What Happens After Your Certificate of Deposit Matures?
When your CD matures, navigate your options and the necessary steps to manage your investment. Make informed financial decisions.
A Certificate of Deposit (CD) holds a fixed amount for a set period, earning a fixed interest rate, often higher than traditional savings accounts. When the term concludes, the CD reaches its maturity date. This point marks a significant moment, as decisions must be made regarding the principal and accumulated interest.
Understanding Your Options at Maturity
When a Certificate of Deposit matures, the account holder is presented with several choices for the funds. Automatic renewal is a common scenario, where the financial institution rolls over the principal and any accrued interest into a new CD of the same term at current rates. This option typically occurs if no specific instructions are provided, ensuring continuous investment without interruption.
Alternatively, you can choose to withdraw the funds entirely once the CD matures. This means taking possession of your original principal investment along with all the interest earned over the CD’s term. These funds can be transferred directly into a linked checking or savings account, or a check might be issued for the full amount. Withdrawing the funds provides immediate liquidity, allowing you to use the money as needed.
A third option involves reinvesting the funds into a new Certificate of Deposit, but with different terms or at a different financial institution. You might decide to open a CD with a longer or shorter duration, or perhaps one that offers a higher interest rate elsewhere. This allows for flexibility to adapt your investment strategy based on current market conditions or personal financial goals, rather than simply accepting an automatic renewal.
The Maturity Process and Your Grace Period
As a Certificate of Deposit approaches its maturity date, financial institutions typically communicate with the CD holder several weeks prior. This notification often occurs through mail, email, or alerts within online banking portals. These communications inform you of the upcoming maturity and outline the choices available for your investment.
Following maturity, most CDs enter a period known as a grace period. This window typically lasts for about 7 to 10 calendar days, though the exact duration can vary by institution. This period provides the CD holder a specific timeframe to make a decision about their matured funds without incurring penalties or allowing unintended automatic renewal.
During this grace period, you can formally communicate your chosen option to the financial institution. This might involve contacting them by phone, visiting a local branch, or utilizing their online banking platform to provide instructions. Taking action within this designated window ensures that your preferences regarding withdrawal, renewal, or reinvestment are implemented as desired, preventing the default action from occurring.
Tax Considerations for Matured CDs
Interest earned on a Certificate of Deposit is generally considered taxable income by the Internal Revenue Service. This interest is typically taxed in the year it is credited to your account or made available for withdrawal, regardless of whether you physically take possession of the funds. This means that even if you choose to automatically renew your CD, the interest earned in the prior term is still subject to taxation for that year.
Financial institutions are required to report interest income to both the CD holder and the IRS. For interest income totaling $10 or more in a calendar year, you will receive a Form 1099-INT. This form details the amount of interest earned and should be used when preparing your annual income tax return. Understanding this reporting requirement helps in accurately accounting for CD earnings.