CD Calculator: What a Certificate of Deposit Earns, Before and After Tax

Illustrative example: the people and figures below are hypothetical, not real clients. Numbers are calculated from the stated assumptions.

A certificate of deposit pays a fixed rate on a fixed sum for a fixed term. If the interest stays in the CD, the arithmetic is one line: value at maturity = deposit × (1 + APY)^years, where years is the term in months divided by 12. The interest is that value minus the deposit.

The calculator opens on $50,000 for 3 years at an illustrative 4.00% APY. That is $50,000 × 1.04³ = $56,243, so the CD earns $6,243. The interest is not the same each year. Year 1 earns $2,000, year 2 earns $2,080 and year 3 earns $2,163, because each year's interest is paid on a balance that includes the interest before it.

For a term under a year the same formula works with a fraction. A 6-month CD at the same rate earns $50,000 × (1.04^6/12 − 1) = $990, a little less than half of the $2,000 a full year earns, since half a year of compounding is worth slightly less than half the annual yield. For terms of 12 months or less the calculator lists the balance month by month; for longer terms, year by year.

This assumes the interest is left to compound. Some CDs let you have interest paid out monthly or quarterly to a checking account. You then earn simple interest on the deposit, a little less in total, in exchange for income along the way. The calculator models the compounding case.

Banks quote a CD two ways. The interest rate is the nominal annual rate before compounding. The annual percentage yield, APY, is what a deposit actually earns in a year once interest is added to the balance and earns interest itself. The link between them is APY = (1 + r ÷ n)ⁿ − 1, where r is the interest rate and n is the number of times a year interest compounds. Regulation DD, the federal Truth in Savings rule, defines the APY that banks must disclose from the interest a deposit earns over the actual days in its term, and tells banks to assume that principal and interest stay on deposit for the whole term (12 CFR Part 1030, Appendix A).

That is why the APY is the number to compare. Two banks advertising the same 4.00% interest rate pay different amounts if one compounds daily and the other once a year:

The whole gap between daily and annual compounding is $131 on $50,000 over 3 years. Compounding frequency matters far less than the rate itself: a CD with a slightly higher APY beats one with more frequent compounding every time, because the APY already includes the compounding. If a quote gives only an interest rate, choose “Interest rate” in the calculator, pick the compounding from the account disclosure, and it converts the quote to an APY for you. Working the other way, the example's 4.00% APY compounded daily comes from a 3.922% interest rate.

Standard CD terms run from six months to five years. At one rate, a longer term simply earns more because the money is at work longer:

In practice each term has its own rate, and longer does not always mean higher. When banks expect rates to fall, a one-year CD can pay more than a five-year one. So the real question is rarely “which term earns the most” and usually “when will I need this money, and what would I earn on it after the CD ends?” A 1 year CD followed by whatever rates are on offer then may beat or trail a 5 years CD held throughout; nobody knows in advance. If you do not want to bet on one term, split the money across several. That is a ladder, and the CD ladder calculator builds one rung by rung with a rate for each term.

The fixed rate is a promise in both directions. The bank pays it for the whole term, and you leave the money for the whole term. Take it out early and the bank charges a penalty, normally stated as so many months' (or days') interest. Federal rules set only a floor: to count as a time deposit, an account must charge at least seven days' simple interest on money withdrawn within the first six days (Regulation D, 12 CFR 204.2). There is no federal maximum. Each institution sets its own schedule, usually larger for longer terms, and must tell you in the account disclosure how the penalty is calculated. The CFPB's advice is to compare the penalty alongside the term and the rate when you shop (CFPB).

The calculator charges the penalty the common way, as simple interest on the deposit at the interest rate: deposit × rate × months ÷ 12. On the example CD a six-month penalty is $981. Cashed in after month 12, the CD has earned $2,000, so the owner receives $51,019. That is an annualized 2.04% instead of 4.00%. The penalty is the same dollar amount whenever the CD is broken, so it bites hardest early: before month 6 it is larger than the interest earned, and the difference comes out of the deposit.

