CDs vs. Checking Accounts: Which Should You Open?

Choosing between immediate access and delayed gratification

When it comes to managing your money, keeping large amounts of cash on you at all times isn't generally considered wise. Most American households (about 95%) have at least one person with a checking or savings account, according to the Federal Deposit Insurance Corporation (FDIC).

Though they are just two choices in a list of possible account types offered by most financial institutions, checking accounts and certificates of deposit (CDs) are good places to keep funds, though they each have their own quirks. By understanding those differences, you can more easily decide which one is right for you.

Key Takeaways

  • A CD accrues interest over time with the expectation that the deposited funds will be left untouched for months or years at a time.
  • Checking accounts are liquid: They allow for more frequent deposits and withdrawals compared with other accounts, like savings and money market accounts.
  • The FDIC and the National Credit Union Share Insurance Fund (NCUSIF) insure up to $250,000 for both types of accounts.

How a Certificate of Deposit (CD) Works

A certificate of deposit (CD) is an interest-bearing time deposit account that offers a fixed interest rate premium in exchange for the fact that the customer agrees to leave the money untouched so it can mature for a set amount of time. Think of a CD as an instance of the bank borrowing money from its customers; as a borrower, the bank pays its customer in the form of regular interest payments.

While nearly every bank and credit union in the country offers CDs to their customers, the terms surrounding each account are up to the bank's discretion. This includes how long the term will be and how much higher the associated interest rate will be compared with their other products.


Checking accounts and CDs are both backed by the FDIC and NCUA for up to $250,000.

Pros of a CD

  • Accrues interest over time: Generating interest over time is an easy way to receive passive income. Since the main idea is to leave the money in a CD untouched, banks and credit unions offer higher interest rates for longer terms. CD interest rates can be as much as several times the national average—if you can commit your money long enough. According to the FDIC, the average national rate can be as low as 0.39% for a five-year CD. Conversely, Goldman Sachs Marcus has five-year online CDs at a 2.55% annual percentage yield (APY). 
  • Fixed interest rates: Once a CD is created, it receives a fixed interest rate. Regardless of what happens during the account's term, the bank cannot increase or decrease the rate at any time. While this means an account will never see diminished gains because of lowered interest rates, it won't see bigger returns if interest rates increase. There are variable rate CDs available but they have their own risks. Still, knowing exactly how much interest your account will accrue gives you an idea of how much you'll receive once the account matures.
  • Helps prepare for future expenses: CDs are great for long-term planning, like saving up for a new car or down payment for a house. By setting some money aside for a couple of years, you can ensure you won't tap into those funds for other expenses, as well as calculate how much extra money your CD will make in terms of interest.

Cons of a CD

  • Funds aren't easily accessible: The biggest characteristic of a CD is the fact that you're expected to effectively keep your hands out of the cookie jar for a set amount of time. Whether you agreed to several months or several years, that money should be considered out of reach.
  • Early withdrawal is punished by law: Though it's discouraged as soon as the account is created, you can withdraw funds early from your CD. Taking money out of a CD before it reaches maturity comes with a federally mandated penalty. Exactly how much you'll be penalized depends on what's outlined in the account agreement but keep in mind while the law sets a minimum penalty, there is no maximum limit.
  • Inflation can erase interest gains: Nobody likes inflation, but CD owners are particularly hit by the phenomenon. If the national inflation rate ever exceeds a CD's interest rate, the account could end up losing money in the long term.

How a Checking Account Works

If a CD means having no access to your funds for a specified time, checking accounts are almost the exact opposite. Offered by virtually every bank and credit union in the U.S., checking accounts are very liquid deposit accounts that allow regular deposits and withdrawals. Checking accounts can be accessed using several methods, including automated teller machines (ATMs), electronic debits, debit cards, or paper checks. Financial institutions typically offer a range of account types, including student checking accounts, business or commercial checking accounts, and joint accounts.

