What happens when a CD matures: Strategic options
Certificates of deposit (CDs) are an appealing tool for Americans looking to grow their savings with minimal risk. If you have a CD maturing, though, you don’t have much time to decide what to do with the funds. A CD grace period is traditionally no longer than 10 days. Renewing a CD is possible, but you may have other plans for that money. Missing the grace period can result in automatic renewal of the CD and potential penalties if you later need to withdraw the funds early.
If you’re curious about what happens when a CD matures, this guide covers the available options and why active monitoring is essential.
What happens when a CD matures?
The CD maturity date is the earliest savers can access their principal and earned interest without penalty. CDs range in length from several months to five or more years. You can withdraw the funds, transfer them to another investment opportunity, or renew the CD.
What is a CD grace period?
A CD renewal grace period is a short window after maturity during which you can take action with the money. While you can make changes during the term, you may incur a fee for doing so.
There is no law directly requiring banks to have a grace period of a certain length. However, the Truth in Savings Act requires institutions to disclose their terms to customers. A seven- to 10-day grace period is standard industry practice among many banks.
If you do nothing, banks typically renew the CD automatically using the terms and rates available on that date. You may receive the same rate and term, but it’s not a guarantee. Banks send a maturity notice ahead of time, but how they notify you can vary from bank to bank.
What to know before your CD matures
Withdrawing funds early from a CD is often problematic, as you will incur an early withdrawal penalty that can be at least several months’ worth of interest. Failing to take action before maturity could leave you locked into a new term and facing penalties if you need to access the funds early.
That’s not the case when cashing out a CD at maturity. It’s wise to compare available CD rates before your CD matures to see what’s currently available if you plan to keep the money in a CD.
CD interest is generally taxable in the year it is paid or made available under IRS rules. You will receive a 1099-INT if the interest meets reporting thresholds. Don’t overlook FDIC coverage, either. FDIC coverage is $250,000 per depositor, per insured bank. Keep FDIC coverage limits in mind when managing maturing CDs.
Options when your CD matures
Savers have various options when a CD matures. Analyzing your holistic financial goals is the best way to identify the most effective use of the funds.
Rolling into a new CD
When a bank CD matures, many savers roll the funds into a new CD. Banks automatically renew a CD within 10 days if you don’t act. Regardless of whether this occurs or if you choose to move the money into a new CD, the bank rolls the principal and earned interest into the new CD.
Rates and terms may differ from the original CD. Treat the new CD as any other savings vehicle. Verify the length, compounding frequency, penalty schedule, and APY. If your timeline is flexible, review available rates and terms to determine what best fits your needs.
Don’t overlook asking for a better rate. Banks won’t always offer a higher rate, but if you’re a good customer or a competitor is offering a better rate, it doesn’t hurt to ask if the bank will increase its rate.
Renewing the CD may seem counterproductive, but it depends on your situation. If the money is for a specific goal and you don’t need access, or you value preserving the funds, renewing can be sensible.
Moving funds to a high-yield savings account
CDs are helpful vehicles for capital preservation, but they lack liquidity. A high-yield savings account (HYSA) is a suitable alternative that offers liquidity. CDs offer fixed interest rates for the duration of the term, while HYSA rates can fluctuate over time.
HYSAs can be a good fit for people who want to maximize interest on emergency savings, save for a near-term expense, or maintain flexibility while monitoring CD rates. To avoid delays or complications, it’s best to confirm transfer requirements before maturity occurs so you can move funds during the grace period.
Banks vary in their transfer requirements, so confirm the process ahead of time to avoid delays during the grace period.
Exploring annuities
If the funds are intended for long-term needs or income generation, an annuity could be a suitable option upon a bank CD’s maturity. An annuity is effectively a contract between the purchaser and an insurance company. Annuities can provide growth or future income, with varying guarantees, depending on the annuity.
Although there are numerous types of annuities, fixed annuities are a good alternative for maturing CDs. Some annuities may offer higher rates or income guarantees, and can be a good tool for retirement planning. Surrender charges and other fees can erode value, though.
CDs are simpler and often don’t have the complexity present in most annuity contracts. Speaking with a financial advisor is wise when considering CDs vs. annuities to help you determine which is best for your situation.
