What Happens When a Certificate of Deposit Matures?
Unsure what happens when your CD matures? Get clear insights into your options, the timeline, and how to manage your funds effectively.
A Certificate of Deposit (CD) is a type of savings account where funds are deposited for a fixed period at a set interest rate, offering a predictable return. When a CD matures, it signifies that the agreed-upon term has ended, and your initial deposit, or principal, along with all earned interest, becomes available to you without penalty.
Understanding Your Options
When a Certificate of Deposit reaches its maturity date, you gain the opportunity to decide the next step for your funds. One common choice is to reinvest or roll over the funds into a new CD. This can involve selecting a new term length, potentially a different interest rate based on current market conditions. You can choose to roll over only the principal, or both the principal and the accumulated interest, and even add new funds to the investment. This option allows your savings to continue earning interest, often at competitive rates compared to standard savings accounts.
Another option is to withdraw your funds. If you choose to withdraw, the financial institution can typically transfer the money to a linked checking or savings account, or issue a check for the total amount. This provides immediate access to your money for other financial needs or investments outside of CDs.
Should you take no action, financial institutions typically have a default procedure where the CD automatically rolls over into a new CD. This new CD will usually have the same or a similar term length as the matured CD, but the interest rate will be based on the rates offered at the time of renewal. Automatic rollover ensures your money continues to earn interest without interruption, though it is important to be aware of the new terms.
The Maturity Process and Timing
As your Certificate of Deposit approaches its maturity date, your financial institution will typically send you a maturity notice. This notice provides important details, including the exact maturity date, the interest rate earned, and often the proposed new rate if the CD were to automatically renew. It also outlines the various options available to you, such as withdrawing the funds or reinvesting them.
Following the maturity date, there is usually a “grace period,” which is a short window during which you can make decisions about your CD without incurring penalties. This grace period typically lasts between 7 to 10 calendar days, though the exact duration can vary depending on the financial institution and the CD’s original term.
During this grace period, you must inform your financial institution of your chosen action, whether it is to withdraw the funds, roll them over into a new CD, or explore other investment avenues. If you do not provide instructions within this specific timeframe, the financial institution will generally proceed with an automatic rollover. This means your funds will be reinvested into a new CD under the terms and rates provided in the maturity notice.
Handling Your Funds and Tax Considerations
For those who opt to withdraw their funds at maturity, financial institutions can typically deposit the principal and earned interest directly into a linked checking or savings account. Alternatively, they may issue a check, which can be mailed or picked up in person. Once the funds are withdrawn, the CD account is typically closed.
The interest earned on a Certificate of Deposit is considered taxable income by the Internal Revenue Service (IRS). This interest is generally taxed as ordinary income, similar to wages or salary, at your applicable income tax rate. Importantly, CD interest is taxable in the year it is earned or credited, regardless of whether you actually withdraw the funds or choose to reinvest them.
Financial institutions are required to report interest earnings to the IRS. If you earn $10 or more in interest during the year, your bank will issue Form 1099-INT. This form details the amount of interest income you earned in the previous calendar year, and you will need to report this on your tax return. Consulting a tax professional can help ensure accurate reporting and understanding of your specific tax obligations.