What Happens When Your CD Matures?

A Certificate of Deposit (CD) is a savings account that offers a fixed interest rate for a predetermined period. This agreement means you typically cannot withdraw funds without penalty until the term ends. The CD’s maturity date marks the official end of this term, when your funds become fully accessible.

Default Actions by the Financial Institution

When a CD reaches its maturity date, financial institutions typically provide a grace period. This period, often around 7 to 10 days, allows the CD holder to decide what to do with their funds without incurring penalties.

A common default action, if no instructions are provided during the grace period, is an automatic rollover. This means the principal amount and any accrued interest are reinvested into a new CD. The new CD usually has the same or a similar term as the original, but the interest rate will be based on the current rates offered by the institution at that time, which may be higher or lower than the original rate.

Financial institutions are generally required by law to notify you in writing before your CD matures. Many banks send these maturity notices regardless of the CD’s term, typically 30 days or more in advance. This notice should outline your options and explain the terms if an automatic rollover occurs.

Your Options at Maturity

Upon your CD’s maturity, you have several choices for your funds. These actions must typically be taken during the grace period to avoid an automatic rollover or potential penalties.

One option is to withdraw your funds. You can cash out the principal deposit plus all earned interest without penalty once the CD matures. To initiate a withdrawal, you can typically notify your bank online, in person, or by phone. Funds may be received via direct deposit to a linked checking or savings account or by check.

Alternatively, you can choose to reinvest your funds. This differs from an automatic rollover because you make a deliberate decision about the new investment. You can select a new CD with a different term length or explore different types of CDs like bump-up CDs that allow a rate increase if market rates rise. It is also possible to transfer the funds to another investment product offered by the same institution, such as a high-yield savings account or a money market account, to maintain liquidity while still earning interest.

Important Considerations for Your Decision

Before making a decision about your matured CD, evaluating several factors is important. Consider the current interest rate environment. Prevailing market rates can influence whether reinvesting in a new CD is advantageous; for example, if rates have risen, you could secure a higher return on a new CD. Conversely, if rates have fallen, locking in a new CD rate might not be as appealing, and other savings vehicles could offer better returns.

Another consideration involves tax implications. Interest earned on a CD is considered taxable income by the IRS, regardless of whether it is withdrawn or reinvested. This interest is taxed as ordinary income in the year it is credited, not just when the CD matures. Financial institutions will report interest earnings to the IRS on Form 1099-INT.

Finally, your personal financial goals and liquidity needs will guide your decision. If you anticipate needing access to your funds in the short term for planned expenses, withdrawing the money or placing it in a more liquid account like a high-yield savings account might be appropriate. For longer-term savings objectives where immediate access is not a concern, reinvesting in a new CD, potentially with a longer term for a higher rate, could align better with your financial strategy.