Three things to check in the disclosure before you buy. First, whether the penalty can reach principal; with most CDs it can. Second, whether partial withdrawals are allowed or the whole CD must be closed. Third, whether the penalty is waived when an owner dies, which matters for a CD in one spouse's name. A no-penalty CD removes the question in exchange for a somewhat lower rate; enter 0 months to model one.

A penalty is not always a reason to stay put. If rates have risen sharply, paying it to move into a new CD can come out ahead. Run both: the amount you would receive today, reinvested at the new rate for the months remaining, against the maturity value of the CD you hold.

In a taxable account, CD interest is ordinary income. It is taxed at your federal bracket and by your state, with none of the lower rates that apply to qualified dividends or long-term gains. On the example CD, an owner in the 24% federal bracket who pays 5% state tax gives up $1,811 of the $6,243 and keeps $4,433, an after-tax yield of 2.84%.

When the interest is taxed

Timing is the part that surprises people. IRS Publication 550 sorts CDs into three cases:

• Interest paid or credited at least once a year. You report it in the year you receive it or could take it without a substantial penalty. For most CDs that means each year's interest is taxed that year, even though it stays in the CD.
• A CD of one year or less that pays everything at maturity. The same rule applies, so the interest generally lands in the year the CD matures. A 6-month CD opened in the autumn and paid out the following spring puts its $990 on next year's return.
• A CD of more than one year that defers all interest to maturity. The original issue discount (OID) rules apply. Publication 550 says that if you buy a CD with a maturity of more than one year, you must include in income each year a part of the total interest due, and the bank reports that amount to you each year on Form 1099-OID. You owe tax on interest you have not yet received.

Whichever case applies, a multi-year CD in a taxable account produces a tax bill every year, not one at the end. On the example that is $580 for the first year, $603 for the second and $627 for the third, paid from other money while the interest stays locked in the CD. The bank reports ordinary CD interest in box 1 of Form 1099-INT. The calculator works in CD years, counted from the day you open the account; your 1099 follows the calendar year, so a CD opened mid-year spreads the same interest over one more tax return.

The penalty is deductible

If you break a taxable CD, you still report all the interest credited, without subtracting the penalty. The penalty is then deducted separately as an adjustment to income on Schedule 1 of Form 1040, which you can take whether or not you itemize (Publication 550). The bank shows it in box 2 of Form 1099-INT. For how interest stacks with Social Security and withdrawals, see our guide to taxes in retirement; at higher incomes, CD interest also counts as investment income for the net investment income tax.

An IRA CD is an ordinary CD held inside an individual retirement account. The CD earns exactly the same interest; what changes is the tax. Nothing is taxed year by year, there is no Form 1099-INT, and the OID rules above do not touch you. Tax depends on which kind of IRA holds it. Choose the account type in the calculator and the tax lines change to match.

Traditional IRA CD

Interest builds untaxed, and withdrawals are taxed as ordinary income in the year you take them (IRS Publication 590-B). That applies to everything you withdraw, the original deposit as well as the interest, except for any share that came from nondeductible contributions. On the example CD nothing is due during the 3 years. If the $6,243 of interest is later withdrawn at the same 29% combined rate, $1,811 goes in tax and $4,433 is kept; withdrawing the whole $56,243 would add $16,311 to the tax bill. The rate that matters is your rate in the year of the withdrawal, which may be lower or higher than today's, so enter the one you expect. Withdrawals before age 59½ generally carry a 10% additional tax as well.

Roth IRA CD

Interest in a Roth IRA is not taxed as it is credited, and a qualified distribution is not taxed at all. A distribution is qualified when it is made after the five-year period that starts with the first tax year you contributed to any Roth IRA, and you are 59½ or older, disabled, or the account has passed to your beneficiary; there is also a limited first-home exception (Publication 590-B). For a reader who meets both tests, the example CD's full $6,243 is kept and its after-tax yield is the full 4.00%. The Roth versus traditional IRA guide covers the choice between the two.

