Every certificate of deposit matures on a specific date, at which point you can collect your principal investment and the interest paid over the life of the CD. But if you don’t take action when a CD matures, what happens to it?
In most cases, the financial institution will automatically renew the CD. The CD yield may be higher or lower than it was originally, depending on the current interest rate environment. And there may be unwanted fees or long-term investment periods involved. Find out what happens when a CD matures and what to do about it.
What happens to forgotten CDs?
“Usually, if you fail to instruct the institution to do something when your CD matures, it will be rolled over to a product with a similar maturity, at the prevailing rate,” says Mike Schenk, chief economist at the Credit Union National Association. “That means if someone who took out a five-year CD five years ago doesn’t respond to the notice of that CD maturing, today he will have another five-year CD.”
Of course, there’s no general policy across financial institutions, and some “will cancel the CD and dump the proceeds into a general savings account,” Schenk says.
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Why does it matter?
Even if you forget about a maturing CD, you won’t lose the funds. Banks and credit unions will hold them for you in some way. However, their policies may not be to your liking. For instance, if you need the cash from the CD and you don’t advise the bank to send you a check, you’re likely to pay penalties to withdraw those funds once they’re rolled into another CD.
If you want to reinvest into another CD, but rates are now better at another institution, you won’t have the opportunity to switch to a higher-rate product if your bank has already rolled your funds into another product.
“There are no additional fees related to rolling over the CD and holding the new CD to its new maturity date,” says Kenneth Carow, professor of finance at Indiana University’s Kelley School of Business. “However, there are penalties should you wish to withdraw the funds prior to the newly established maturity date.”
Early withdrawal penalties for CDs can vary widely and some are harsher than others. At Ally Bank, for example, the cost of an early exit from a 2-year CD is 60 days of interest. But at Popular Direct, the penalty for a CD maturing in the same amount of time is 270 days of simple interest.
Avoid the issue
With careful planning, you can avoid forgetting about your maturing CDs and never worry about what will happen to them without your guidance. Before even purchasing a CD, ask the financial institution how it provides notice of maturity and how much time you’ll have between the notice and your deadline to take action.
Many institutions offer a grace period following the maturity of a CD, Carow says. You may have between seven and 10 days — or less — to decide what to do with the funds you invested. But find out the specifics in advance. “Anything that might be important to you on the back-end (of a CD transaction) is important to ask about on the front-end,” Schenk says.
If you move or change email addresses during the CD’s term, update your contact information with the financial institution. That way, when the notice of CD maturity is sent, you’ll be sure to receive it. Make a habit of opening mail from financial institutions in a timely manner.
While most financial institutions will send correspondence notifying you that your CD is about to mature, keep your own records.
“You need to keep track of what you have and when it’s maturing,” says Kathryn Fisher, a senior financial adviser, wealth management at Moss Adams in Seattle. “Shop around, but don’t fret too much about a 0.01 percent or 0.02 percent return difference. The hassle of having CDs at three or four different institutions can negate the financial benefits.”
The FDIC insures up to $250,000 per depositor, per institution for each ownership category, so most people do not need to worry about diversifying across institutions.
Finally, find out if the institution holding your CD allows for prematurity instructions. If it does, you can simply provide the instructions in writing for what to do with the money in your CD upon maturity, and you won’t have to worry about being there on a specific date to take action.
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Alternatives for forgetful savers
If you’re someone who’s bound to forget about a traditional CD you’ve opened, consider whether it’s best to park your money elsewhere.
Keeping your money in a regular savings or money market account, for example, may be a better idea. Since the Federal Reserve has cut interest rates three times in recent months, there’s barely a difference between short-term CD yields and the interest rates tied to more liquid savings accounts.
A no-penalty CD is another option for the absent-minded. If you’re unaware when your CD matures (and it renews automatically as a no-penalty CD), you will be able to withdraw your savings without worrying about a penalty. Just make sure to check your bank’s terms and conditions to find out exactly what happens when your no-penalty CD term ends.
— Note: This story was revised with the updated last name and job title of Moss Adams senior financial adviser, Kathryn Fisher.