A certificate of deposit, or CD, is a time-deposit offered by banks. While these accounts can be a part of a sound financial planning strategy, they aren’t the best choice for long-term investments. Here’s what you should know about CDs, and what to do when your CD matures.
On the day that a CD term ends, or “matures,” you typically have less than two weeks to decide what to do next or let your bank decide for you. This is your opportunity to change up your money, either in a new CD or elsewhere. In this guide we wil break down how it works.
What is a CD?
A certificate of deposit, or CD, is a time-deposit offered by banks. While these accounts can be a part of a sound financial planning strategy, they aren’t the best choice for long-term investments. When you put money into a CD, you’re agreeing to leave your money on deposit at the bank for a set period of time, typically from three months to five years. In exchange for giving up access to the money, banks offer better rates on CD accounts than on standard deposit products such as savings accounts and interest-bearing checking accounts.
The end of the agreed-upon time frame is known as the CD’s maturity date, and after this time the money in the CD can be either withdrawn or rolled over into a new CD. Account holders can choose to withdraw their money early, but it will be subject to a penalty that depends on the particular bank’s policy.
What Happens When Your CD Matures?
When a certificate of deposit (CD) matures, you’ve got options. So, what’s the best thing to do with money available from a maturing CD?
You have a brief window—often ten days or so—to decide what to do and provide instructions to your bank. Doing nothing usually means the CD will renew: You start over with another CD that has the same term as before. But that’s not necessarily your best option, and it’s always best to proactively choose what happens to your money instead of letting the bank do it for you. Here are 3 options you should consider during your grace period:
- Withdraw your CD funds and transfer them into a different account: This gives you the chance to either put that money into a more accessible vehicle, such as a checking or savings account, or invest it. If you used a CD to pursue short-term savings goals, such as buying a home or car, you’ll likely want more access now. If, on the other hand, you want a better return and are willing to accept more risk, then moving money into a brokerage account is a logical move.
- Let your bank renew your CD: This is the most convenient option but not necessarily the best. Letting your bank renew your CD might mean ending up with a lower (or higher) rate because your bank will likely give you the same rate it offers for new CDs with that term.
- Withdraw your funds and deposit them into a different CD: You might decide your CD funds don’t need more risk or accessibility. In this case, opening another CD may be the right choice. Compare several rates across banks, especially at online banks. You might also want a different type of CD
Early Withdrawal Penalty
If you pull your money out of the CD before maturity (sometimes known as “breaking” the CD), your bank might charge an early withdrawal penalty. That penalty is often quoted as several months’ worth of interest, or you might pay a flat fee. In some cases, the penalty just wipes out the interest you earn, and you get 100% (or more) of your money back. In other cases, the penalty can eat into your initial investment, and you receive less than you put in.
Your bank or credit union is required to send you a notification shortly before your CD matures. The notification might arrive by regular mail or email, depending on how you set things up with your bank. Pay attention to these notices
Longer Term Investments
If you have plenty of cash available and no debt, you may want to use different types of investments for longer-term goals (like retirement). CDs are safe, and that may be exactly what you need. But if you have a long time horizon and the ability to take more risk, a diversified portfolio could be appropriate. Ask a financial planner for advice on how to save for your goals.
Conclusion
Overall, a certificate of deposit is a great place to save your money. Once a CD matures, you have three options: withdraw your money and put it in another account, withdraw and open a different CD, or let your CD renew. Make sure to do your research so that you know which option is best so that you make the most on your funds.
In addition, we have a list of bank promotions to get some extra cash in your pockets today. You may also want to check out savings accounts if you want to get started on saving up money.
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