What is a certificate of deposit (CD)?
A certificate of deposit, or CD, is a type of savings account offered by banks and credit unions. You generally agree to keep your money in it for a specified length of time, called the term, and withdrawing early means paying a penalty fee.
Source CFPB · What is a certificate of deposit (CD)? ↗
CD rates are usually quoted as the APY, or annual percentage yield: the yearly rate that includes compounding.
Source CFPB · Regulation DD, Appendix A (annual percentage yield) ↗
Your CD year by year
| Time | Balance | Interest so far |
|---|---|---|
| Year 1 | $10,400.00 | $400.00 |
How to calculate CD interest
Banks quote the APY, the yearly yield after compounding. Raise one plus the APY to the number of years, then multiply by your deposit.
Here it is with your numbers:
- Turn the APY into a decimal: 4.00% ÷ 100 = 0.04.
- Growth over 1 year: (1 + 0.04) ^ (12 ÷ 12) = 1.04.
- Multiply by your deposit: $10,000.00 × 1.04 = $10,400.00.
- Interest: $10,400.00 − $10,000.00 = $400.00.
It means every $1.00 you deposit grows to $1.04 by the end of 1 year.
Source Microsoft Support · EFFECT function ↗
For the official definition, Regulation DD works APY out from the interest earned: APY = 100 × [(1 + Interest ÷ Principal) ^ (365 ÷ days in term) − 1]. Its example: $1,000 that earns $61.68 over 365 days has a 6.17% APY. This calculator counts a year as 12 months, so a bank that counts exact days can differ by a few cents.
Is CD interest taxable?
Yes. Interest on a CD is taxable income in the year it becomes available to you, and you report it on your federal return. A bank sends a Form 1099-INT if you earned $10 or more. Your state may tax it too.
Source IRS · Topic no. 403, Interest received ↗
FAQs
How to calculate CD interest?
Multiply your deposit by (1 + APY) raised to the number of years, then subtract the deposit. $10,000 at 4% APY for 1 year is 10,000 × 1.04 = $10,400, so the interest is $400. The federal rule for APY is Regulation DD.
Source CFPB · Regulation DD, Appendix A (annual percentage yield) ↗
How much interest does a CD earn?
It depends on the deposit, the rate and the term. For a one-year CD, the interest is the deposit times the APY: $10,000 at 4.00% APY earns $400. For longer terms the interest earns interest, so each year earns a little more than the last.
What is the difference between APY and the interest rate?
The APY, or annual percentage yield, includes compounding, so it shows what you earn in a year after interest is added to your balance. A 5.25% interest rate compounded 4 times a year is a 5.35% APY. Choose "Rate, compounded …" in the calculator to see the APY it works out to.
Is CD interest taxable?
Yes. The IRS says most interest you receive is taxable income in the year it becomes available to you, and you must report it even if you do not get a Form 1099-INT. You should get that form if you received $10 or more of interest. Enter your own tax rate under "Taxes" to see what you keep.
Sources
- CFPB: What is a certificate of deposit (CD)?
- CFPB: Regulation DD, Appendix A (annual percentage yield)
- Microsoft Support: EFFECT function
- IRS: Topic no. 403, Interest received