What Happens When a Certificate of Deposit Matures?

A Certificate of Deposit (CD) offers a secure way to save money, providing a fixed interest rate for a specific duration. This savings vehicle requires funds to be invested for a predetermined term, which can range from a few months to several years. When this period concludes, your CD reaches its maturity date, signaling the end of its term. At this point, the principal along with all accumulated interest becomes available to you.

Understanding Automatic Renewal

Upon a CD’s maturity, financial institutions typically have automatic renewal. If you take no action, your CD will generally roll over into a new CD for a similar term. This new CD will be subject to the financial institution’s current interest rates, which may be different from your original rate. The new rate could be higher or lower depending on prevailing market conditions.

Most financial institutions offer a “grace period” after the maturity date. This grace period typically lasts 7 to 10 calendar days, though it can range from 5 to 14 days depending on the bank. During this window, you can make changes to your CD or withdraw funds without incurring any penalties. Financial institutions send a notification about an upcoming maturity, often 30 days in advance, outlining your options and the grace period.

Your Options After a CD Matures

When your CD matures, you have several choices for your funds. One common option is to withdraw the principal and any accumulated interest. This might be chosen if you need immediate access to cash for expenses or wish to pursue other investment opportunities.

Alternatively, you can choose to renew your CD for a new term. This involves reinvesting your funds into another CD, with a new interest rate and potentially a different term length. You may also decide to reinvest the matured funds elsewhere, either within the same institution or at a different one. This could involve moving the money to a high-yield savings account, a money market account, or exploring other investment products.

Steps to Take Action

Once you decide on the best course of action for your matured CD, communicate your instructions to your financial institution. You can do this through various channels, including an in-person visit, a phone call, or their online banking portal. Some institutions may also accept written instructions.

When contacting your financial institution, ensure you have your account number and proper identification readily available. Adhere to the grace period deadline to avoid automatic renewal, especially if you intend to withdraw funds or select a different CD term or product. If you miss this deadline and take no action, your CD will likely automatically renew under the institution’s default terms. After executing your chosen action, confirm the transaction and request documentation for your records.

Tax Considerations for Matured CDs

Interest earned on a Certificate of Deposit is taxable income in the year it is credited or made available to you, regardless of whether you withdraw or reinvest the funds. This interest is taxed at your ordinary income tax rate. Financial institutions are required to report interest income to the Internal Revenue Service (IRS) if you earn $10 or more in interest during the year.

You will receive a Form 1099-INT from your bank by January 31st, detailing the interest earned on your CD during the previous calendar year. Box 1 on this form shows your taxable interest income. For CDs with terms longer than one year, interest is taxed as it accrues each year, even if you do not receive a payout until maturity. For shorter-term CDs, interest is taxed in the year it is paid out or at maturity, whichever comes first.