Reinvesting CDs at maturity: What should you do next?

When a certificate of deposit (CD) matures, if you don’t give your bank other instructions, they will typically roll the CD into a new one with similar characteristics. That’s convenient, but potentially a costly mistake.

There are several reasons why it can be a mistake to let a CD roll over automatically. This guide will help you understand the process so you can get the most for your money.

Key takeaways:

• A CD’s maturity date is an opportunity to reassess what you want to do with the money.
• Before you decide, you should compare CD rates at other banks to see where you can maximize your returns.
• You should also think ahead to see if you have any needs for the money coming up before the new CD will mature.
• Check your account agreement to see how long you have to decide after your CD matures.
• If you don’t act within the grace period, in most cases the bank will automatically renew the CD into one with a similar term, but at today’s interest rates.
• Automatic renewal may not be best suited to your needs.
  

Know what happens when your CD matures

CDs are designed to last for a specific period of time, such as 6 months, 1 year, or 5 years. Here’s what happens when that period runs out:

What does CD maturity mean?

When a CD’s term is up, it’s known as the CD reaching maturity. Once a CD matures, you’re free to take your cash, move the money into other investments, or put it into another CD.

Another thing that happens is that the interest rate on your old CD expires. So, even if you choose to keep your money in a CD, the rates available now may be very different from when you last opened a CD.

What is the grace period?

A grace period is usually a span of a week to 10 days during which you’re free to choose what you want to happen to the proceeds from a maturing CD. Think of it as a window that opens when a CD matures.

Throughout a CD’s term, you typically can’t take out money from the CD or move it to other investments without paying a penalty. However, when a CD matures, you’re free to access the money. The catch is that access may only last for a limited grace period.

What happens if you don’t take any action?

If you don’t give your bank instructions during the grace period, what happens depends on the terms of your account agreement. The bank might just send you the proceeds, but most often they’ll roll it over into a CD of similar length to the one that just matured.

For example, if you had a 3-year CD mature, the bank might automatically roll the proceeds over into a new 3-year CD unless you give them different instructions.

That new CD may have the same length as the one that just matured, but the interest rate will be based on the rate the bank offers for the renewed CD. That interest rate may be very different from the one on your previous CD.

Besides a change in the interest rate, the alternatives available and your financial situation may have changed since the last time you signed up for a CD. That’s why you should think before letting a CD roll over automatically.

Understand your options at maturity

Before you let a CD roll over automatically, make sure you evaluate your choices:

• Withdraw your money. If you have a near-term use for the money, you can simply withdraw it and make it available to spend as you see fit.
• Reinvest in a new CD. Even if you want to use the proceeds from a maturing CD to start a brand-new CD, you might not want one that’s the same length as before. There also might be better CD rates available at other banks now. That’s why it’s better to make an active decision than to just passively let the money roll over.
• Move your money to another bank. Once you’ve chosen the term length you want, compare rates and other conditions at your bank with those offered by other banks. Competitive factors change over time, so the bank that offered the best rate the last time you signed up for a CD might not have the best rate now. If you can find a better rate elsewhere, a maturing CD gives you the opportunity to capture that better rate.
• Transfer your funds to savings, investments, or other accounts at the same bank. Even if you want to stay with the same bank, a CD might not be the best fit for your current needs. You might consider a savings, money market, or checking account for more immediate access. Or your bank may offer investment products designed for longer-term growth. Just be advised that not all products offered by a bank are covered by the Federal Deposit Insurance Corp. (FDIC). Before signing up for an account, check to see if it’s covered by deposit insurance.
  

Decide whether you should reinvest your CD

The decision to reinvest your CD depends on your current financial needs. Here are some ways those needs might guide your choice:

Reinvest if…

Consider reinvesting if you don’t have an immediate need for the money. If you can afford to lock your money up for the term of a CD, you can reinvest the proceeds of a maturing CD into a new CD.

Even if you decide to reinvest in a new CD, that’s not necessarily the same as rolling over your CD. Your future needs might dictate a longer or shorter CD term this time. You might also find more competitive rates available at another bank.

