What Happens When a CD Matures? Your Options

The CD Maturity Event

A Certificate of Deposit (CD) is a savings account where a fixed sum of money is held for a set period, earning a predetermined interest rate. When a CD reaches its maturity date, it signifies the end of this fixed term, making the initial investment and any accumulated interest available to the account holder.

As a CD approaches its maturity date, the financial institution typically sends a maturity notice to the account holder. These notifications commonly arrive through mail, email, or via online banking alerts, usually a few weeks before the maturity date. The notice generally details the original maturity date, and if applicable, the new maturity date if the CD were to automatically renew. It also provides information on the current interest rate offered for new CDs and outlines the various options available to the account holder.

Your Choices Upon Maturity

Upon a CD’s maturity, account holders have several options for their funds. One common choice is to fully withdraw the principal and all accumulated interest. This can typically be accomplished through a transfer to a linked bank account, receiving a check, or in some cases, a cashier’s check. If permitted by the financial institution, a partial withdrawal is also an option, where a portion of the funds is taken out while the remaining balance is reinvested into a new CD.

Another frequent decision is to reinvest, or “rollover,” the funds into a new CD. This involves placing the original principal and earned interest into a new CD product offered by the institution. The new CD will have a new term, which could be the same or different from the original, and will earn interest at the prevailing rate offered by the institution at that time. Account holders might select a different term length, such as six months, one year, or five years, depending on their financial planning. Alternatively, funds can be transferred to a different type of account within the same institution, such as a savings account, checking account, or even an investment account.

The Grace Period and Automatic Rollover

Following a CD’s maturity date, there is typically a short timeframe known as the grace period. This period, often ranging from 7 to 10 calendar days, provides account holders with an opportunity to decide what to do with their funds without incurring penalties.

If no specific instructions are provided by the account holder during the grace period, the financial institution will usually automatically “rollover” or reinvest the entire balance, including both principal and accrued interest, into a new CD. This new CD is typically set for the same term length as the original CD. However, the interest rate applied to this new CD will be the institution’s current rate for that specific term at the time of rollover, which may be higher or lower than the rate of the original CD. It is important to remember that once funds are automatically rolled over, they become locked into the new term, and early withdrawal penalties would apply if the funds are needed before the new maturity date.

Making Your Maturity Decision

When a CD matures, evaluating the current interest rate environment is an important step. Account holders should compare the new CD rates offered by their current institution, and potentially other financial institutions, against the rate of their maturing CD and other available investment options. Considering immediate and future liquidity needs is also important; if access to funds is anticipated in the near future, a full withdrawal or a shorter-term CD might be a more suitable choice.

Aligning the decision with broader financial objectives is also a practical consideration. Whether saving for a significant purchase, contributing to long-term retirement savings, or building an emergency fund, the CD maturity decision should support these overarching goals. It is important to note that interest earned on CDs is considered taxable income in the year it is credited, regardless of whether the funds are withdrawn or reinvested.