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A certificate of deposit (CD) is called a “term deposit” because the depositor agrees to keep it with a financial institution for a specified amount of time. The end of that fixed term, whether it’s six months or 60 months, is called the maturity date.
It’s at maturity that the depositor has to decide what to do with the CD. If the depositor does nothing, the bank is likely to renew the CD at the same term, though the interest rate may be higher or lower than it was before. The good news is that CD savers get a brief window of time called a grace period before they have to take their next step.
“If you aren’t quite sure what to do with the maturing CD proceeds and you need more time to decide, CDs usually have a 10-day grace period that begins after the CD matures,” says Juli Erhart-Graves, certified financial planner and president of Worley Erhart-Graves in Indianapolis.
What happens when a CD matures
There’s no common policy among financial institutions on what to do when a CD matures. The issuing bank probably will notify you ahead of an impending CD maturity.
If you did not instruct the bank on what to do with the CD, it likely will renew it for the same term as before, Erhart-Graves says. So, if you originally opened a one-year CD, the bank would renew it for another year.
The CD also would be renewed at the current market interest rate.
“The bank sets the new rates, which may or may not be competitive,” says certified financial planner Rich Arzaga, university instructor and founder of The Real Estate Whisperer in Monument, Colorado.
Allowing your bank to renew the CD may be convenient, but it locks you in for another term at what could be a less competitive yield.
The grace period: A short window of opportunity
Each bank sets its own grace period for CDs, and grace periods can vary by CD term. Typically, they range from five to 14 days. For example, Wells Fargo has a seven-day grace period, while Chase gives 10 days. Bank of America has a one-day grace period for CDs that range from seven to 27 days, and its CD terms of 28 days or more have a grace period of seven days.
The grace period gives the CD holder time to withdraw the funds or renew the CD. “It’s during this time you can take your money from a CD without penalties,” Arzaga says.
If you decide to cash out the CD, and you didn’t instruct the bank to send you a check or transfer the funds to another account, expect to pay an early withdrawal penalty once the grace period is up. Early withdrawal penalties for CDs vary widely. At Ally Bank, for example, the cost of an early exit from a two-year CD is 60 days of interest. But at Popular Direct, the early-withdrawal penalty for a two-year CD is 270 days of simple interest.
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, but their policies may not be to your liking. For example, if you missed the grace period and your bank renewed your CD, you could miss the chance to reinvest your money in a higher-rate product.
Options for a mature CD
Maturity dates on CDs are tied to their terms. For example, a one-year CD matures in 12 months and a five-year CD matures in 60 months.
When a bank CD matures, you have several options:
- Put the money into a new CD. You can take the money and accrued interest and open a brand-new CD with a different rate and term. You could choose to open a no-penalty CD or a bump-rate CD, or even put the money into a different savings product, such as a high-yield savings account.
- Let the CD renew. You can let the CD renew for the same term and add or withdraw funds if you want. The yield on your renewed CD may be higher or lower than the previous annual percentage yield (APY), depending on the interest rate environment.
- Cash in the CD. You can collect your principal and interest and do with it what you like, including spending it, paying down debt, or investing in stocks, mutual funds or a Roth IRA, among other things.
Staying on top of CD maturity dates
Before you purchase a CD, confirm the maturity date with the issuing institution. Read the fine print, which should clearly state the terms of the CD.
Before purchasing a CD, ask the financial institution how it provides notice of maturity and how long the grace period is. A bank is required to notify you in writing before a CD matures, and that message will provide details about a grace period and whether the CD may renew automatically.
If you move or change email addresses during the CD term, update your contact information with the financial institution.
Find out whether the institution holding your CD allows for you to provide instructions in advance regarding what to do when the CD matures. If it does, you can tell the bank ahead of time what to do upon the CD’s maturity, and you won’t have to worry about taking action on a specific date in the future.
Once you buy a CD, track your maturity date.
“Something as simple as marking your calendar or setting up a reminder on your phone with the maturity date should do the trick,” Erhart-Graves says.
Alternatives for forgetful savers
If you’re concerned that you might forget about your CD maturing, a regular savings account or money market account may suit you better. Interest rates are rising, and you can find banks paying competitive yields on traditional savings accounts if you shop around.
Opening a no-penalty CD is another option. That way, if you lose track of when your CD matures, you can withdraw your savings without a penalty. Just be sure to check your bank’s terms and conditions for what happens when your no-penalty CD term ends. Also note that in return for the flexibility, a no-penalty CD often earns a lower rate than a traditional CD with the same term.
Another alternative is to simply use the money to pay down debt instead of opening a CD account.
“Paying down a debt that charges a higher interest rate than what the CD earns is an excellent idea,” Arzaga says.
Bottom line
CDs are a popular and low-risk investment option, but it’s important to stay informed and involved in the process. As a CD nears its maturity date, you must decide whether to renew it or withdraw the funds. With a brief grace period, you have time to make a decision without penalty. However, it’s important to keep track of the maturity date and update contact information with the issuing institution.
If you think you might forget about a CD’s maturity date, there are alternatives such as regular savings accounts or no-penalty CDs. By staying informed and proactive, you can make the most of your CD investments and potentially earn higher returns.
— Libby Wells contributed to a previous version of this article.
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