Do you know how a CDs auto renew policy could force you into a penalty withdrawal?
I discuss Certificate of Deposits (CDs) in my latest book Simple Investing, from the perspective of them being a simple investment vehicle if you’re looking to park some cash for a while, or maybe you’re retired and looking at taking a more conservative approach to making more money with the money you already have.
One of the topics I highlight in the book is a financial institutions policy of how CDs are handled as they reach their maturity date.
A quick recap, CDs are a type of savings account where you earn a higher interest rate than a basic savings account because you commit your money to the financial institution (bank, credit union…) for a fixed period of time.
Typically CD term lengths range from as few as six months to as long as five years. The interest rate and yield you earn is generally based on the amount of money you assign to a CD and the term length. The longer the term and the more you allocate to the CD the higher the interest rate and yield.
The date when your CD commitment ends is called the maturity date. The maturity date is the date when you can remove your money from the CD without penalty.
- What is a Certificate of Deposit?
- Simple Investing – The Bucket Strategy
- Learn How to Invest – 3 Steps to Start Investing
A CDs auto renew policy is the policy the financial institution sets up to notify you when your CD reaches its maturity date and what they will do with your CD if you don’t tell them what to do with it once it matures.
Here are the key points on why you should understand your financial institutions CD auto renew policy.
- Withdrawing your money at any time during a CDs term period will result in a penalty. Depending on the financial institutions policy the penalty could be as little as not earning the interest on the CD to as high as taking some of the principal (your money) that you started with.
- In general you will be notified prior to your CD reaching its maturity date. This typically takes place a week or two before the CD reaches its maturity date and will be done via mail, email or both.
- Once the CD reaches its maturity date you will have a specified number of days to determine what you want to do with the money allocated to the CD. Most institutions will provide anywhere from a five to 15 day grace period before automatically renewing the CD for the previous term length.
- Your options for the money assigned to the CD once it matures are; let the CD renew for another term, choose a different term, or withdraw your money and interest and do whatever you want with it.
- If the CD auto renews without you knowing it, your money is locked up again for another term and you won’t be able to get at it without penalty.
Under the right circumstances CDs can be a simple way of making more money with the money you already have. However, be sure you understand how your financial institution will notify you of the CDs maturity date and how many days you have until you have to make a decision on what to do with the CD. Otherwise you may find yourself needing your money, but not being able to get access to it because it was auto renewed for another term.
Do you invest in CDs? Comment below.