Consider withdrawing if…

When a CD matures, there are a few reasons why you might want to take the opportunity to withdraw the proceeds from the bank:

• You have needs for the money coming up within the next month or so.
• You want to invest in more growth-oriented investments somewhere else.
• You want to transfer the money to a CD at a new bank.
  

Compare rates before making a decision

Interest rates change all the time. Not only do they go up and down, but the relationship between short-term and long-term rates can change. Also, different banks may have the most competitive rates at different times. This is why it’s very important to take a fresh look at CD rates before making a decision about what to do with the proceeds from a maturing CD.

See how different maturity scenarios play out

CD terms are commonly available in lengths ranging from 1 month to 5 years, though in some cases CDs as long as 10 years might be available. Which length should you choose when reinvesting a maturing CD?

The right choice might be different from when you last opened a CD. The scenarios below give examples of how changing conditions might affect your decision.

Scenario: Interest rates are higher than when you opened your CD

If interest rates have risen since you opened your last CD, it might now be more attractive to lock in a higher rate with a longer-term CD. To think of it another way, when rates are high, you risk losing that favorable rate sooner if you choose a short-term CD and rates fall.

Scenario: Interest rates have fallen since you opened your CD

When interest rates are low, consider reinvesting in a shorter-term CD. That will give you a chance to reinvest sooner in case rates rise. Depending on how the rates compare, you also might want to consider a high-yield savings account instead of committing to a low-rate CD.

Alternatively, if rates are low, it might be a good time to consider more growth-oriented alternatives, though these carry more risk.

Scenario: The relationship between short-term and long-term interest rates has changed

Under normal circumstances, long-term CDs may offer higher yields than short-term ones. That gives you an incentive to commit to a longer-term CD. However, sometimes this relationship is flipped, and short-term rates are higher than long-term ones.

So, choosing a CD is not just a matter of whether rates are generally high or low. The relationship between short-term and long-term rates also matters. If short-term rates are higher, that might make them more attractive. However, this usually only happens when rates are expected to fall, so there might still be some value in locking in a rate for a longer term if you don’t plan on using the money within the next few years.

Scenario: You’ll need the money soon

It’s not just the rate environment that should affect your choice of CDs. Your financial needs and plans may change over time, and this should inform your choice of term length.

For example, if you expect to need the money within the next few years, you should choose a CD that fits within that timeframe. Otherwise, you’d have to pay a penalty to access the money before the CD matures. Even if a longer-term CD offers a higher rate, it’s simpler just to choose a term that matches your needs so you can avoid the penalty.

Scenario: You’re maintaining a CD ladder

A CD ladder involves owning a series of CDs with different maturity dates. This can help you earn CD yields while still having money become available at regular intervals. It’s also a way of reducing the amount of money you have to reinvest at any one time by spreading out the times when you’ll have to reinvest the money.

If you’re laddering CDs, you should replace a maturing CD with one that best fits the structure of your ladder. This often isn’t a CD of the same length as the one that just matured.

For example, suppose you set up a ladder to give you liquidity on an annual basis. Initially, this involves investing in CDs of 1-year, 2-year, 3-year, 4-year, and 5-year lengths. At the end of the first year, the 1-year CD would mature. To maintain the same structure, you wouldn’t want to replace it with a new 1-year CD, because your original 2-year CD would now be due to mature in a year’s time. Instead, you’d replace the 1-year CD with a 5-year CD. This would fit neatly into your CD ladder, because by now your original 5-year CD would be due to mature in just 4 years.

Compare automatic renewal with manual reinvestment

Don’t assume your CD will automatically renew. While this is often the case, some banks treat maturing CDs differently. Read the CD account agreement carefully so you understand what happens when the CD matures and how long the grace period is.

Benefits of automatic renewal

If your account agreement calls for the CD to renew automatically, this offers a certain amount of convenience. You’re saved the trouble of making a decision and notifying the bank. You also don’t have to worry about taking action before the grace period expires.

