If you were one of the 44% of Americans who chose to open a certificate of deposit (CD) in 2023, then you likely locked in a great rate over an appointed period of time. What happens, though, when that time is up?
For new CD account owners, the next steps may be unfamiliar. The good news is that the financial institution with which you’ve opened a CD will likely increase communication with you in the final months of your CD’s maturation, providing you with a number of options for how to proceed.
Be better prepared to evaluate your choices and enjoy the fruits of your investment with confidence using this simple guide.
Ding Ding! Your Interest Has Arrived
The bottom line is that, once your CD has matured, all of the interest on it has too. Over the months or years of your CD term, the interest you’ve locked in has been applied to your account at monthly or quarterly intervals. When your CD is fully matured–or, in other words, when the CD term has ended–you are free to access the total funds, including deposit and interest, without penalty.
As we’ve mentioned, the bank holding your CD will offer you options for how to access your funds. Often these options are:
- Roll your maturing CD into a new CD with the same institution,
- Transfer the funds into another account with the same institution,
- Or, withdraw the funds by transfer or check, to use as you will
Pay attention to the deadline your bank provides and consider your financial situation and goals when deciding what next steps to take. If you enjoyed the experience or are eager to continue earning on this put-away portion of your money, rolling over the CD or shopping for a new CD may be an excellent choice. If you would prefer these funds to be more flexible, you may choose to deposit them into a checking or savings account instead.
How Are CDs Taxed?
Though the bank may not penalize you when withdrawing from your matured CD, the federal government will tax you on what you’ve earned. The interest on your CD will be reported as income according to the tax year, regardless of when the CD term ends. In other words, rather than being taxed all at once when the CD ends, you are taxed on the interest earned along the way.
For example, if you opened a six-month CD in October of 2023, you would be taxed for the interest earned in October, November, and December when paying 2023 taxes. When paying 2024 taxes, you would then pay on the interest earned in January, February, and March of 2024.
Final Considerations
Interest rates are constantly changing, as does enthusiasm for opening CDs. However, these types of accounts are always in demand for people who want stability in their earnings over risky investments like stocks or bonds.
If you’re new to this type of account, take time to consider how to best navigate your choices when your CD matures and enjoy what you’ve earned.
Nothing contained in this blog should be construed as legal, tax, or financial advice. An attorney, tax advisor, or financial advisor should be consulted for advice on specific issues.