Pros of a Checking Account

  • Access your money whenever you need it: Unlike savings accounts and other bank offerings, customers can make numerous withdrawals and unlimited deposits without any risk of penalties. With multiple ways to access funds, checking accounts make it easy to pay for everyday costs in addition to major purchases.
  • Diverse account types: Banks usually don't offer a generic checking account. In most instances, checking accounts are divided up into different types, each with its own unique features, limitations, and benefits. Some accounts can even offer a limited amount of interest. If you have a need for a checking account, it's likely that one exists to fit your unique specifications.
  • Set up direct deposit: Thanks to direct deposit, the days of receiving and cashing a paper check for your wages are in the past. By simply filling out some quick documentation with your employer, your funds can be deposited directly into your checking account. In some cases, banks will offer to make your paycheck available up to two days in advance.

Cons of a Checking Account

  • Often zero interest: Many checking accounts are not interest-bearing, so keeping large amounts of cash in one will not yield any measurable returns. As a result, you're likely going to want a second account that does accrue interest.
  • Account fees and minimums: Checking accounts generally come with account fees and minimums attached. From overdraft fees for spending more money than you have in your account, to ATM fees for withdrawing cash out-of-network, to monthly service fees to keep your account running, banks will charge these additional costs as a way to generate revenue.
  • Easy to overspend: For some people, having access to so much money can be tempting. As such, it's easy for people to overspend and potentially trigger an overdraft on their accounts. Luckily, most banks offer numerous ways to make sure account holders are aware when they get close to emptying out their accounts.

What Happens to My CD at Maturity?

In the month or two before the maturity date of your CD’, the bank or credit union will notify you of the impending end date. You'll be given instructions on how to tell them what to do with the maturing funds. Typically, they will offer you three options: Roll over the CD into a new CD at that bank, transfer the funds into another account at that bank, or withdraw the proceeds.

How Can I Avoid Checking Account Fees?

One way to get free checking is to sign up for direct deposit. Many banks waive fees for accounts with a regularly deposited paycheck. Be sure to check to see if there is a minimum amount that must be deposited.

Do I Have to Pay Taxes on a CD Account?

Yes. Interest income earned on certificates of deposit is subject to state and federal income tax. Since CD interest earnings are taxed as income, the tax percentage depends on the tax bracket for your overall income.

The Bottom Line

Whether you go with a checking account or a CD, the decision boils down to how much access to your cash you want or need. If you need access to most of your funds at all times, then a checking account may be right for you. If you're able to live without touching some of your money for a while and want to earn some interest along the way, then you should take a look at CDs in your area.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. Federal Deposit Insurance Corporation. "How America Banks: Household Use of Banking and Financial Services."

  2. Financial Industry Regulatory Authority. "Certificates of Deposit (CDs)."

  3. National Credit Union Administration. "Share Insurance Fund Overview."

  4. Federal Deposit Insurance Corporation. “Deposit Insurance FAQs.”

  5. Federal Deposit Insurance Corporation. "National Rates and Rate Caps."

  6. Goldman Sachs. “High-Yield Certificates of Deposit.”

  7. Office of the Comptroller of the Currency. "What are the Penalties for Withdrawing Money Early from a Certificate of Deposit (CD)?"

  8. Office of the Comptroller of the Currency. "Checking Accounts: Understanding Your Rights."

  9. Consumer Financial Protection Bureau. "Checking Account Basics," Page 7.

  10. Office of the Comptroller of the Currency. "My Certificate of Deposit (CD) Matured, but I Didn't Redeem It. What Happened to My Funds?"

  11. National Archives, Code of Federal Regulations. "Title 12-§ 1030.5 Subsequent Disclosures."

  12. American Bankers Association. “How to Avoid Bank Fees.”

  13. Internal Revenue Service. "Topic No. 409 Capital Gains and Losses."

  14. Internal Revenue Service. "Topic No. 403 Interest Received."