How Much Interest Does a CD Earn in a Year?

Discover the earning potential of Certificates of Deposit (CDs). Compare rates, strategies, terms, & returns to make informed savings decisions.
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Written by Rob Sabo
Financial Expert
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Managing Editor

There are likely as many strategies for saving money as grains of sand on a Florida beach.

However, some strategies may be more practical and easier to implement. Putting money into a certificate of deposit (CD) falls into this category, especially when you have additional liquidity that you don’t need to tap into immediately.

Five-figure checking and savings accounts will net you minimal additional dollars from interest returns. Putting money into a certificate of deposit will likely bear much more fruit. CDs work a bit like savings accounts, but they are also slightly different. Let’s take a closer look at some standard features of CDs and expected APY returns with CDs so you can decide whether this financial product meets your savings goals.

How Do Certificates of Deposit Differ From Savings Accounts?

CDs and savings accounts are good financial products, though they serve different purposes.

Savings Accounts

Savings accounts are suitable for parking additional money you may need soon. It’s stashed but also readily available if something comes up. You can access your savings account funds anytime, and transferring the money into a linked checking account involves just a few clicks of the mouse or taps on a smartphone screen.

Although you can make deposits into your savings account at any time, you typically can only make a limited number of withdrawals or transfers — often, just six per month. You’ll earn some interest on your savings account balance, but interest rates on savings accounts at traditional banks are minuscule. 

Many banks offer high-interest savings accounts with much better interest rates. The difference can be significant. Savings accounts are fully insured up to $250,000 by the Federal Deposit Insurance Corporation, making them risk free for amounts under that threshold.

Certificates of Deposit

You open a CD just like a savings account, but you’ll have to choose a deposit amount, usually at least $1,000, and a term — the length of time your money is tied up in the certificate of deposit.

Terms vary greatly, from one month to 10 years. Generally speaking, CDs with more extended periods offer better interest rates. However, certain online banks or regional credit unions may offer exceptional interest rates at or above 5% on shorter-term 12-month CDs.

When you put money into a certificate of deposit, you can expect fixed returns throughout the term of the CD. For example, if you put $5,000 into a 24-month CD at 5%, your yield would be $250 per year or $500 for the 24-month term.

When your CD reaches the end of its term, called its maturity date, you can withdraw your initial deposit plus the earned interest or roll your savings into a new CD.

Some financial institutions will automatically roll over your funds into an identical CD unless you alert the bank or credit union you have different plans for your money.

However, you can expect to receive a letter or some form of communication from your bank before any automated rollover of funds.

One significant difference between CDs and savings accounts is that you cannot access your funds once you deposit them into a CD without incurring an early withdrawal penalty.

Think of your CD as a promise to your bank: You promise to leave your money alone, and your bank promises to pay you the exact amount of interest earned, along with your initial deposit, when the CD matures.

Penalties vary but usually are a percentage of the lost interest the CD would have earned.

Which Banks Have the Best Savings Account Rates?

Savings rates are higher than they’ve been in several years, but if you’re using a traditional, big-name bank, you could be missing out on these rates.

Here are our top picks for those who want to earn the highest interest on their savings.

Short- and Long-Term Certificates of Deposit

As noted, a wide range of terms are available with certificates of deposit.

Short-term CDs

Generally, a short-term CD is any certificate of deposit with a term of 12 or fewer months. Typical terms within that range include:

  • 12 months
  • 9 months
  • 6 months
  • 3 months
  • 30 days

Some financial institutions also offer nine-, 11-, and 13-month CDs. Interest rates vary by length and by financial institution.

Long-term CDs

As the name implies, long-term CDs have longer maturity dates. These may include:

  • 10 years
  • 5 years
  • 4 years
  • 3 years
  • 2 years
  • 18 months
  • 15 months

Think carefully before tying up any of your savings into CDs with exceptionally long maturity dates since you won’t be able to access those funds without incurring a penalty.

Here’s a table showing potential earnings on both short- and long-term CDs using a $15,000 deposit and a baseline 3.5% interest rate.

Interest rates shown here may be higher or lower depending on your financial institution’s CD offerings.

12-Month Certificates of Deposit

12-month CDs can be the sweet spot for serious savers. They offer a feasible maturity date coupled with solid opportunities for yield since interest rates are commonly around or slightly above 5%.

Interest rates for 12-month CDs are strong due to the 11 interest rate hikes through late 2023 by the Federal Reserve. While far from the lofty 12-month CD interest rates of the mid-1980s — peaking at 11.24% in August of 1984 — average interest rates for one-year CDs have climbed by several percentage points in recent years. However, as noted, savvy savers can find interest rates more than double the national average from many online banks or regional credit unions.

Let’s take a look at the potential yield from 12-month CDs at 5% interest with varying deposit amounts.

Interest rates can be higher or lower depending on your choice of financial institution and their current 12-month CD interest rates.

Where to Find the Highest-Rate 1-year CDs

The Federal Reserve’s efforts to tame inflation by raising interest rates have translated into CD rates approaching 20-year highs since CD rates closely mirror the fed fund rate.

Typically, online banks offer exceptional interest rates compared to larger national banks because they don’t have physical locations, which results in reduced staffing needs and lower operating expenses.

However, that’s not a hard-and-fast rule. Many well-known national financial institutions offer competitive rates on 12-month or similar certificates of deposit.

You may have to make a larger initial deposit at a traditional bank, but you’ll get increased convenience, face-to-face interaction, and personal support.

Pros and Cons of a 12-month CD

Certificates of deposit can be significant savings tools, but there are some potential drawbacks.

Pros

  • Higher interest rates than standard savings accounts
  • FDIC-backed security means low risk
  • Predictable returns
  • Wide range of banks and other financial institutions from which to choose
  • Option for CD laddering – purchasing multiple CDs in varying terms so returns are delivered at a steady pace

Cons

  • Lack of short-term liquidity
  • Returns may be higher with other investments
  • Interest is taxable
  • Early withdrawal penalties

Due to their low risk and predictable returns, 12-month CDs are a good option for saving money that’s not needed in the near term. Longer-term CDs provide predictable returns, but your money is tied up for extended periods and could be used in investments offering higher yields.

About Author
Rob Sabo
Rob Sabo has been a Nevada-based business reporter for nearly two decades and full time freelance writer since 2017. He writes on a wide range of financial topics, including investing, taxation, personal finance and retirement planning.
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