When a certificate of deposit (CD) matures, you get your money back without having to pay any early withdrawal penalties. The CD's term has ended, so there are no bank-imposed withdrawal restrictions at maturity. You can do what you want with the money, but if you buy another CD, you won't get the same interest rate. That might be a good or bad thing, depending on how rates have moved since you bought the last CD.
Keep reading to learn more about what to expect when your CD reaches maturity.
- Certificates of Deposit (CDs) are like savings or investment accounts that earn interest while your deposit is locked, until reaching a date of maturity.
- CDs with longer timeframes often come with higher interest rates.
- You will receive a notice from your financial institution when your CD is about to mature, at which time you have a range of options.
- There are many strategies to help guide your CD choices, which include forecasting interest rates and minimizing risk through multiple maturity dates.
Certificate of Deposit Overview
CDs are timed deposits. When you buy a CD, you are depositing money into an institution that promises to pay an interest rate in exchange for your promise to keep the deposit with the institution for a set length of time.
CDs typically pay higher interest rates than what is available from savings accounts. Since you promise to keep your money locked up for a certain amount of time, the institution is willing to pay a higher rate for your deposit.
You get to choose the timeline for your CD when you buy it. CD timelines are usually expressed in months, and they typically range from three months on the short end to several years on the long end. However, your institution may offer shorter or longer CDs.
Interest rates will vary based on the timeline of the CD. You usually get a higher interest rate in exchange for choosing a longer-term CD.
The maturity date is often part of the CD's name. For example, if you buy a "six-month CD," the CD will mature six months after you deposit your money into that account. On your statements (online or on paper), you might see the date you purchased the CD or the date that the CD comes due.
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 seven days' worth of simple interest, or you might pay a flat fee.
In some cases, the penalty 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.
Some CDs allow you to pull funds out before maturity without any penalty. These "liquid" CDs are increasingly popular because people like flexibility. However, in exchange for the ability to pull out early, you pay a cost in the form of a lower CD rate, so you don't earn as much on your money. Some liquid CDs allow you to pull all your money out, while others set limits.
What Happens When a CD Matures
When your CD matures, you have several options, but it's best to be proactive. If you don't choose in time, a decision may be automatically made for you.
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 the preferences you have set up with your bank. Pay close attention to these features:
- The maturity date of your CD
- The default action if you do nothing (the matured CD may automatically roll over into a new CD, or it may deposit cash into your account)
- The rate on renewing CDs (if this isn't obvious, make sure you find out—the rollover rates could be lower)
- The maturity date for rollover CDs, if applicable
- The deadline to change your default action or request a new action
If you do nothing and you have set up an automated rollover, your bank will usually put your money into another CD with the same length as the CD that just matured. For example, if your six-month CD is maturing, you may have a 10-day window of time after maturity to provide instructions to your bank. If you don't provide new instructions, your bank may put the money into another six-month CD. However, you might not earn the same rate that you were earning on the last CD.
Banks rolling over mature CD funds will pay what they currently offer to people buying six-month CDs, which might be more or less than you earned on the previous CD.
You Have Options
The most important thing to know is that you have options. Upon your CD's expiration date, you can (among other things):
- Let the mature CD roll over into a new CD and take whatever interest rate you get
- Choose a different CD (perhaps a different maturity or different kind of CD structure)
- Choose a different institution that is offering better CD rates
- Deposit the cash from the mature CD into your checking or savings account and use it for something else entirely
One way to approach mature CD funds is like bonus money, such as if you found an extra $20 bill in your pocket. Evaluate your financial situation and your goals and decide how this extra money can help you meet those goals.
How Long Should Your Maturity Be?
When buying CDs, you get to choose how long the CD will last, and you might not know which maturity to choose. Again, identifying your goals and required cash flows should help guide you toward the right maturity. Here are some questions to consider.
Do You Want Flexibility or Yield?
In general, longer terms come with higher interest rates. If you want to maximize your earnings, a one-year CD typically pays more than a three-month CD. However, by opting for a one-year CD, you have less flexibility with your money than you would have had if you only signed up for a three-month CD.
In What Direction Are Interest Rates Going?
Locking up for a longer period might or might not be wise, depending on where interest rates are going. While it's impossible to know for sure where an interest rate is heading, you can gauge the general interest rate environment to estimate what will happen in the coming months and years.
- If you think rates will move higher: It might be better to stick with short-term CDs, liquid CDs, or bump-up CDs. That way, you'll have a chance to reset your interest rate sooner, and if interest rates increase, you'll get a better rate when you reset after the short-term CD matures.
- If you think rates will fall: Locking in the current rate might make more sense. If you buy a two-year CD, for example, your interest rate won't reset for two years. If the interest rate falls during that time, it won't affect you as much as it would if you had only bought a three-month CD.
Ladder for Flexibility
Fortunately, you don't have to pick just one maturity. It may be a good strategy to spread your money among different maturities. For example:
- A portion could go into a six-month CD that rolls over into a new six-month CD at maturity.
- A portion could go into a one-year CD.
- The remainder could go into a two-year CD.
With that approach, you'll have a maturity date coming up every six months or so, so you'll have access to money if you need it. That helps you avoid paying penalties, and you can also manage the risk of getting stuck with the wrong interest rate.
Frequently Asked Questions (FAQs)
Do I have to pay taxes on my CD earnings?
Yes, the money you earn from the interest on a CD is treated like regular investment income, and you are required to pay taxes on it at your appropriate income tax rate when you cash out.
Can I lose money in a CD?
For the most part, CDs are very safe investments. If you choose a CD that is insured by the FDIC (which most are), the risk that you will lose any amount of your principal deposit is extremely low.