CD accounts are set to auto-renew at maturity, but there is a grace period (a period of time following the maturity date of the account) during which you can make a deposit to or withdrawal from the account, change the term of the account or cancel the account.
Although it's possible to withdraw your money from a CD before the maturity date, you'll be assessed an early withdrawal penalty for doing so. If you're withdrawing your money to invest in something with a better interest rate, the penalty could negatively affect the benefits of switching to another investment.
When your CD matures, you typically have a grace period during which you must determine what to do next with the account. Most grace periods last ten days, but this may vary based on your bank and the length of your CD's term. If you don't do anything during the grace period, your bank may automatically renew your CD.
You can either have the financial company complete a direct transfer to the new account, or withdraw the money yourself and deposit it within 60 days in the new account without penalty.
An IRA CD is a lower-risk retirement account containing a certificate of deposit account. An IRA CD pays a set interest rate over the CD's term. Disadvantages of an IRA CD include lower potential earnings over the long term than other investment types. An IRA CD risks not keeping up with inflation.
Many people use IRA funds to invest in stocks and bonds, but you could also put it into money market accounts or CDs. Regardless of which type of IRA you have or how you allocate IRA funds, the advantage is that you don't pay tax on your money as it grows.
If your CD's term is less than one year and matures within the same year you open it, you'll report these earnings on your tax return for that year. But if your CD's term is longer than one year — or spans multiple years — you'll pay taxes on the interest you earn at the end of each year.
One major drawback of a CD is that account holders can't easily access their money if an unanticipated need arises. They typically have to pay a penalty for early withdrawals, which can eat up interest and can even result in the loss of principal.
A brokered CD works just like a traditional bank CD, except you buy it through a brokerage firm, hold it with the brokerage firm, and receive both interest payments and the repayment of principal when the CD matures, in your account with the brokerage firm.
Shawn Valco, CFP®, former financial advisor, explains that the difference between regular CDs and IRA CDs is that with regular CDs, interest you earn is taxable in the year you receive it. Valco notes that with Traditional IRA CDs, tax on interest is deferred, allowing more money to stay in the IRA.
Required minimum distributions (RMDs) must be taken each year beginning with the year you turn age 72 (70 ½ if you turn 70 ½ in 2019). The RMD for each year is calculated by dividing the IRA account balance as of December 31 of the prior year by the applicable distribution period or life expectancy.
What Happens as Your Maturity Date Nears. When the term ends, you can access your deposit plus the money it has earned. You'll get a notice from your financial institution that gives you a grace period during which you must tell them what you want to do with the money.
The U.S. government charges a 10% penalty on early withdrawals from a Traditional IRA, and a state tax penalty may also apply. You can learn more at IRS Publication 590-B. Some types of home purchases are eligible. Funds must be used within 120 days, and there is a pre-tax lifetime limit of $10,000.
Most pre-retirement payments you receive from a retirement plan or IRA can be “rolled over” by depositing the payment in another retirement plan or IRA within 60 days. You can also have your financial institution or plan directly transfer the payment to another plan or IRA.
Losing money in a CD is highly unlikely. However, it's not impossible. If you're thinking about opening one, read the fine print about early withdrawal penalties, and be sure to compare more flexible options that don't have a maturity date. And even if you decide to open a CD, don't set it and forget it.
CDs are one option that can help protect your investment from times of turmoil by providing stable income. The returns gained from these investments usually won't be as high as those provided by stocks but they can serve as a cushion to balance your portfolio and keep it afloat when the market is down in the dumps.
When a CD is placed in a tax-advantaged account such as a tax-deferred IRA and 401(k), you are not taxed on your interest until you withdraw your total earnings - typically around retirement. On a Roth IRA CD, the interest is tax-free if you hold the IRA for 5 years and are 59.5 years old or older.
Once the CD matures, you may have a grace period, established by the bank, to decide whether to renew the CD or withdraw the funds. The bank will pay interest, if any, once the CD matures in accordance with your account agreement and bank policy during the grace period.
The Bottom Line
When you take out a CD, you agree to leave your money in the account for a set amount of time, known as the term length of the CD. At the end of this period, the CD will mature, and your bank or credit union will release your money and the interest you've earned.
Also, note that rollovers need to be like-kind to avoid any tax consequences. If you have a traditional 401(k) and you want to roll it into a Roth IRA CD, for instance, the IRS requires you to pay taxes on the amount that you're converting.
Lower potential returns. The risk-reward tradeoff for IRA CDs is low. While you're guaranteed to preserve your initial investment, plus earn a steady rate of return, you miss out on the potential of higher returns in other investments, such as stocks, bonds, or real estate.
What Happens to IRA Funds When Someone Dies? If the beneficiary is someone other than the surviving spouse, the IRA funds must be transferred from the deceased person's IRA into an entirely new IRA beneficiary account.