What Happens at the End of a CD Term?

A Certificate of Deposit (CD) is a type of savings account designed to hold a fixed amount of money for a predetermined period, known as its “term.” In exchange for committing funds for this fixed duration, the issuing bank typically pays a fixed interest rate, which is often higher than that offered by traditional savings accounts. At the conclusion of this term, the CD reaches its “maturity date,” at which point the principal and any accrued interest become accessible to the investor. Understanding what occurs at this juncture is important for managing your savings effectively.

Your Choices at Maturity

When a Certificate of Deposit reaches its maturity date, the investor typically has several options for the funds. One common scenario is automatic renewal, also known as a rollover. The principal and often the earned interest are reinvested into a new CD for a similar term. This automatic process ensures continuous investment.

Another choice is to withdraw the funds, which involves taking out both the initial principal and all earned interest. This can typically be accomplished by transferring the money to a linked checking or savings account, or by receiving a physical check. Opting for withdrawal provides immediate access to your money, which can be useful if the funds were earmarked for a specific short-term goal, such as a down payment or a significant purchase.

A third option allows for greater flexibility, enabling the transfer of matured funds to a different type of account or even to another financial institution. This could involve moving the money into a different CD with a new term or rate at the same bank, or shifting it to a money market account, or even transferring it to a new CD at a different bank that might offer more favorable rates. Such transfers provide an opportunity to re-evaluate investment strategies and seek better returns or liquidity options.

Understanding the Grace Period

Following a CD’s maturity date, financial institutions typically provide a brief window known as a “grace period.” This period, commonly ranging from 7 to 10 days, allows the investor to make decisions regarding their matured funds without incurring early withdrawal penalties. The primary purpose of this grace period is to give the CD holder adequate time to communicate their chosen action to the bank.

If no action is taken during this specified timeframe, the CD will generally automatically renew into a new CD with a term similar to the original. The new CD will typically reflect the current interest rates offered by the bank for that term, which could be different from the previous rate. To prevent an unintended automatic renewal, investors must proactively inform their bank of their intentions, whether it’s to withdraw the funds, transfer them, or renew into a different CD product. This communication often involves contacting the bank directly, submitting an online instruction, or visiting a branch, as specified by the institution.

Tax Considerations

Interest earned on a Certificate of Deposit is generally considered taxable income. This interest is typically subject to federal income tax, and in some cases, state and local taxes, in the year it is earned or credited. The amount of tax owed depends on the investor’s individual income and tax bracket, as CD interest is taxed as ordinary income.

For any year in which $10 or more in interest is earned on a CD, the financial institution is required to issue Form 1099-INT to the investor. This form details the total interest income received, which must be reported on the investor’s tax return. For long-term CDs, taxes are typically due on the interest accrued each year. However, if a CD is held within a tax-advantaged account, such as an Individual Retirement Account (IRA), taxes on the interest may be deferred until funds are withdrawn in retirement.