Thursday, October 22, 2015

What To Do With Maturing CDs?

I started buying 5-year CDs directly from banks and credit unions ("direct CDs") about five years ago, because I learned about the advantages in terms of risk and expected return compared to bonds or bond funds. Perhaps you did too, either based on my musings or those of bloggers from whom I learned about direct CDs, like Allan Roth and The Finance Buff. Now that our CDs are starting to mature, what should we do?

First, you should be sure you are keeping track of your CDs and their maturity dates. I track mine in a Google Sheets spreadsheet, but I also enter the maturity dates in my Google Calendar, set up with email alerts to notify me a few days before each CD matures.

You probably will receive an email or letter from the bank or credit union, notifying you a month or so before your CD matures, but I would keep track of your CD maturity dates just to be safe.

You have several choices about what to do with your maturing CD, and what you choose depends on a number of factors. Some of the factors depend on whether the CD is in a taxable account or an IRA account. Examples of taxable accounts are individual, joint, trust, and Payable on Death (POD) accounts. The factors related to IRAs are the same for traditional or Roth IRAs, so I'll just refer to these as IRAs.

I'll discuss the alternatives below, and since I bought my first direct CDs from Ally Bank, and those are the ones that are maturing, I'll use Ally Bank to provide examples.

The first choice is to ...

Do Nothing

Typically CDs are set up to renew at maturity. This means that the proceeds of the maturing CD are "rolled" (deposited) into a new CD with the same term to maturity. So if you do nothing, a 5-year CD maturing on November 1, 2015 will roll into a new 5-year CD maturing on November 1, 2020. Although the term to maturity of the new CD is the same, the interest rate probably is lower, since rates generally are lower now than they were five years ago. Also, there may be better rates elsewhere.

For example, a 5-year Ally CD I bought on November 1, 2010 has a nominal interest rate of 2.46%, which is an APY of 2.49% (APY, or Annual Percentage Yield, is slightly higher than the nominal interest rate because of daily compounding), but a 5-year CD at Ally now has an APY of only 2.00%, so about half a percent less per year.

So if you do nothing, your 5-year Ally Bank CD with an APY of 2.49% will roll into a new 5-year CD with an APY of 2.00%, but Ally Bank may increase the APY to 2.05% as a loyalty reward.

The Do Nothing choice is pretty much the same for a taxable account or IRA, but is it the right choice? To answer that, we have to consider the alternatives, which brings us to choice #2 ...

Use the proceeds from the maturing CD to buy a new CD somewhere else

This is much easier to do in a taxable account than in an IRA, so I'll discuss taxable accounts first.

Currently you can buy a 5-year CD from Synchrony Bank with an APY of 2.25%, so about a quarter percent higher than the Ally Bank CD--about 0.20% higher if you get the 2.05% loyalty rate from Ally Bank. The Synchrony Bank rate is competitive; I've purchased Synchrony Bank CDs for myself, and have helped friends and family members buy them, so let's use a Synchrony Bank CD as an example.

Assuming you get the loyalty 5-year APY of 2.05% from Ally Bank, I show below how much more you'll earn on various amounts in a Synchrony Bank CD with an APY of 2.25%, assuming you hold it to maturity:

  • $10,000 CD: $22 more per year, so about $109 more over five years
  • $50,000 CD: $109 more per year, so about $544 more over five years
  • $100,000 CD: $218 more per year, so about $1,089 more over five years
These numbers show the additional interest before income taxes, so for the after tax difference, multiply the above numbers by one minus your marginal tax rate. Assuming 25% federal and 5% state marginal tax rates, so 30% total, multiply by (1-0.30) = 0.70. So that would be an after-tax five-year premium of $762 over five years for a $100,000 CD.

You may be able to find a better deal, by looking at the 5-year CD rates on Currently the highest rate for a nationally available 5-year CD is 2.45% APY on an eloan CD, but the early withdrawal penalty (EWP) is very steep at 730 days of interest (about 4.9%), compared to the EWP of 180 days of interest on the Synchrony Bank CD (about 1.13%). I would stick with the Synchrony Bank CD.

