Certificate of Deposit Calculator

 

This calculator will figure the future value and annual percentage rate of your certificate of deposit based on its compounding interval. You can also enter your personal income tax bracket and the expected level of inflation to see what your nominal and real gains are after accounting for income taxes and inflation.

Your Deposit Info

Deposit amount ($):
Annual interest rate (APR %):
Certificate duration in months:
Compounding interval:
Income tax rate (%):
Inflation rate (%):

Your CD Results

Future value:
Annual percentage yield (APY):
Interest earned:
Income taxes paid:
Savings after income taxes:
Current spending power of future after-tax savings:

A Beginner's Guide to Understanding Certificates of Deposit

Guide published by Joelle Jacinto on November 29, 2019

If you have extra money that you won't need soon, investing in a certificate of deposit may make sense. CDs are interest-bearing time deposits where money stays in an account for a specific period of time, during which it may not be withdrawn. CDs are available in many terms:

  • three months
  • six months
  • one year
  • two year
  • three year
  • five years
  • or even longer

Banks compensate savers for the time value of money & inflation risk by paying interest, with yields rising over longer terms.

Man Hiding Money.

Banks like timed deposits, as they are a stable source of funding for personal & business loans. CDs give the bank the right to use your money for a period of time, compensating you with accumulated interest over the term. 

A CD is a conservative investment strategy. They do not grow as fast or as large as other investment vehicles, though they have limited volatility. A nominal return is guaranteed, no matter the state of the economy or the bank or credit union you invested your money in. 

Here are common phrases associated with CDs.

  • Term – length of time of your deposit
  • Principal – the amount you open the CD with, your initial, and only, deposit into the account
  • Maturity date – the end of the CD term , where you can withdraw your savings with interest

Why should I get a CD?

Open a CD if you have money you will not need imminently & want to save in a low-risk fashion for a future goal. For example, if you wish to travel, or want to put down a larger downpayment on a house or car, you can earn interest on your current savings using a CD. 

  • CDs are a guaranteed investment. There is no risk of nominal loss in holding through the maturity date. The interest rate is fixed and guaranteed. Deposit agreements state how much you will receive on the maturity date. No matter how much the economy fluctuates, your investment grows and you receive the matured balance.
  • CDs do not require much attention or effort. You also don't need to invest a huge sum of money to open a CD. Banks typically have a minimum deposit requirement of either $500 or $1000, while some banks having no minimum requirement. 
  • CDs are insured. The Federal Deposit Insurance Corporation insures CDs up to $250,000, as does the National Credit Union Association for shares certificates offered by credit unions. Verify your bank has this insurance before making your deposit. While most banks and credit unions are covered by these institutions, some haven't registered yet. 

Compare: CDs vs Savings Accounts

The main difference between a passbook savings account and a CD is you can deposit and withdraw money from savings accounts anytime. A CD is fixed for the duration of the term. CDs typically offer a higher interest rate than savings or checking accounts. The point of the CD, after all, is for it to grow compound interest. 

If you make an early withdrawal from the CD, you will have to pay a penalty. Penalties usually amount to several months of accrued insterest. 

As mentioned earlier, longer terms yield higher interest rates. High-interest savings accounts can offer competitive rates to shorter duration CDs. Deposit rates vary by bank. Some financial institutions offering higher rates online to attract new customers

Shop Around Before Opening an Account

Even if you trust your current bank you should compare rates before opening an account.

  • Large banks offer lower rates. They are not as desperate for capital as smaller & faster growing regional or online-only competitors lacking their capital base and branch network.
  • Small banks offer more competitive rates to offset a lack of brand awareness and attract investors.
  • Online banks offer higher interest rates as their operational costs are lower. 

Man Riding a Money Rocket.

Compare: CDs vs Bonds

A bond is a financial instrument which is associated with loans to a company or government. Bonds can be simple instruments like a vanilla U.S. Treasury bond or they can be structured to represent a complex set of assets.