An IRA CD still counts toward RMDs

A traditional IRA owner must take required minimum distributions starting with the year they reach age 73 (75 for those born in 1960 or later). Each year's RMD is the IRA's balance on the previous December 31 divided by a life-expectancy factor (IRS). A CD inside the IRA is part of that balance at its full value, locked up or not. At 75 the factor is 24.6, so $50,000 in an IRA CD adds $2,033 to that year's RMD. The RMD calculator works out the full amount.

The money for the RMD has to come from somewhere, and that is where a CD's lock-up can hurt. The IRS lets you work out the RMD for each traditional IRA separately and then take the total from any one or more of them, so a CD does not have to be broken if another IRA, or cash in the same IRA, can cover the withdrawal. If the CD is most of your IRA money, plan the term around the deadline: December 31 each year, or April 1 of the following year for your first RMD. Have a CD mature before then, ladder several so one matures each year, or ask the bank before you buy whether it waives its early-withdrawal penalty for RMDs. Missing an RMD costs a 25% excise tax on the shortfall, reduced to 10% if corrected within two years. Roth IRAs have no RMDs during the owner's lifetime.

A CD at an FDIC-insured bank is insured to at least $250,000 per depositor, per ownership category, at each bank (FDIC). A share certificate, the credit union name for a CD, has the same $250,000 cover from the NCUA's Share Insurance Fund (NCUA). The limit covers principal and interest accrued up to the day the institution fails, so a CD opened at exactly $250,000 is over the limit as soon as it earns interest. The calculator flags a balance that passes the limit.

Ownership categories are what let one household insure far more at one bank (FDIC, Deposit Insurance at a Glance):

• Single accounts: $250,000 per owner.
• Joint accounts: $250,000 per co-owner.
• Certain retirement accounts: $250,000 per owner. Traditional and Roth IRA deposits at the same bank are added together, and naming beneficiaries does not raise the limit (FDIC, Your Insured Deposits).
• Trust accounts, including payable-on-death accounts: $250,000 per beneficiary, up to $1,250,000 per owner.

A married couple with a single account each, one joint account and an IRA CD each can therefore have $1,500,000 insured at one bank before using trust accounts. Within a category everything is added together: three CDs, a savings account and a checking account in your name alone at one bank share one $250,000. The FDIC's EDIE estimator checks a set of accounts, and the emergency fund guide walks through a couple's accounts.

The calculator describes a CD bought directly from a bank or credit union: a known rate, a known penalty, and interest that compounds. Two variations behave differently enough to change the answer.

Brokered CDs

A brokered CD is issued by a bank and sold through a brokerage account. It can be convenient: CDs from many banks in one place, each with its own insurance limit. FDIC cover passes through to you as if you had deposited the money yourself, provided the broker actually places it at an insured bank and the records show the broker is acting as your agent (FDIC; FDIC Consumer News). A brokered CD at a bank where you already hold deposits counts toward the same $250,000.

The differences are in the interest and the exit. Brokered CDs usually pay interest out to the brokerage account instead of compounding it, so the quoted rate behaves like a simple rate. And there is usually no early-withdrawal penalty because there is no early withdrawal: to get out, you sell the CD to another investor at the market price. The SEC warns that if rates have risen you would have to sell at a discount and lose some of your original deposit (SEC). Insurance protects against the bank failing, not against that market loss. The penalty section of this calculator does not describe a brokered CD.

Callable CDs

A callable CD gives the issuing bank, and only the bank, the right to end the CD early. Banks call CDs when rates have fallen, because they can then borrow more cheaply, which is exactly when you would want to keep the old rate. The FDIC's wording is that a callable CD “could undermine your ability to lock in an attractive, long-term interest rate” (FDIC Consumer News). Call features tend to appear on long-term CDs with high advertised yields. Do not confuse the call date with the maturity date: a 10-year CD that is callable after one year can still tie up your money for 10 years if rates rise and the bank chooses not to call it. Run a callable CD through the calculator twice, once to the first call date and once to maturity, and treat the shorter result as the one you can count on.