Building a CD ladder
One risk of CDs is the inability to withdraw funds without penalty. A CD ladder is a strategy that allows savers to lock in rates while still having regular access to cash without sacrificing higher rates. The strategy reduces reinvestment risk while giving savers more flexibility as interest rates change.
Creating a CD ladder isn’t difficult. You select the number of “rungs” you want and choose the spacing. For example, you could establish a ladder with five rungs, all one year apart, and place 20% in each rung. Let’s say you’re saving $50,000 in the ladder. You will divide it as follows:
- $10,000 in a 12-month CD
- $10,000 in a 24-month CD
- $10,000 in a 36-month CD
- $10,000 in a 48-month CD
- $10,000 in a 60-month CD
When the 12-month CD matures, you either use the cash for another investment or place it in a new 60-month CD. After the first several mature, assuming you continue to reinvest in 60-month CDs, you’ll have a CD mature annually. Ultimately, CD laddering offers more flexibility with potentially higher rates.
How to manage CD maturity dates
Passive management is rarely the best approach when using CDs. Following a few simple steps can help you avoid unwanted renewals.
Using reminders to track CD maturity dates
Using a digital calendar is a good method to manage CD renewals. You can use calendars to create multiple reminders before CD maturity. Create the first reminder 30 days before maturity to prompt you to research current rates, then create several more as maturity approaches.
If you use a budgeting app, it may offer a way to monitor maturing CDs. You can even use a notes app or spreadsheet to stay on top of maturity dates. The specific method matters less than staying consistent.
Automatic notifications
Enabling automatic notifications is a wise step for people who may forget or who don’t actively monitor CD maturity dates. Ask your bank which notifications they offer and select the method that works best for you.
If possible, ask the bank to include renewal terms and APYs in its notification. Don’t forget to verify that the institution has your current contact information, so you receive the messages.
Working with your bank
Banks value relationships, and establishing a strong relationship with your bank can help you manage maturing CDs more effectively. Consider speaking with a personal banker to establish a working relationship. Not only does this aid in potential requests for higher rates, but it can also lead them to contact you directly when they notice one of your CDs approaching maturity.
Example questions to ask the personal banker include:
- What is my exact grace period window?
- Can I change the instructions online?
- What term or rate will this renew at if I do nothing?
- Do you allow standing directions on maturing CDs?
The answers to these questions can help you avoid a last-minute rush to make a decision.
Alternatives to CDs that require less management
CDs are an appropriate tool for people wanting to maximize interest and preserve capital. Regularly monitoring maturity dates may make CDs less valuable for some savers. Thankfully, some alternatives provide similar earning opportunities.
High-yield savings accounts
HYSAs are an attractive substitute for savers who don’t want to manage maturity dates. The savings accounts are liquid and offer competitive interest rates, though rates can fluctuate over time.
Most brick-and-mortar banks don’t offer HYSAs, so you will need to search online to find the best high-yield savings accounts. In most cases, you can transfer funds to your standard bank account within one business day, and you get the same FDIC coverage.
Money market accounts
For people who want some check-writing capabilities, a money market account is a worthwhile solution. Money market accounts generally pay rates similar to HYSAs, but they let you write a set number of checks each month on the account. This provides relative safety and the ability to pay bills without monitoring CD maturity dates.
It’s not uncommon for banks to tier interest rates and have minimum balance requirements for money market accounts. Research the best money market accounts available to find an institution that works best for you.
Other low maintenance options
There are other options for savers wanting to maximize interest opportunities. Treasury bills and bonds are typically low-risk and straightforward, but they still have maturity dates to manage.
If you want a CD with limited liquidity, a no-penalty CD is a possible replacement. After a lock-in period, usually seven days after opening, you can withdraw some funds. The no-penalty CD offers a fixed APY, but it’s usually lower than a standard CD.
If long-term growth is a goal, an automated investing platform like Betterment is a potential alternative. These platforms typically do not offer the same principal protection as CDs.
Bottom line: What to do when a CD matures
CDs are a valuable tool for protecting capital and earning interest, but they’re not entirely passive. Failing to plan ahead can leave you stuck with terms or rates that no longer fit your needs. Once a bank CD matures, you typically have up to 10 days to act on the funds. Establishing a plan before opening a CD can help you make informed decisions when the time comes. Don’t overlook researching the best CD rates at the time to determine whether renewing is best or if you need to look elsewhere to grow your money.