In some cases bonds represent traunches of credit quality associated with a group of financial assets. A bank can combine many residential mortgages or auto loans into a single security and then sell slices of that security to other investors, offering lower yields to senior slices and higher yields looking to achieve higher returns while taking on greater risk of loss.

Similar to a CD, your money earns interest over a period of time, but may be sold before the bond matures.

  • Zero coupon bonds are sold at a discount to face value with the face value being paid at maturity. The lack of coupon keeps all capital embedded in the instrument, making it more sensitive to interest rate changes. While investors do not receive regular cashflow from a zero coupon bond, they are required to report the imputed "phantom interest" as income.
  • Other bonds usually pay interest every six months, with the principal repaid at maturity.

Another difference between CDs and bonds is the minimum investment in a bond is typically higher, depending on whether it is a U.S. Treasury bond or a corporate bond. Minimum investments required can range from $100 to $5,000.

Bonds are recommended for long-term investments. Maturity can range from one year to 30 years. Bonds offer steadier income if you build a portfolio across multiple sectors, risk levels, and durations.

Unlike CDs, corporate bonds have a risk of loss, as the ability for a business to fund operations depends on economic performance. You may incur loss if the company becomes bankrupt.

You can set up an accout at TreasuryDirect to purchase low-risk federal bonds directly. Interest income from the Treasury is taxable, though many municipal bonds are tax free.

Riskier bonds are a bit harder for a part-time investor to invest in as the bond market is less liquid than the stock market. To be able to purchase individual bonds, you will need to build up your bond portfolio, which assumes that you have substantial funds to do so, as the cost of these are usually in 6 figures. 

Many investors choose to buy individual bonds apart from U.S. Treasury bonds through bond mutual funds or exchange traded funds, which provide convenient access to a diverse group of bonds. Close ended funds are generally considered less risky than open ended funds. If another investor chooses to sell a portion of their open ended fund in a panic when there is little liquidity they also lock in losses for other investors who remain invested in the instrument.

The CD Ladder: A Smart Strategy

Man Standing on the Ladder of Opportunity.

In the finance world, CDs won't yield the highest returns, but they are low risk. A nifty strategy known as laddering can give you the higher rates of a 5-year CD term, while some of your CDS mature annually. This is each step in the ladder:

  1. Divide your principal into 5. 
  2. Open a high-yield CD with a 1 year term with one-fifth of the money.
  3. Place the rest in separate CDs with 2-, 3-, 4-, and 5-year terms. 
  4. After a year, use the matured funds to open a new, high earning 5-year CD. Repeat as each CD matures. 

The result: you have five CDs wih 5-year annual percentage yield (APYs) maturing annually, giving you better access to your investments.

Tax Implications of CDs

CDs aren't taxed but the interest made on CDs is taxed as oridinary income on your tax return. Here are two easy rules to follow:

  • Taxes on short term CDs: If your CD matures less than a year, put the generated interest income on your tax return and pay the corresponding tax. For instance, if you deposited $20,000 in your CD and your matured balance is $20,506.28, you pay tax on the interest income of $506.28. 
  • Taxes on Long Term CDs: According to the federal tax law, interest is not allowed to accrue tax-deferred for more than a year. Even if your CD hasn't matured yet, you need to declare the interest that was made within that year on your income tax. Banks issue monthly or quarterly reports on the interest made on your CD, so you may refer to these statements to file your income tax correctly. Many banks also send 1099-INT account statements.

If you need to make an early withdrawal on your deposit and pay a penalty, you can deduct the full penalty, even if it is more than your earned interest.

About the Author

Joelle sees writing as a craft, and is genuinely interested in the topics she tackles, which have ranged from finance and transportation, to pop music, to business advice, to society and culture, to performing arts. She has a Master's in Art Theory and Criticism from the University of the Philippines and is pursuing a PhD in Philippine Socio-Cultural Studies. Her works have been published in broadsheets, lifestyle magazines, online portals and academic journals. Her performing arts reviews have been published in Malaya, Manila Times, Critics Republic, Malaysia, and RealTime Arts, Australia, while her academic work appears in The Borneo Journal and the Journal for the Anthropological Study of Human Movement.

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