What Happens When a CD Reaches Maturity?
Parking extra cash into a savings account may seem like a secure way to safeguard your money, but there may be better options, especially if you don’t need to access the cash anytime soon.
The good news is that savings account interest rates are up, but many big banks still offer meager interest rates that make it hard for your money to grow. When you put your money in a low-interest account, you effectively give your bank an interest-free loan on your capital.
You can make your money work harder by purchasing an interest-bearing certificate of deposit (CD) from a federally insured financial institution, such as a regional bank or credit union.
The good thing about savings accounts is that you can park your money there and leave it. There’s no expiration date. Not so with CDs. So what happens when a CD expires?
What Are Certificates of Deposit, and How Do They Work?
CDs are standard savings instruments that deliver savers returns based on a fixed interest rate over a set period.
They pretty much work like standard savings accounts. When you purchase a CD from a federally insured bank or credit union, you make a fixed deposit for a fixed length of time, called the term.
When the CD term ends (i.e., reaches its maturity date), you get your money back. Along the way, you’ll earn interest on your CD deposit that’s typically better than what’s offered for standard savings accounts and often even better than high-interest savings accounts. When your CD comes to term, you can cash out or roll the funds into a new CD.
CD terms range from short-term options such as 30 and 60 days to 10 years. Longer-term CDs usually offer better (higher) interest rates than short-term CDs.
Since CDs are only issued by financial institutions backed by the Federal Deposit Insurance Corporation (FDIC), they are guaranteed up to $250,000, making them among the safest investments and an excellent option to help reduce your overall investment risk profile. However, they are also highly illiquid investments — you can’t access your initial investment capital without incurring an early withdrawal penalty.
Which Banks Have the Best CD Rates?
Hundreds of banks offer CDs, and there’s fierce competition among them to offer the best rates. Use our MoneyRates CD rate-finder tool below to sort through the list to find a CD that fits your financial goals.
What Happens with Early CD Withdrawal
Two huge benefits of CDs are their predictable returns and low investment risk. Those benefits come with a price, though. You can only touch your money once the CD reaches maturity. If you take your money before the term ends, you’ll incur an early withdrawal penalty.
While early withdrawal penalties vary among financial institutions, expect a penalty equal to seven days of cumulative interest at a minimum. At worst, you’ll likely pay a percentage of the interest you would have earned had you left your money alone and kept the CD intact until the end of its term. Following that thought, longer-term CDs usually have stiffer penalties because you would have earned more interest.
Suppose you do need to access your money before your CD reaches maturity. You’ll have to do some math to determine whether the penalty will affect your original investment capital.
If you purchased a CD with a seven-year maturity date and withdrew your money in the initial year, you’ll likely lose a portion of your initial deposit.
Banks typically charge three months of interest, but the early withdrawal penalty could be higher. Check your CD’s agreement before breaking the term contract.
Types of CDs
There are many different types of CDs to accommodate a wide range of savers and their investment objectives. Here is a brief overview of the most popular types of CDs, though there are many more.
Traditional CDs are standard and interest-bearing with fixed interest rates and terms.
Also called no-penalty CDs, these savings vehicles let you withdraw your money before the CD reaches maturity without incurring a penalty.
These CDs are like traditional CDs but with higher interest rates.
These CDs have high minimum investment amounts, often starting at $100,000.
With this type of CD, you can increase your initial deposit amount.
No-penalty (liquid) CDs don’t levy a fee if you need to withdraw your money before the CD matures. These savings vehicles work like regular CDs but offer lower interest rates than standard CDs.
You’ll get less yield over the term length, but you’ll have the security of increased liquidity if you happen to need it.
How Much Money Can You Put into a CD?
There’s typically no cap on how much money you can put into a CD.
However, it’s important to note that the FDIC only insures CDs up to $250,000. Putting more than that into a single CD makes little sense, especially since you can purchase as many CDs as you need with varying terms to meet your financial goals.
If you cap your investment at $250,000 per CD, you’ll get increased security knowing your money is fully backed by the FDIC.
How Much Money Can You Make by Purchasing a CD?
Online financial institutions that offer high-yield CDs usually have interest rates that are much higher than those at brick-and-mortar institutions. Depending on term length, interest rates could be as much as 5% or slightly higher.
What Happens When a CD Matures?
You have several options when your CD reaches its maturity date.
Typically, you’ll have a short window of about two weeks to decide on what to do with your money. If you don’t inform your financial institution of your plan, the CD might automatically renew at current interest rates. That’s one option. Your other options are as follows.
You can take your initial investment and any accrued interest and move that money into an investment or savings vehicle of your choice.
Rolling Over the Funds
You can use the funds to purchase single or multiple CDs with maturity dates that meet your investment objectives.
What Is CD Laddering?
One common strategy for CD investors is CD laddering. Using this approach, you spread your investment capital over multiple CDs with staggering maturity dates.
If you have $40,000 to purchase CDs, you would build a CD ladder by purchasing 12-, 24-, 36- and 48-month CDs for $10,000 each. You roll the money into a new four-year CD when each CD matures.
This strategy allows you to enjoy continuous annual maturity dates on each four-year CD and provides a steady income stream. It also provides increased liquidity and will enable you to access better interest rates on long-term CDs.
It’s important to remember your CD’s maturity date because your financial institution only allows a short grace period before automatically renewing your CD.
However, your bank or credit union must let you know in writing about upcoming CD maturity dates and provide details about the grace period and automatic renewal. Make sure you read your CD’s maturity notice carefully.
Shopping for a New CD with Better Terms
There’s no standard formula for shopping for the best CD interest rates and terms because individual investors have different financial objectives.
Your primary objective is to grow your investment capital, so you’ll want to find the highest interest rates on CDs with maturity dates that align with your liquidity needs.
You’ll also want to choose deposit amounts that generate the desired yield while providing enough liquidity to avoid financial distress.
A Few Other Things to Keep in Mind
Online banks typically offer higher interest rates than brick-and-mortar financial institutions because they have such drastically reduced overhead.
Make sure you are aware of any early withdrawal penalties.
Purchase the type of CD that aligns with your investment goals.
Pros and Cons of Short Versus Long Maturity Dates
Short-term CDs provide savings with increased liquidity. You’ll get your money back in one, three, six, or twelve months. The tradeoff is significantly lower interest rates, which means less yield.
Meanwhile, long-term CDs come with much more favorable interest rates, but your money will be tied up longer. You won’t be able to access it without incurring an early withdrawal penalty.
Novice investors may opt for a CD investment strategy that blends short- and long-term maturity dates to get a better feel for how the maturity process works and the types of returns generated on their capital.
Putting It All Together
Purchasing CDs can align with a wide range of investment strategies and investment goals.
You’ll want to look for the best interest rates on CDs with maturity dates that give you sufficient liquidity to meet current and future financial obligations.
Since CDs have fixed interest rates, you’ll enjoy a predictable rate of return with near-zero risk and a federal guarantee that your money is protected.
If you have any additional questions, consider discussing your financial goals with a banker or advisor at your preferred financial institution.
Frequently Asked Questions
Here are a few commonly asked questions about CDs that we haven’t yet addressed.
The answer to this question lies in your financial goals. If you seek predictable returns with minimal risk, then yes. If you desire a higher yield, other options may better meet your investment objectives.
It depends on your appetite for risk and which stocks you pick. Public equities markets can generate higher yields, but these investments carry much greater risk. CDs are virtually risk-free, though their yield can be lower than investing in the stock market.
It sure is. Interest on CDs is taxed just like ordinary income you earn from working.