Takeaways
- Certificates of Deposit come in various maturities ranging from months to years.
- Once CDs mature, you enter a grace period of usually 7 to 10 days.
- Withdrawing funds from your CD allows you to capture interest income.
- Letting your CD automatically renew lets you harness compounding interest.
- Automatic renewals occur at the bank or credit union's current new interest rate offering for your term.
What Is a Certificate of Deposit?
Certificates of deposit (CDs) are savings vehicles offered by banks and credit unions that offer fixed interest rates. CDs can be issued in different maturities ranging from one month to 5 years or more.
Once a CD matures – or its term ends – you are provided with a grace period of 7 to 10 days to decide what to do with your funds: withdraw your funds or let your funds automatically renew into a similarly structured CD. Learn about all of the different types of CDs.
>> Want to compare CDs? Check out Our Picks for the Best CDs.
Take the Next Step and Invest in a CD:
What Is a Grace Period?
A grace period for CDs typically lasts 7 to 10 days, during which you must decide what to do with your investment funds. Grace periods on certificates of deposit are particularly important to pay attention to because they are your window to decide, penalty-free, what to do with your money.
Once you reach your CD term, you can withdraw your investment plus the interest income you have earned. Alternatively, if you don’t withdraw your money, the bank or credit union will reinvest it in a similar CD.
Example of Automatic Renewal
Let’s say you purchased a 1-year CD with a fixed APY of 4.5%. At expiration, one year later, you can automatically enroll in another 1-year CD that is now earning an APY of 5%.
While automatic renewal makes sense during periods of rising interest rates, investors should pay particular attention to CD maturity dates during periods of falling interest rates. Meeting with a financial advisor to optimize your investment portfolio can help you titrate how much of your net worth you should have in certificates of deposit, versus stocks, bonds, mutual funds, or high-yield savings accounts.
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3 Main Options During Your Grace Period
1. Withdraw Your Investment and Invest in a Different CD
There are many types of CDs you can invest in. Certificates of deposit can lock up your money for an extended period of time – depending on the term – so your financial goals may have changed since your initial investment.
It could be time to evaluate a:
Proper financial hygiene means you should regularly monitor your investments, their performance, and your evolving financial needs. It could be time to shift from CDs altogether.
2. Withdraw Your Money and Invest in Stocks, Bonds, or Crypto
CDs aren’t the only game in town to earn high interest. While they do provide a healthy dose of fixed interest, there are many other types ofasset classes to consider.
Once your CD matures, you could use those funds to reinvest in alternative assets or other highly liquid investments like:
- High-Yield Savings Accounts (Our picks for the Best Online Savings Accounts)
- Stocks (Read more about How to Invest in Stocks)
- Bonds (Read more about the Types of Bonds to Know)
- Cryptocurrencies (Read about the 7 Steps to invest in Bitcoin)
3. Allow Your Bank to Auto-renew Your CD
Another highly reasonable approach is to simply let your CD auto-renew. If you choose this path, your CD will simply roll into a similar term and the updated interest rate for that term.
One important variable to keep in mind is that this strategy should align with your long-term financial goals; you might incur a penalty if you withdraw your funds too soon.
Why It Pays to Remember a CD’s Maturity Date
Unlike high-interest savings accounts, where you can let your savings earn interest and withdraw your funds at any time, CDs operate slightly differently. Certificates of Deposit have set grace periods where you are able to withdraw your money penalty-free. You need to pay attention to these grace periods because withdrawing your funds outside of a grace period can cause you to incur early withdrawal penalties.
The good news is that banks and credit unions will send you an email or push reminders about your upcoming CD term. These reminders should help you manage when you need to pull your funds, especially if you want to reinvest them in another asset class, like stocks, bonds, or cryptocurrencies.
Of course, the exception to this rule is no-penalty CDs. As their name suggests, these CDs don’t charge investors a fee for early withdrawal. However, in exchange for this flexibility, they tend to offer interest rates lower than other types of CDs.
Smart Summary
Certificates of Deposit have a set maturity date. Once a CD matures, there is a grace period of a week or two during which you can decide the future of your funds. You can either reinvest these funds elsewhere or allow the CD to automatically renew into a substantially similar CD. You should always monitor your CD investments to know when your CDs' terms are set to arrive.
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