Why manual reinvestment offers more flexibility

While automatic renewal is convenient, it doesn’t give you a chance to account for shifts in the interest rate environment or changes in your needs. It also doesn’t give you the chance to look for better opportunities. Making an active choice of a new CD gives you the chance to find the best fit for current conditions.

Questions to ask before renewing

Here are some key questions to ask before renewing:

• Will I need the money within the next few years?
• What interest rates are available on CDs of different lengths now?
• Does my bank still offer a competitive rate on the CD length I want?
• What is the early withdrawal penalty on the CD I’m considering?
• Are my total deposits at the bank still within the applicable FDIC deposit insurance limits?
  

Common mistakes when a CD matures

Make a note on your calendar of when your CDs are due to mature. This will allow you to prepare so you can avoid some common mistakes that happen when a CD matures:

• Missing the grace period. This may cause your CD to automatically roll over, depriving you of the opportunity to make a better choice.
• Automatically renewing without comparing rates. Even if your bank offered a great rate the last time you opened a CD, don’t assume the same will be true now. Rates can change drastically over time, so you won’t know how competitive your bank’s rates are until you compare them with offers from other banks.
• Reinvesting for the wrong term. Just because you chose a certain CD length last time doesn’t mean that’s the right length now. You may have needs that are coming up sooner. You also may need a different length of CD for a CD ladder. Or the rate environment may have changed the relative attractiveness of short- and long-term CDs.
• Forgetting about taxes on CD interest. Unless your CD is in a tax-advantaged account like an individual retirement account (IRA), the interest is generally taxable each year in which it is earned. For example, with a 5-year CD, interest generally must be reported as income as it is earned, even if you don’t withdraw it until the CD matures. So, make sure you leave yourself enough cash available for these year-by-year tax payments.
• Not accounting for deposit insurance coverage limits. FDIC coverage depends on the depositor and ownership category, and deposits in the same ownership category at the same insured bank are generally added together when determining coverage. Before you reinvest proceeds from a maturing CD, you’ll want to check that the amount will still fit within applicable coverage limits even as interest grows the value of the CD over time.
  

Use this quick guide to decide what to do next

The following table summarizes some of your options when a CD matures:

Make the most of your maturing CD instead of renewing by default

Having a CD automatically renew may seem like a convenience, but it takes an important choice out of your hands. When a CD matures, it gives you the opportunity to use some or all of the money, choose a different length for your next CD, or shop for a better interest rate than your current bank offers.

Make the most of that opportunity by choosing what to do next with the proceeds of your maturing CD rather than having the bank make that choice for you.

Questions readers ask about CD maturity and reinvestment

Should I reinvest my CD if interest rates have dropped?

Possibly, but a change in interest rates is a good reason to rethink your strategy. If you expect rates to go back up, consider a shorter-term CD, so you’ll have the chance to reinvest sooner. Also consider other investment opportunities if CD rates are no longer attractive.

Can I negotiate a better CD rate before renewing?

Though it’s theoretically possible, being able to negotiate a better CD rate is unlikely unless you have a very large balance. However, raising the issue might prompt your bank to alert you to special offers that can boost your rate. It certainly doesn’t hurt to ask.

Is it better to switch banks when my CD matures?

It depends. It’s certainly worth a look to see if you can find a significantly better rate somewhere else.

Can I add more money when I reinvest my CD?

Yes, reinvesting is an opportunity to add more money to your next CD. Just check to make sure your total deposits at the bank remain within applicable FDIC coverage limits.

Do I have to pay taxes if I reinvest my CD?

Reinvesting a CD doesn’t generally eliminate the tax obligation on interest you’ve earned. CD interest is generally taxable in the year it is credited or otherwise made available to you, even if you reinvest the money.

How long do I have to decide after my CD matures?

The grace period for making a decision after a CD matures is typically about a week to 10 days. Check your CD agreement to find the exact length of your grace period.

What happens if I miss my CD’s grace period?

If you miss the CD’s grace period, in most cases the CD will renew automatically. At that point, your only other option may be to consider whether taking your money out of the CD is worth paying the early withdrawal penalty. Before your CD matures, you should check how long the grace period is and what will happen if you don’t tell the bank what to do within that period.