What Happens When a Certificate of Deposit Expires?
Your Certificate of Deposit is maturing. Learn what happens next and how to confidently manage your funds for future financial goals.
A Certificate of Deposit (CD) is a savings product where a fixed sum is held for a predetermined period, often yielding a higher interest rate than standard savings accounts. CDs provide a secure way to save while earning a guaranteed return. This article explains the process and choices when a CD reaches its maturity date.
The CD Maturity Process
Financial institutions typically contact CD holders a few weeks before the maturity date. Notifications, often sent via mail or email, outline the principal and accrued interest. They also specify the maturity date and a brief window, known as the grace period, for deciding how to proceed.
The grace period typically extends for seven to ten days following the maturity date. During this timeframe, CD holders can access funds or make new arrangements without incurring any penalties. If no action is taken within this grace period, the financial institution will activate an automatic rollover provision.
Under an automatic rollover, the principal and accrued interest are reinvested into a new CD. This new CD will typically have the same term length as the original, or a similar term if the exact original is no longer offered. The interest rate applied to the new CD will be the prevailing rate at the time of renewal for that specific term, which may be higher or lower than the original rate.
Your Options at Maturity
Once a Certificate of Deposit reaches its maturity date, and you are within the grace period, you have several choices for your funds.
One option is to reinvest the principal and earned interest into a new CD. This allows savings to continue growing, and you can choose a different term length based on your financial goals. The new CD will be subject to current interest rates at the time of reinvestment.
Alternatively, you can withdraw the principal and accrued interest as cash. This withdrawal can typically be facilitated through direct deposit to a linked account, transfer within the same institution, or by receiving a check. Withdrawing funds provides immediate liquidity for other purposes.
A third option is transferring matured CD funds to a different financial institution or another investment product. This choice is useful if you find more favorable interest rates elsewhere or wish to diversify your investment portfolio. Communicate your decision to your current financial institution within the grace period to ensure funds are handled as desired and to avoid unintended automatic rollover.
Tax Considerations for CD Interest
Interest earned on a Certificate of Deposit is taxable income by the Internal Revenue Service (IRS). This income is typically taxed in the year it is earned or credited to your account, even if you reinvest the interest rather than withdrawing it. Even if not physically received, it still counts towards your gross income for tax purposes.
Financial institutions report interest income earned on CDs to both the CD holder and the IRS. They do this by issuing Form 1099-INT, “Interest Income,” for any year the interest earned is $10 or more. This form details the total interest paid or credited to your account during the tax year.
The taxability of CD interest applies regardless of the CD’s term length, meaning both short-term and long-term CD interest is subject to federal income tax. While specific state tax laws vary, it is important to account for this income when filing your federal income tax return. Consult with a tax professional for personalized advice regarding your tax situation.
For CDs with terms longer than one year, you will receive a Form 1099-INT each year showing the interest accrued for that year, and you must report it annually. This interest is taxed at your ordinary income tax rate, similar to wages. Even if a Form 1099-INT is not received for interest earned, any amount of $10 or more must be reported to the IRS.