A certificate of deposit (CD) can be closed either when it reaches its maturity date or before that if you need your money sooner. Waiting until your CD matures is simpler and less expensive because early withdrawals will usually incur penalties. In this article, we'll look at how you can close a CD once it reaches maturity, and then at how you can close a CD early.
- Certificates of deposit (CDs) can be closed either when they reach their maturity date or before that if necessary.
- If you decide to close a CD before it matures, you will generally have to pay a penalty.
- Once your CD reaches its maturity date, you can tell your bank or credit union to roll the money over into a new CD, deposit it in another account, or pay you in cash.
- If you don't give your bank or credit union specific instructions within the grace period, it will usually put your money in a new CD.
Closing a CD When It Matures
Certificates of deposit issued by banks and credit unions typically offer a higher interest rate than their other types of accounts. In exchange, the buyer agrees to leave the money untouched for a set period of time.
You can buy CDs that run for a few months or many years. A month or two before your CD's maturity date, the financial institution should notify you that the CD is about to mature and ask for your instructions on what to do with the funds. Typically, you'll have three options:
- Roll the proceeds into a new CD at that institution. You can opt for a CD with the same term as your old one or a term that's shorter or longer.
- Transfer the funds into another account at that bank. Options include a savings, checking, or money market account.
- Withdraw the proceeds. You can have the money transmitted to an account at a different financial institution or mailed to you in a paper check.
The financial institution will give you a deadline for providing instructions and indicate what it will do in the absence of any guidance from you. Generally, its default move will be to roll your proceeds into a new certificate with a term similar to your old one. For example, if you had a one-year certificate, your balance would be rolled into a new one-year CD. The interest rate may be higher or lower than the old CD's, depending on where rates are at the time.
It's important to act quickly once you receive this notice. After the CD reaches maturity, the account enters a grace period that may last for roughly 10 days. If you do nothing, your bank may automatically roll over your CD into a new one and you may then have to pay a penalty if you want access to your funds before the next maturity date.
Under the federal Truth in Savings Act (Regulation DD), the issuer of your CD is required to disclose when it may impose an early-withdrawal penalty and how that penalty will be calculated.
Closing a CD Early
It's also possible to close a CD and withdraw your money early. The downside is that, for the most common types of CD, you will face a penalty for doing so.
The amount of that penalty will depend on your agreement with the financial institution. Federal law specifies a minimum penalty of at least seven days' interest, but there is no maximum, so your actual penalty could be many times that. As a result, you could get less money back than you originally put in.
Most often, the early withdrawal penalty is calculated as a number of months' interest, with a greater number of months for longer CD terms and fewer months for shorter CDs. For instance, a bank's policy might be to deduct three months' interest for all CDs with terms up to 12 months, six months' interest for those with terms up to three years, and a full year's worth of interest for long-term CDs.
There are some types of CDs—such as liquid CDs or no-penalty CDs—that charge lower (or no) penalties if you close the account early. However, these CDs pay lower interest rates than standard ones.
Another exception is brokered CDs. These are certificates that you purchase from a brokerage firm or an independent sales representative. Unlike conventional CDs, brokered CDs trade on a secondary market, making it possible to sell one early if you wish to. You won't incur penalties, but you may have to pay a small fee.
Can You Close a CD Before Maturity?
You can, but you will most likely be charged a penalty. Penalties can vary from one financial institution to another and from one CD to another. Typically, the longer the term of the CD, the higher the potential penalty.
What Is a CD Grace Period?
The grace period is the length of time you have to tell the financial institution that holds your matured CD what you want to do with the proceeds. If you take no action, it will typically put your money into a new CD.
How Long Is a CD Grace Period?
It depends on your bank or credit union. Ten days is fairly common, but some grace periods are as short as seven days, so you should be prepared to act quickly.
Can I Avoid CD Early Withdrawal Penalties?
It's difficult to avoid these charges with most types of CDs. In some cases, a financial institution may waive an early withdrawal penalty if you ask, but it is not required to do so by law.
The Bottom Line
CDs are intended to remain untouched until the end of their term, but it is possible to get your money out early if necessary. However, you will most likely have to pay a penalty, which could mean getting back less money than you put in. For that reason, it's best not to invest in a CD unless you're reasonably certain you won't need the money before it matures.