What to Do When Your CD Matures: Your Top Options
Navigate the choices for your Certificate of Deposit as it matures. Understand your options to align with your financial strategy.
A Certificate of Deposit (CD) offers a secure way to save money, providing a fixed interest rate for a specific duration. Once a CD reaches its maturity date, the principal investment and accrued interest become accessible, prompting the account holder to decide on the next step for their funds.
Automatic Renewal and Grace Period
Upon reaching its maturity date, a Certificate of Deposit enters an automatic renewal process if no action is taken by the account holder. The funds, including principal and earned interest, are automatically reinvested into a new CD, often with similar terms but at the current market rate. Financial institutions provide a “grace period” following maturity, typically 7 to 10 days, during which the CD holder can make decisions about the funds without penalty. If instructions are not provided within this timeframe, the bank will proceed with the automatic renewal, and withdrawing funds from the newly renewed CD before its next maturity date could result in early withdrawal penalties.
Reinvesting Your Funds
Reinvesting CD funds can support long-term financial objectives. You can renew your CD with the same financial institution, opting for a different term length or exploring specialized CD types. For instance, a callable CD might offer a higher interest rate, but the issuing bank retains the right to redeem it before maturity, typically if market interest rates decline. Another option is a step-up CD, which features a predetermined schedule of interest rate increases at specified intervals throughout its term, offering potential for higher returns over time.
A strategic approach to reinvestment involves CD laddering, where an investor divides their funds among multiple CDs with staggered maturity dates. As each short-term CD matures, funds can be reinvested into a new longer-term CD, creating a continuous cycle that benefits from the higher rates of longer terms. This strategy helps manage interest rate risk, allowing portions of the investment to be reinvested at current market rates as they become available. Interest earned on CDs is taxable income in the year it is credited, even if reinvested, and is reported on Form 1099-INT if the interest earned is $10 or more.
Withdrawing or Transferring Your Funds
When a CD matures, you can withdraw or transfer the funds, offering flexibility for various financial needs. The entire balance, including principal and accumulated interest, can be withdrawn without penalty during the grace period. This option is suitable if funds are needed for immediate expenses, such as a home renovation or a new vehicle.
Alternatively, funds can be transferred to a different account within the same financial institution, such as a checking or savings account, offering immediate liquidity. You may also transfer funds to an account at a different bank or credit union to seek higher returns on other savings products or to consolidate finances. This decision might also be driven by a desire to diversify investments beyond CDs, such as stocks, bonds, or mutual funds, or to allocate funds to a high-yield savings or money market account for greater accessibility.
Notifying Your Financial Institution
Once you decide on your matured CD, communicate instructions to the financial institution promptly. Most banks provide written notice as the CD approaches maturity, outlining options and the process for providing instructions. This notification may include specific deadlines for action, often corresponding with the end of the grace period.
Common methods for notifying the bank include utilizing online banking portals, making a phone call to a customer service representative, or visiting a local branch in person. Some institutions may also accept written instructions sent via mail. Act within the grace period to avoid automatic renewal under less favorable terms or incurring penalties for early withdrawal from a newly renewed CD. After submitting instructions, confirm the bank’s receipt and understand any required documentation, such as signing a renewal agreement or completing a transfer form, to ensure the chosen action is executed correctly.