If you opened a certificate of deposit (CD) earlier in this Federal Reserve rate-hike cycle, you may soon be faced with what to do with it when it reaches its upcoming maturity date. Fortunately, the choices are fairly straightforward and easy to execute.
Unfortunately, making the wrong move—or rather non-move—could not only cost you dearly, but could also make your funds inaccessible for a lot longer than you’d like.
- Whenever a CD is approaching its maturity date, you have a decision to make on what to do with the resulting funds. Taking thoughtful and timely action here will serve your finances well, while inaction could prove to be a costly and painful error.
- In the weeks or months leading up to your CD’s maturity, the bank or credit union will notify you with instructions on how to convey your request about what to do with the CD funds.
- If you don’t specify otherwise, the money will be automatically rolled over into a standard-menu CD that is closest in duration to your original CD, at whatever the current rates are.
- Allowing this could land you in a new CD that not only pays a much worse rate than you can earn by shopping the best current options, but also locks your money up for a new term, when instead you may prefer to move the funds into a shorter-term CD or a flexible liquid account.
- The smarter play is to plan ahead, scheduling a future reminder to shop around for other options before the maturity date rolls around. Even if you can’t make a final decision in time, you can still instruct the bank to move the funds to a savings account, giving you more time to make a carefully considered decision on where to put the money next.
What Happens With Maturing CD Funds
Every CD has a set maturity date, established when you finalize the process of opening the account and funding it. This is the date on which you are free to withdraw your money, including all the interest you’ve earned, without incurring an early withdrawal penalty.
In the month or two before that date rolls around, the bank or credit union will contact you, usually by letter, reminding you that the CD is maturing and providing instructions for how to let them know what you want done with the funds. They may provide a reply form and envelope, and/or instructions for how to make your wishes known through online banking or secure email.
With most institutions, there are usually three options:
- Transfer the CD funds into another account at that institution
- Transfer the funds to an account at another bank
- Let the CD “roll over” into a new CD
To accomplish the first two, you’ll need to submit your instructions to the bank by the deadline they stipulate. But if you do nothing, or fail to act in time, you’ll unfortunately get Door No. 3.
Why Letting CDs Roll Over Is a Costly Mistake
If your goal is to keep the money saved, you’re forgiven for thinking it’s a good idea to simply move it right into another CD. After all, that will avoid any temptation to spend it before you sock it away again.
The problem—and it’s a big one—is that automatic CD roll-overs give you zero choice on the certificate your funds will be moved into. The bank will simply transfer the funds into its standard-menu CD that most closely matches the duration of your original CD.
One of today’s leading options in our daily ranking of the best CD rates provides a good example. Right now, you can open a promotional 15-month certificate at NASA Federal Credit Union that pays an excellent 5.45% APY. If you do nothing before that 15 months runs out, here’s what the fine print says will happen with your funds:
“Special certificate renews automatically to a standard 12-month term at the rate in effect at the time of renewal unless instructed otherwise.”
That may not seem like a big deal, but it can cost you big time. That’s because banks and credit unions always roll your proceeds into a standard CD, never a promotional offer with a more attractive rate. So for example, while NASA FCU’s 15-month promo certificate pays 5.45% APY, its current standard 12-month CD pays just 4.75% APY.
The practice of rolling over CDs into a standard-rate CD of the closest similar duration is not unique to NASA FCU policy. It’s the industry-standard practice across banks and credit unions that offer CDs.
Also, while this credit union offers a lot of at least “acceptable” rates on its standard CDs, at another institution you could end up locked into a CD that pays a truly subpar return for months or years into the future.
When you let a CD roll over automatically, you entirely give up your opportunity to shop around for the best rates at that time, which is the No. 1 rule for smart CD investing. Adding salt to the wound, your funds will now be locked in for some new duration on an inferior rate—potentially far inferior—with no way to exit unless you agree to pay the early withdrawal penalty.
Furthermore, you forfeit your chance to make a different decision with your money, such as choosing a longer or shorter-duration CD this time around, or moving the funds into a high-yield savings account.
Because your financial situation evolves over time, and because the interest rate environment is also always changing, choosing a new CD should always be done carefully with current factors and rates considered.
The Longer Duration Your CD, the Worse Your Potential Pain
In the example of a 15-month CD rolling over into a 12-month CD, that may not be the end of the world. Perhaps you don’t need the money during the next year. But the pain of automatic rollovers is multiplied with longer-duration CDs.
Imagine you initially committed to a 3-year CD. Finally the day of maturity is arriving and you’ll again have access to those funds. But if you let the certificate balance roll over, it will move into another 3-year CD, meaning you’ve essentially locked yourself out of using that money for six years.
Obviously, the hit is even worse with a 4-year or 5-year certificate, while less with a 3-month or 6-month CD. But this fact remains: you may want to access your funds much sooner than a second CD term will allow. That’s why the smartest move is consciously deciding for yourself how you want to deploy your maturing CD funds, rather than have the decision made for you.
Smart Money Moves to Make Instead
Now that you’re hopefully convinced to never let a CD just automatically roll over without carefully thinking it through, here are three ways to set yourself up as a savvy CD saver:
- As soon as you open a new CD, set a reminder on your calendar a month or two before its maturity date. Not only will this give you some time to decide what you’d prefer to do with the money, but it will also help you notice if you haven’t received notification from the bank on how to submit your instructions.
- When you get that tickler, start shopping around for what the top current CDs are paying, as well as what you can earn with the best high-yield savings accounts or best money market accounts. This can help lead you to a decision on whether to keep the money in a CD (and if so, with how long a term?), or to move it to a liquid account with a high-yield but more flexible access.
- Even if you can’t make a final decision on what to do with the funds before your CD’s maturity, instruct the bank to transfer the CD balance into a savings account at that institution or another one where you have an account. The funds can sit there safely while you decide what to do next, while avoiding the risk that they get committed to a new CD term.
Rate Collection Methodology Disclosure
Every business day, Investopedia tracks the rate data of more than 200 banks and credit unions that offer money market, savings accounts, and CDs to customers nationwide, and determines daily rankings of the top-paying accounts. To qualify for our lists, the institution must be federally insured (FDIC for banks, NCUA for credit unions), and the account’s minimum initial deposit must not exceed $25,000.
Banks must be available in at least 40 states. And while some credit unions require you to donate to a specific charity or association to become a member if you don’t meet other eligibility criteria (e.g., you don’t live in a certain area or work in a certain kind of job), we exclude credit unions whose donation requirement is $40 or more. For more about how we choose the best rates, read our full methodology.
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