Many bank CDs renew automatically. If you do nothing, the bank rolls the balance into a new CD of the same term at whatever rate it is paying that day, which may be well below both your old rate and what is available elsewhere, and the early-withdrawal penalty starts again (CFPB).

Regulation DD requires a written notice first. For an automatically renewing CD longer than a month, the notice must be sent at least 30 calendar days before maturity, or at least 20 days before the end of the grace period if the bank allows a grace period of at least five days. For a CD longer than a year that does not renew, the bank must tell you at least 10 days ahead the maturity date and whether interest is paid after it (12 CFR 1030.5). A grace period is a short window after maturity in which you can withdraw or change the CD without penalty. The rule does not require one and its length varies, so find it in your disclosure.

So put the maturity date in your calendar when you open the CD. In the week before, look up the bank's renewal rate and compare it with other CDs, Treasuries and a savings account. Then choose: renew, move the money, or change the term. Tell the bank inside the grace period. A CD that does not renew usually stops earning interest at maturity, so idle money is the cost of ignoring that one too.

A CD is one of several places for money you cannot afford to lose. Two alternatives deserve a look before you lock in.

Treasuries, if you pay state income tax

Interest on Treasury bills, notes and bonds is taxed by the federal government but exempt from state and local income tax (Publication 550; TreasuryDirect). CD interest is taxed by both. In a taxable account a Treasury can therefore yield less than a CD and still leave you more. At a 24% federal and 5% state rate, a Treasury yielding 3.737% keeps as much after tax as the example 4.00% CD:

Any Treasury of the same term yielding more than the figure in the last column beats the CD. Treasuries can also be sold before maturity without a penalty, though at a market price that may be above or below what you paid. In an IRA the state-tax advantage disappears, because neither kind of interest is taxed as it is earned, and the higher yield simply wins. The CD and Treasury ladder calculator compares a CD with a Treasury at your tax rates and converts a T-bill's price to a yield.

Money market funds and savings accounts, if you may need the money

A CD pays you for giving up access. If there is a real chance you will need the money before maturity, an early-withdrawal penalty can wipe out the extra yield, and an account with no term is the better fit even at a lower rate. A high-yield savings account or a bank money market deposit account is FDIC-insured (FDIC), with a rate that can change at any time. A money market mutual fund, the kind held in a brokerage account, is an investment and not a deposit: the FDIC does not insure mutual funds (FDIC), and its value is not guaranteed. Its yield also floats, falling soon after short-term rates fall. That is the trade a CD makes: a rate that is fixed for the term, in exchange for money that is not. Cash you may need within months, such as an emergency fund, belongs where you can reach it.

A CD guarantees dollars, not buying power. The calculator's inflation input restates the maturity value in today's dollars: value ÷ (1 + inflation)^years. At an assumed 2.5% a year, the example's $56,243 buys what $52,227 buys today, a gain in buying power of $2,227 before tax. Tax is charged on the whole interest, including the part that only kept up with prices, so the taxable owner's 2.84% after-tax yield is 0.33% a year over inflation. When that figure is near zero or negative, a CD is preserving money, not growing it, which is a reasonable job for money needed in the next few years and a poor one for money needed in twenty. The inflation calculator shows what past inflation has done to a dollar.

• Today's rates. It does not fetch or publish rates. Every default is an illustrative round number.
• Interest paid out. It assumes interest stays in the CD and compounds.
• Other penalty formulas. It uses months of simple interest on the deposit. Some institutions charge a flat fee, a percentage of the amount withdrawn, or interest on the amount withdrawn only.
• Calendar-year tax. It taxes interest by CD year at flat marginal rates, and ignores the net investment income tax, the effect of extra income on Social Security taxation and Medicare premiums, and the 10% additional tax on IRA withdrawals before 59½.
• Brokered, callable, step-up and market-linked CDs. It models one fixed rate, held at the issuing bank, with no call.
• Your total deposit insurance. It flags a single CD that passes $250,000 but does not know your other accounts at the same bank.