If you have a certificate of deposit (CD) that is maturing soon, it’s time to make a decision. Your CD has been collecting interest for months or years, helping you to get closer to your financial goals. Now you need to decide whether to roll it over to another CD, deposit it into another account, cash it out and spend it—or invest it.
Before you decide what to do, it helps to consider all of your options first. Be aware that your bank or credit union may rollover your CD automatically at the end of the term—unless you tell them not to. And, it’s possible their new interest rate could be lower. The bank or credit union is required to notify you in advance before the CD matures, but you should scope out your options in advance. You’ll have a grace period—generally one to two weeks—to act on your decision, but it helps to have a plan first.
Here are options to consider:
CDs are extremely low-risk products and are insured by the FDIC (if they are held with an FDIC-insured institution). There is also no market risk with a CD, and their interest rates climbed into the double digits in the 1980s, when inflation rates were also high. CD terms usually range from three months to five years, and can be a great choice for someone who wants to lock-in an investment for a set amount of time, with set returns. There is a downside, though, if you need to access your CD funds before maturity. Early withdrawal penalties for CDs vary by institution, and are typically calculated as a set period of interest earned, such as 90 days or six months.
But if you’re investing for the long term, your best option may be talking to an advisor and moving your maturing CD funds into a brokerage account. A Forbes article from September 2022 pointed out that CDs were paying above 3% in a high-interest environment, but the historic annualized average return of the S&P was 11.88%.1 So, while CDs may be considered a safer investment, they typically reward you with less of a return over a longer period of time.
CDs are FDIC insured to specific limits and offer a fixed rate of return if held to maturity, whereas investing in securities is subject to market risk including loss of principal.
1 Forbes: What Investors Need To Know About Certificates of Deposit: Pros & Cons Of Rounding Out Your Portfolio With CDs, September 19, 2022