What Happens When a Certificate of Deposit Term Ends?

A Certificate of Deposit (CD) is a type of savings account where a sum of money is deposited for a fixed period at a specific interest rate. This financial product typically offers higher interest rates compared to traditional savings accounts, in exchange for the agreement to keep the funds untouched until a predetermined date. When this fixed period concludes, the CD reaches its “maturity date,” at which point decisions must be made regarding the deposited funds and the interest earned.

Understanding Your Maturity Options

When your Certificate of Deposit reaches its maturity date, you have several choices for managing your funds. One option is to cash out, withdrawing the original principal and accrued interest. This provides immediate access to your money for spending or transferring to another account.

Alternatively, you can choose to roll over or reinvest the funds into a new CD. This allows your money to continue earning interest, potentially with a new term length or at the current interest rates offered by the financial institution. Another option involves transferring the funds to a different type of account within the same institution, such as a checking or savings account, or moving them to an external bank.

The Grace Period and Automatic Renewal

Upon a CD’s maturity, financial institutions provide a short window of time known as a grace period. This period usually lasts 7 to 10 calendar days, though some shorter-term CDs may have a shorter grace period. The purpose of this grace period is to allow you to make a decision about your matured funds without incurring any penalties.

If no action is taken during this grace period, most CDs automatically renew. The CD will roll over into a new CD of the same or similar term length, with the interest rate based on current rates at renewal. This new rate could be higher or lower than the original rate you earned on the maturing CD. Understanding this automatic renewal process helps ensure your funds align with your financial goals.

Executing Your Decision

Once you have determined the best course of action for your matured Certificate of Deposit, acting promptly within the grace period is advisable. To execute your decision, you need to contact your financial institution. This can be done through various channels, including phone, online banking portals, or by visiting a local branch.

When communicating your choice, be prepared to provide necessary account details and personal identification to confirm your ownership. Clearly state whether you wish to cash out, roll over the funds into a new CD, or transfer the money to another account. It is advisable to request and retain confirmation of your transaction from the bank for your records. Completing these steps within the grace period helps avoid an unintended automatic renewal of your CD.

Tax Implications

Interest earned on a Certificate of Deposit is considered taxable income by the IRS. This interest is taxed as ordinary income, similar to wages, in the year it is earned or credited to your account, even if you reinvest it into a new CD. Financial institutions are required to report interest earnings to the IRS.

If you earn $10 or more in interest from a CD during a calendar year, your bank will issue you a Form 1099-INT by January 31st of the following year. This form details the total interest income you received, which you must report on your federal income tax return. While certain retirement accounts, such as IRAs, can defer the taxation of CD interest, it is advisable to consult with a qualified tax professional for guidance regarding your specific tax situation.