What Is a Renewable CD?

A Renewable CD Explained in Less Than 4 Minutes

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A renewable CD is a certificate of deposit (CD) that can be rolled over into a new one after the initial term expires. In some cases, CDs are automatically renewable, although you may have to specify that you want this automatic feature. In contrast, some CDs simply expire at the end of their term, and you would have to manually renew by investing in a new one. Let’s take a closer look at what a renewable CD involves.

Definition and Example of a Renewable CD

A renewable certificate of deposit is a savings account that pays interest on a fixed amount of money for an agreed-upon length of time, and allows you to start a new CD term after the first one reaches maturity.

Unlike a regular savings account where you might move money in and out a few times per month, a CD generally involves leaving your deposit in that account for the length of the CD’s term, which may be months or perhaps several years. The longer you agree to leave your money in the account, the more interest you’ll typically earn. If you pull the money out before the CD reaches maturity, you often face penalties.

With a renewable CD, your new term begins after the initial one ends. For example, a renewable five-year CD might have been purchased in 2017, reached maturity in 2022, and renewed for another five years so that the deposit continues to earn interest until 2027 (and perhaps longer if renewed again).

However, the interest rate wouldn’t necessarily be the same when your CD gets renewed. The funds will roll into a new CD that typically is based on current interest rates, not whatever the rate was for the previous CD. Different types of banks might offer renewable CDs but have their own nuances in terms of what they offer.

Many banks and credit unions offer promotional rates to entice investors to put their money into a new CD. Explore your options to determine if that is a better option than renewing your CD.

How a Renewable CD Works

A renewable CD works by either a financial institution automatically rolling the funds from a mature CD into a new one, or you making the choice to do so yourself. The Truth in Savings Act requires financial institutions to disclose what will happen to CDs at maturity if their terms are longer than one year.

If the CD is automatically renewable, the financial institution should specify if there is a grace period. That would allow you to still withdraw your funds if you do not wish to start a new CD.

Once any grace period expires, the CD would renew with the financial institution. So, while renewable CDs can help you continue to earn interest, some people might prefer to take their money out after maturity and explore other investment options rather than continue to hold it in a CD.

If you do choose to allow your CD to renew, the interest accrued from the initial investment would also be rolled into the new CD, so you would start with a higher amount.

What a Renewable CD Means for Individuals

Understanding renewable CDs can help individuals make better investment decisions. In general, investors might choose CDs if they do not want to take on too much risk, but still want to earn more interest than they would with a typical savings account. However, that doesn’t mean you should approach CDs without careful consideration.

In particular, a renewed CD would generally be based on current interest rates offered by the financial institution, so you may wish to compare rates and shop around for potential promotional rates on a new CD or other investment that may best suit your needs.

Key Takeaways

  • A renewable CD is a certificate of deposit that rolls over into a new CD after the initial one matures.
  • Some CD renewals occur automatically, while others offer investors the opportunity to decide if they wish to roll funds into a new CD after one matures, or withdraw and invest their money elsewhere.
  • The interest rates for a renewed CD might not be the same as they were for the initial CD, so you'll want to explore all options before accepting any rollovers.

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