What is a 1-year CD, and how does it work?

A CD is a deposit account in which you agree to leave your funds for a set period of time, called the “CD term.” In exchange, the bank pays a fixed interest rate, called the annual percentage yield (APY).

This rate is often higher than what you can get from traditional savings accounts. But if you withdraw money from a CD before its maturity date, you could lose some of the interest earned as an early withdrawal penalty.

Some banks automatically renew your CD when it matures, rolling the money into a new CD. In that case, there may be a seven- or 10-day grace period during which you can withdraw your funds without penalty before they are locked into the new CD.

1-year CD rate history: Average APY (%) rate trend over time

Where to find the best 1-year CDs

You can find 1-year CDs at banks and credit unions. Brokerage firms also sell CDs, called brokered CDs. While online banks and credit unions tend to offer higher rates, you might be able to negotiate a better deal with a broker, so it's worth considering both types.

If you're buying a brokered CD, make sure it's federally insured — by the Federal Deposit Insurance Corp. (FDIC) if purchased through a bank or by the National Credit Union Association (NCUA) if bought through a credit union.

You'll also want to look out for fees, such as account maintenance fees, in addition to early withdrawal penalties. Review your bank's or credit union's fee schedule so you know what to expect.

What to know when comparing CDs

Comparison shopping is key to getting the best one-year CD. Consider the following points:

• APY: The annual percentage yield on your CD determines how much you'll earn if you hold the CD until maturity.
• Term: This is how long you'll need to keep your funds in the CD to get the full APY.
• Early withdrawal penalty: Ideally, you’ll hold your CD until maturity, but it's worth knowing the penalty in case you need to access your funds sooner.
• No-penalty CDs: Another option is no-penalty CDs, which do not have early withdrawal penalties. However, these often have lower APYs than traditional CDs.
• Minimum deposit: CDs may require a minimum deposit to open the account. Make sure this amount meets your budget.
• Fees: Check the fee schedule for your bank or credit union.
• Federal insurance: You can check if your bank is FDIC-insured on the FDIC's BankFind Suite or if your credit union is covered by the NCUA on the NCUA's Credit Union Finder tool.

When is a 1-year CD a good idea?

A one-year CD often provides higher interest rate yields than savings accounts but with less risk than stock market investments, which could lead to higher returns.

Also, one-year CDs usually pay better than shorter-term CDs, such as those with three- or six-month terms.

However, this might not always be the case. Rates can change daily, so if you like the current selection, invest now to lock in these rates in case they decline.

Of course, rates may rise in the future, so do some research and invest based on where you think the financial markets are headed.

Pros and cons of 1-year CDs

1-year CD alternatives

CDs can be great places to put your cash to work, but they aren't the only savings vehicles available. It's important to consider all of your options before deciding on a CD.

High-yield savings account

High-yield savings accounts are another type of deposit account offered by banks and credit unions. They generally offer much higher rates than traditional savings accounts, with APYs that can be similar to CDs. You won't have to lock up your cash for a set period of time, but banks and credit unions may limit how many transactions you can make each month.

Money market account

Money market accounts operate like checking accounts, with ATM cards and check-writing capabilities, but they pay rates close to high-yield savings accounts. These accounts, offered by banks and credit unions, can be a great solution if you need access to your money but still want to earn solid interest rates.

I bond

I bonds are savings bonds issued by the U.S. Treasury. Like CDs, I bonds pay regular interest, except that the interest rate can rise or fall with inflation. When consumer prices rise, your CD yield will likely rise, and when prices fall, the yield will too.

The current interest rate on I bonds is 3.11% compared with more than 4.5% for the best 1-year CD rates. Also, you need to hold onto an I bond for 12 months to receive full interest.

Frequently asked questions

How do I invest in CDs?

You can invest in CDs through a bank, credit union or brokerage firm. First, decide which CD term works best for you. Then, find the financial institution with the best rate and lowest fees. Finally, open a CD account and buy your CD.

How many CDs can you have at one bank?

You can have as many CDs at one bank as you'd like. However, FDIC and NCUA insurance only covers up to $250,000 for each type of account at a given institution. That means you can be fully covered if you have $250,000 worth of CDs at one bank and $50,000 at another.

Are CDs insured?

CDs are federally insured if they're issued by FDIC- or NCUA-covered institutions. The FDIC insures deposits at banks, while the NCUA backs deposits at credit unions. Deposits are covered up to $250,000 per person, per account type at each institution.