Giving to charity can be a great way of giving back while also gaining access to some key tax deductions. Depending on how you're looking to give back, you can always donate cash, your time, and certain assets like real estate, vehicles, and other valuable items, though certain rules and limitations exist. It's a win-win scenario. And while certain securities can be a part of your philanthropic strategy, certificates of deposit (CDs) are not one of them. That being said, measures can be taken to ensure the money in your CD goes to the right charity.
- It's not possible to directly donate a CD that's in your name to a charity
- You can, however, name a charity as the beneficiary of a CD
- Once a CD either matures or you decide to withdraw from it early, you can donate that cash if you choose
How a CD Works
Offered at nearly every bank and credit union throughout the country, a CD is a time deposit account that accrues interest over time. That interest rate is fixed at the time the account is created and is paid by the bank for the CD's duration. That's because the bank is effectively borrowing the money that you agree to not touch for months or years so the funds can mature. Once that time period expires, the principal and accrued interest are either disbursed to the account owner or beneficiary, transferred into a different bank account, or rolled over into a new CD.
Though CDs are ubiquitous as far as bank products go, each bank and credit union offers its own set of terms and conditions with each account. That means that a CD can run for a set term length and come with a certain interest rate at one institution, but those terms could be entirely different at a different establishment.
Pay attention to the Federal Reserve System’s, also called the Fed's, rate-setting movements and plans when you are deciding whether to open a CD or choosing the length of the term. Opening a long-term CD right before a Fed rate hike can hurt your future earnings, while expectations of decreasing rates can signal a good time to lock in a long-term rate.
Can You Directly Donate a CD to Charity?
When it comes to whether you can donate a CD to charity, the simple answer is no. When a CD is created, it's done in a person or organization's name and is attached to their tax identification number. Once opened, that information cannot be changed until the account matures.
Even if you have the name and tax identification number of your preferred charity, you can't establish a CD in their name. In order to open a new account for a charity, non-profit, or business, you need special authority from the organization to do so. This usually requires a letter from the organization on official letterhead or provisions in their bylaws that specifically allow you to do this. Despite those limitations, there are still ways you can use a CD to benefit your favorite charity.
Other Ways to Contribute CD Funds to a Charity
Although you can't directly create a new CD for charity, you can still use those funds to help their efforts. While you can't change the account holder's name after the fact, you can add a beneficiary to the account.
A beneficiary doesn't get access to a CD's funds until after the account holder passes away. If you make a charitable organization the beneficiary of your CD, they will receive the funds in one of two ways:
- The CD is closed out and the funds are disbursed directly to the beneficiary
- Ownership of the CD is transferred to the beneficiary
If you're the owner of a CD and want to contribute those funds to a charity, you can always withdraw the money early and make a cash donation—though that course of action typically comes with penalties. If you opt for this course of action, know that there will be repercussions if you do so.
Tax Rules for Beneficiaries
Over the lifespan of a CD, it's the owner that pays taxes on any interest earned. Though CDs with a smaller balance should expect minimal taxes, larger CDs will come with larger tax bills. Once the owner dies and the CD is either transferred or paid out to the beneficiary, they are then on the hook for any interest-related taxes.
How Do I Claim Charitable Donations on My Taxes?
If you intend to claim deductions for your charitable contributions, keep a record of your donations, which is required for donations of $250 or more. For donations under $250, the IRS requires you to keep canceled checks or other records. A receipt or any written communication from the charity that cites the amount donated, the date, and the name of the organization will do.
What Happens When a CD Matures?
As the maturity date of your CD approaches, you'll be notified by your bank or credit union that the end date is coming due. The bank or credit union will offer you instructions on how to proceed with the funds. You'll generally be given three options: Roll over the CD into a new CD at that bank, transfer the funds into another account at that bank, or withdraw the proceeds.
What Is the Best Term for a CD?
The best term for a CD is the one that will offer you the highest interest rate within a time frame that matches your financial goals. Withdrawing money from a CD before it matures can result in an early withdrawal penalty.
The Bottom Line
Wanting to donate a CD to the charity of your choice is a noble pursuit. And while you can name them as a beneficiary of a CD you already own, it's just not possible to create a CD in that charity's name unless you're personally responsible for the organization's finances. Instead, you can choose to set money aside with a beneficiary, which means you can let your CD accrue interest and grow over time with the intent of giving that money to the charity once you pass away. If you don't want to wait that long, you can withdraw the money from your CD before it matures, though this will likely mean you'll be on the hook for an early withdrawal penalty.