Many banks and credit unions offer certificates of deposit, also known as CDs. Essentially, the bank or credit union holds your money for a fixed period of time, or term, in exchange for interest rates that may be higher than what you find in savings or checking accounts. These certificates are federally insured, similar to your bank account (up to $250,000), and you know exactly how much you will receive for your investment upfront.
How does the renewal of a certificate of deposit work?
Typically, when setting up your bank certificate, you choose whether you want to automatically renew the certificate or have the funds returned to you at the end of the term. As the term progresses, you can log in to your online account or talk to a customer service representative to change these preferences. You may also be able to change the preferences during a grace period after the certificate expires.
About 14 to 30 days before your certificate expires, the bank or issuing institution will contact you to alert you that your certificate is about to “mature” or end its term. In this maturity notice, the bank generally describes whether it pays interest after maturity if you do not renew your certificate account.
On the expiration or maturity date of the certificate, your options will occur. This can be an automatic renewal; any changes you made to the amount, term, or type of certificate; or a return of your funds and interest (if you chose the payment at the end of the term).
The renewal works as an automatic renewal of the certificate’s term. The certificate will automatically renew or convert to another certificate of the same term. So, if you have a six-month certificate, it will renew to another six-month certificate. If you choose to renew, it’s likely that interest rates will not remain at the same level. They will be adjusted according to the current rate, which may be higher or lower than the previous rate.
Making Changes in the Renewal of a Certificate of Deposit
Depending on the bank or credit union, you may be able to make any of the following changes to your bank certificate with the renewal process:
- Add some funds to the certificate
- Withdraw some funds from the certificate
- Change the term of the certificate
- Change the type of certificate
In the last two cases, you will not be renewing the same type of certificate you previously had. For example, you might convert a six-month certificate to a no-penalty certificate or a three-month certificate instead.
Closing the Certificate
If you want to avoid renewal altogether, you will need to read your account agreement to understand how to close your account and withdraw funds. Depending on the bank or credit union, you may request to transfer the certificate funds to a linked account or via a check mailed to you. You may also choose to transfer the funds to another bank certificate or investment product at a different bank.
Advantages and Disadvantages of Renewing a Certificate of Deposit
Advantages:
- Automated investments: Choosing automatic renewal means you won’t have to worry about keeping a secured certificate in the bank for years to come.
- Renewal bonuses: Some banks may offer renewal bonuses when you renew your bank certificate.
- Using certificate renewals to create a ladder of certificates: You can use renewals to create automatic renewal investments in a staggered ladder of bank certificates.
Disadvantages:
- Return risk: Renewing the certificate may lead to missing out on better yield investment opportunities or finding that the new interest rate does not keep pace with inflationary pressures on costs.
- Confusion in tracking maturity dates: If you cannot keep track of the maturity dates of bank certificates, your certificate may automatically renew when you did not intend it to.
- Missing out on the best interest rates for bank certificates elsewhere: You might have chosen your certificate after shopping around for the best interest rates and terms. If you renew, you could miss out on the top interest rates from another bank or credit union.
Do you
Can you add more money when renewing a certificate of deposit?
Typically, you can add more money when renewing a certificate of deposit, depending on the terms of the certificate. Some banks may even allow you to schedule new cash flow in advance. At maturity, the new cash is combined with the existing certificate for renewal. If your certificate pays compound interest or a higher rate for larger amounts, you may want to increase the amount of your certificate.
On the other hand, you may want to invest additional funds in a new certificate if your bank offers a promotional interest rate for a different type of certificate, particularly if the rate is better than your current renewal rate. You may also want to add more funds to the current amount to open a new jumbo certificate, which depends on a higher initial deposit.
How does renewal and the certificate ladder work?
A certificate ladder is a strategy that can be used to take advantage of the power of renewals to create an automated saving process that allows you to access cash regularly. With a certificate ladder, you invest equal amounts of money in three or four certificates with staggered maturities—perhaps one month, three months, and six months; or one year, two years, and three years. When setting up the certificate, you assign the renewal to automatically renew into the next longest time frame.
For example, let’s say you use $20,000 to create a certificate ladder with annual increments for one year. You can set up four different certificates of $5,000 each, each with different terms and interest rates:
- $5,000 in a 12-month certificate with an annual compound interest rate of 1.25%
- $5,000 in a 24-month certificate with an annual compound interest rate of 1.55%
- $5,000 in a 36-month certificate with an annual compound interest rate of 1.75%
- $5,000 in a 48-month certificate with an annual compound interest rate of 1.90%
When the 12-month certificate matures, open a new certificate for four years. When the 24-month certificate matures, open another one for four years, and so on. In four years, you will only have the highest-yielding certificates in your ladder, and one will mature each year. If you need cash at any time, you can stop the renewal before the certificate matures.
Should you renew your certificate of deposit?
If interest rates have increased since your certificate was opened, know what your new interest rate will be during the notice period or grace period before maturity. Then, research similar types of certificates to see if you can find a better interest rate elsewhere. Compare certificates with the same duration and any requirements (deposit amounts, penalty-free or with penalty withdrawals, etc.).
Know your new certificate rate before renewing if interest rates have decreased since the original certificate was opened. You may need to decide whether the potentially lower interest rate is worth the lesser risk and locking up the funds, or if you’re losing money due to the inflation erosion of the dollar.
If you are unable to find better yield rates elsewhere and do not need the cash, you may choose the automatic renewal of the certificate of deposit from the bank.
Frequently Asked Questions (FAQs)
How long do you have to renew your certificate of deposit?
Check your certificate’s documents, but you usually get a grace period when your certificate expires. You can decide whether you want to renew your certificate, make changes to your certificate account, or withdraw your funds. However, if you indicated that you want your certificate to renew automatically, this may happen without any additional input from you. Additionally, if you do not respond to the bank’s notice about a certificate that you did not indicate you wanted to renew, the bank may automatically cancel your certificate and transfer the funds to you.
How
Can you transfer funds from the certificate instead of allowing it to renew?
In most cases, you can notify the bank or the cooperative association in advance that you would like to transfer the funds to an account once the certificate expires instead of choosing to renew it. You can usually also make the decision during the grace period. However, you may have to pay a penalty if you wait too long before withdrawing your money or closing your certificate. This typically occurs after the grace period ends and
Source: https://www.thebalancemoney.com/a-guide-to-cd-rollovers-5224054
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