earns interest over a set period. Typical term lengths range from three months to five years, with longer terms generally offering higher interest rates. However, extended durations also expose investors to greater interest rate risk. As a low-risk, low-return investment, CDs typically offer higher interest rates than savings accounts or money market accounts, but they are far less lucrative than equities, whose historical returns tend to surpass those of CDs.

Different types of CDs exist; some offer fixed interest rates, while others link to indexes. The CD Calculator specifically helps calculate fixed-rate CDs.

In the U.S., earnings from CDs are taxable as income unless held in tax-advantaged accounts, such as an IRA or Roth IRA. For calculations involving these accounts, please refer to the IRA or Roth IRA Calculators.

The term “Certificate of Deposit” originated from the practice of issuing physical certificates in exchange for deposits. With the advent of electronic transactions, this practice has become obsolete, and CDs are now managed digitally.

How to Calculate Your CD Earnings

Calculating your Certificate of Deposit (CD) earnings involves understanding how interest is applied to your deposit over time. Here’s a step-by-step guide to explore our CD Calculator:

1. Key Information You’ll Need

• Principal Amount (P): The initial deposit you invest in the CD.
• Annual Percentage Yield (APY): The interest rate offered by the bank or credit union, including compounding.
• Term Length (T): The duration your money will remain in the CD, typically measured in years.

2. Using the Simple Interest Formula (For CDs Without Compounding)

Earnings = P × APY × T

Where:

• P = Principal (initial deposit)
• APY = Annual Percentage Yield (expressed as a decimal, e.g., 3% = 0.03)
• T = Time (in years)

If you invest $5,000 in a 2-year CD with an APY of 3% (0.03):

• Earnings = 5,000 × 0.03 × 2 = $300

3. Using the Compound Interest Formula (For CDs With Compounding)

A = P × (1 + (r / n))^{n × T}

Where:

• A: Final amount (total balance after interest)
• P: Principal (initial deposit)
• r: Annual interest rate (in decimal form, e.g., 2% = 0.02)
• n: Number of compounding periods per year (e.g., 12 for monthly, 4 for quarterly)
• t: Time the money is invested for (in years)

If you invest $5,000 in a 3-year CD with an APY of 4% (0.04), compounded monthly (n = 12), your earnings would be:

A = 5000 × (1 + (0.04 / 12))^{12 × 3}
A = 5000 × (1.0033)³⁶
A ≈ 5000 × 1.127
A ≈ 5635

So, the final balance after 3 years would be approximately $5,635, meaning you earned $635 in interest.

4. Consider Taxes and Fees

• Taxes: Interest earned on CDs is typically subject to federal and state taxes. Check your tax bracket to estimate the post-tax earnings.
• Early Withdrawal Fees: Withdrawing funds before maturity may reduce your earnings significantly.

What is a good APY on a CD?

A good Annual Percentage Yield (APY) on a Certificate of Deposit (CD) depends on several factors, including the term length, the current interest rate environment, and whether the CD is from a traditional bank or an online bank.

• Short-term CDs (3 months to 1 year): Generally, a good APY is around 1.5% to 3%. This can vary based on the economic conditions.
• Medium-term CDs (1 to 3 years): A competitive APY is usually in the range of 2% to 4%, depending on market conditions and the financial institution.
• Long-term CDs (3 years and longer): You can expect an APY around 3% to 5%, though higher rates are possible during periods of higher interest rates or inflation.

For online banks or credit unions, APYs can often be higher than those offered by traditional brick-and-mortar institutions, with some offering 5% or more for longer-term CDs.

It’s always a good idea to compare offers from multiple institutions and consider the effects of inflation, fees, and early withdrawal penalties when choosing a CD.

Types of CDs

There are several types of Certificates of Deposit (CDs), each with distinct features suited to different financial goals and needs. Here are the main types:

1. Traditional CD

• The most common type, offering a fixed interest rate for a specific term, such as 6 months, 1 year, or 5 years.
• The deposit is locked in for the term, and early withdrawals typically incur penalties.

2. Jumbo CD

• Requires a large minimum deposit, usually $100,000 or more.
• Typically offers higher interest rates compared to traditional CDs due to the larger deposit requirement.
• Subject to the same rules regarding early withdrawal penalties.

3. Bump-Up CD

• Offers a fixed rate but with the option to “bump up” to a higher rate if interest rates increase during the term.
• These tend to have lower initial interest rates than traditional CDs but provide flexibility if rates rise.
• Usually, the bump option can only be exercised once or twice during the term.

4. Step-Up CD

• Interest rate increases at set intervals during the term (e.g., every 6 months or annually).
• This type provides the benefit of rising rates, but the initial rate may be lower than a traditional CD.

5. No-Penalty CD

• Allows for early withdrawal without penalty, making it more flexible than traditional CDs.
• The trade-off is that the interest rates tend to be lower compared to CDs with fixed terms and penalties.

6. IRA CD (Individual Retirement Account CD)

• A CD held within an Individual Retirement Account (IRA), allowing you to save for retirement while earning interest on the deposit.
• These can be either traditional or Roth IRAs and offer tax benefits, but there are penalties for early withdrawals similar to other retirement accounts.

7. Callable CD

• A CD that can be “called” or redeemed by the bank before the maturity date, typically if interest rates decline.
• These CDs offer higher interest rates, but there’s a risk that the bank will call the CD if rates fall, leaving you with a lower return on your investment.

8. Market-Linked CD (Equity-Linked CD)

• Interest rates are tied to the performance of an underlying market index, such as the S&P 500.
• These CDs offer the potential for higher returns but also carry the risk of earning no interest or limited returns if the market performs poorly.
• They are not fully guaranteed like fixed-rate CDs but offer a mix of safety with the potential for higher returns.

Each type of CD comes with its own set of benefits and considerations, so it’s essential to choose one that matches your financial goals, risk tolerance, and the time horizon for your investment.