Every certificate of deposit matures on a specific date, at which point you can collect your principal investment and the interest paid over the life of the CD. But if you don't take action when a CD matures, what happens to it?
In most cases, the financial institution will automatically renew the CD, but there may be unwanted fees or long-term investment periods involved. Learn what happens when a CD matures and what to do about it.
What Happens to Forgotten CDs?
"Usually, if you fail to instruct the institution to do something when your CD matures, it will be rolled over to a product with a similar maturity, at the prevailing rate," says Mike Schenk, vice president of economics and statistics at the Credit Union National Association. "That means if someone who took out a five-year CD five years ago doesn't respond to the notice of that CD maturing, today he will have another five-year CD with interest close to zero."
However, there's no general policy across financial institutions, and some "will cancel the CD and dump the proceeds into a general savings account," Schenk says.
Why Does it Matter?
Even if you forget about a maturing CD, you won't lose the funds. Bank and credit unions will hold them for you in some way. However, their policies may not be to your liking. For instance, if you need the cash from the CD and you don't advise the bank to send you a check, you're likely to pay penalties to withdraw those funds once they're rolled into another CD.
If you want to reinvest into another CD, but rates are now better at another institution, you won't have the opportunity to switch to a higher-rate product if your bank has already rolled your funds into another of its own products.
"There are no additional fees related to rolling over the CD and holding the new CD to its new maturity date," says Kenneth Carow, professor of finance at Indiana University's Kelley School of Business. "However, there are penalties should you wish to withdraw the funds prior to the newly established maturity date."
For instance, Bankrate's survey in March on CD early withdrawal penalties showed penalties varied widely.
At the time, for closing a one-year CD early, some institutions, including Bank of the West and Boeing Employees Credit Union, charged only 30 days' interest as a penalty.
On the other hand, Bank of America and JPMorgan Chase & Co. were charging early CD withdrawals of a flat $25 fee plus 3% of principal, according to the survey. If a consumer closes a $10,000 one-year CD, the fee structures above show a gap in penalties of $1.60 compared to $325 .
Avoid the Issue
With careful planning, you can avoid forgetting about your maturing CDs and never worry about what will happen to them without your guidance. Before even purchasing a CD, ask the financial institution how it provides notice of maturity and how much time you'll have between the notice and your deadline to take action.
Many institutions offer a one- to 10-day grace period following the maturity of a CD, Carow says. But find out the specifics in advance. "Anything that might be important to you on the back end (of a CD transaction) is important to ask about on the front end," Schenk says.
If you move or change email addresses during the CD's term, update your contact information with the financial institution. That way, when the notice of CD maturity is sent, you'll be sure to receive it. Make a habit of opening mail from financial institutions in a timely manner.
While most financial institutions will send correspondence notifying you that your CD is about to mature, keep your own records.
"You need to keep track of what you have and when it's maturing," says Kathryn Garrison, a financial adviser with Moss Adams Wealth Advisors in Seattle. "Shop around, but don't fret too much about a 0.01% or 0.02% return difference. The hassle of having CDs at three or four different institutions can negate the financial benefits."
The FDIC insures up to $250,000 per depositor, per institution for each ownership category, so most people do not need to worry about diversifying across institutions.
Finally, find out if the institution holding your CD allows for prematurity instructions. If it does, you can simply provide in writing instructions for what to do with the money in your CD upon maturity, and you won't have to worry about being there on a specific date to take action.