How Certificate of Deposit (CDs) Maturities Work

When a CD reaches maturity, you have a few options

Fact checked by Betsy PetrickReviewed by Katie MillerFact checked by Betsy PetrickReviewed by Katie Miller

A CD maturity date occurs when the CD’s term ends, whether in three months or three years. At maturity, the bank releases the CD’s money to you and the interest it earned. The bank or credit union will contact you before the CD matures and give instructions on your options.

When your CD matures, you can deposit the money in another account at the bank, like your savings account. You can roll it over into another CD term at the bank. You can also remove funds and spend the cash or deposit into a new, higher-rate CD at another bank. 

Key Takeaways

• When you take out a CD, you agree to leave your money in the account for a set amount of time, known as the term length of the CD. 
• At the end of this period, the CD will mature, and your bank or credit union will release your money and the interest you’ve earned.
• You can take out the money, deposit it in another account, or roll it over into another CD.
• Your CD provider should send you a notice in the weeks before your CD matures. This message will outline your options and how you can tell the bank your decision.

How CD Maturities Work

Banks and credit unions offer certificates of deposit (CD), which pay a fixed amount of interest over a specific amount of time. In exchange, the customer agrees to leave a lump-sum deposit untouched.

Effectively, you’re granting a loan to your bank. The bank is then loaning your money out elsewhere (at a profit) and guaranteeing you a better interest rate than in a standard savings account.

A CD’s term can be a few months or many years. Historically, the longer the term, the higher the interest rate. Recently, shorter CD terms, such as 6-month CDs, have sometimes paid higher interest.

In the month or two before your CD’s maturity date, the bank or credit union notifies you that the end of your CD term is approaching. It stipulates a deadline for you to provide instructions, indicating what the institution will do instead of receiving your guidance.

This message should also include instructions on how to tell them what to do with the maturing funds.

After the CD reaches maturity (or deadline), the account enters a grace period that may not last long, depending on the terms of your CD. If you don’t provide direction, the default will be to roll your proceeds into a new CD.

Typically, the institution offers the options below.

Roll Over the CD

Generally, this is equivalent to renewing your CD. The CD rollover or renewal most closely matches the term of your maturing CD. For example, if you have a 1-year certificate concluding, you’re rolling your balance into a new 1-year CD.

However, you won’t receive the same interest rate you had previously. Instead, you’ll get whatever interest rate currently offers for that term. This APY may be lower or higher than what you had previously. For this reason, it’s smart to go CD rate-shopping before your CD expires.

Transfer the CD Funds

With this option, you transfer the CD’s principal and earned interest into another account at that bank. Options include a savings, checking, or money market account.

Withdraw or Add to the CD Proceeds

Your original deposit and earned interest can be transferred to an external bank account or mailed to you as a paper check. You may also be able to add more money to your account and then renew the CD, as above.

Important

Make sure you move quickly when your CD comes to maturity. The grace period to withdraw CD funds may only last days, and if you don’t withdraw your funds and close the account, the money may be automatically rolled over into a new CD.

Issues and Problems

There are a couple of potential problems to be aware of regarding CD maturities.

First, you must act quickly once you notice your CD is about to mature. If you don’t close the CD within the grace period, your bank may automatically roll it over into a new one. Then, you may face an early withdrawal penalty to access the funds before the next maturity date.

The exact early withdrawal penalty amount will depend on the bank or credit union. Federal law specifies a minimum penalty for withdrawal within six days beyond the grace period for rollovers, but there is no maximum. You should check these fees before you withdraw money from your CD.

If your CD rolls over and your financial institution no longer pays a competitive interest rate, you’ll likely earn less in interest over the next year and miss out on better returns.

Go CD rate-shopping a few weeks before your rollover. Compare CDs for terms and rates. You might decide to move your funds to a CD offering a higher APY and a longer or shorter term.

Frequently Asked Questions (FAQs)

Can You Close a CD Before Maturity?

Yes, you can. After all, the money in the CD is yours. However, you will be charged a penalty for this.

Federal law sets a minimum penalty on early withdrawals from CDs, but no maximum penalty exists. If you withdraw money within the first six days after deposit, the penalty is at least seven days’ simple interest.

Review your account agreement for policies specific to your bank and your account.

How Long Is a CD Grace Period?

It depends on your bank or credit union and it can vary significantly. Bank of America has a one- to seven-day grace period while Navy Federal Credit Union gives you 21 days.

Can I Avoid CD Early Withdrawal Penalties?

In some cases, your bank may waive early withdrawal penalties for CDs. However, they are not required to do this by law.

The Bottom Line

When you take out a CD, you agree to leave your money in the account for a set amount of time, known as the term length of the CD. At the end of this period, the CD will mature, and your bank or credit union will release your money and the interest you’ve earned. You can take a check, deposit the funds in another account, or roll it into another CD. Watch for a message outlining your options and how you can tell the bank your decision.

Read the original article on Investopedia.