How hard is it to open a taxable account and buy a CD at Synchrony Bank? I think it is very easy, but different people have different abilities and tolerances for dealing with any issues that arise. I think it would take me about 10-15 minutes to open the account and buy the CD, entirely online, but it might take someone else 30 minutes or longer, depending on their abilities. You also can do it by phone, and it shouldn't take much longer than doing it online. I just prefer typing to talking, so I usually try to do these things online, but I don't hesitate to pick up the phone if I run into any issues, or am confused about something.

So to me, it is well worth the few minutes is takes to open a new account to buy a CD at a higher rate. I earn more than $1,000 more (before taxes) over five years for a few minutes work. However, for a $10,000 CD, it may not be worth it to you to bother with it to earn the extra $109 over five years.

More work is required to move the proceeds from a maturing CD in an IRA to another bank or credit union to buy an IRA CD with a higher rate. I recently did this, and published a blog post on it, so you can read that to get a sense of what's involved: Kevin On Investing: First bank-to-bank IRA transfer from a maturing IRA CD

Obviously it was worth it to me to do this, and I plan to do it with other Ally Bank IRA CDs that will mature next year. On the other hand, I had a relatively small Ally Bank IRA CD that matured recently, and it wasn't worth it to me to do the IRA transfer, so I just let it roll over to a new Ally Bank 5-year IRA CD. They gave me the loyalty rate of 2.05% APY.

Other Alternatives

You may have other uses for some or all of the proceeds from the maturing CD, other than letting it roll into a new CD, or buying a better CD elsewhere. You may want to spend some of the money, use it for rebalancing into stocks, or put some of it in a savings account to earn a bonus. For any of these alternatives, you close the CD the same as if you were moving the proceeds to another bank or credit union. Closing the CD is discussed in the last section.

I just transferred most of the proceeds of an Ally Bank CD that matured into a new CapitalOne360 savings account, because I will receive a bonus of up to $500 if I leave the money in the account for 90 days. This comes out to an APY of 4.89%, which is better than any CD deal. So I think of it as a 3-month CD earning 4.89% APY on up to $50,000, which you can't come close to with a competitive 3-month CD earning about 0.5% APY, or in an online savings account earning about 1%.

After the 90-day period is up, I'll move the money from the CapitalOne360 savings account to the 3-year "add-on" CD that I recently opened at Northwest Federal Credit Union (NWFCU) (it was a great deal with an APY of 3.04%). Unfortunately, this deal is no longer available, but it was a great choice for someone with CDs maturing soon, since you can make additional deposits to the CD as your existing CDs mature, up to the $100,000 limit.

Actually, I'll probably fill up the NWFCU CD with proceeds from other CDs maturing before the 90-day period is up, but maybe another good CD deal will pop up by then. I'll be keeping my eye out for great CD deals at as CDs mature over the next few months.

I'll also probably use some of proceeds from CDs maturing over the next few months to rebalance back to my target allocations for my stock funds, unless stocks have gone up enough by then to get me back to my target allocations. If stocks go down more, I'll use more of the proceeds from maturing CDs to buy more shares of my stock funds.

Depending on the premiums of good direct CDs over Treasuries of the same maturities, I'll probably move the bulk of the proceeds from maturing CDs into more 5-year CDs. Currently the 5-year Treasury yield is about 1.4%, so at 2.25%, a good direct CD is earning a premium of about 0.85% (85 basis points), which is quite good, so CDs still look better than bonds to me. Of course as you can see from this post, managing direct CDs can be more work than just using a bond fund, so if simplicity is of paramount importance to you, just use a bond fund.

If bond yields were to rise much, decreasing the value of my bond funds accordingly, I'd probably use some of the maturing CD proceeds to buy more shares of them, assuming the best available CD rates didn't also rise proportionally.

If some or all of these alternatives sound too complicated, remember, you can always keep it simple, do nothing, and let the CD roll over into a new CD at the same bank or credit union, as long as you don't need the money for something else.

Closing the CD

If you decide to pursue one of the alternatives other than doing nothing, you must notify the bank or credit union that you want to close the CD--i.e., not have it roll over to a new CD. With Ally Bank, I notify them of this on the day the CD matures using online chat; you also can do it by phone. You have 10 days from the maturity date to do this without incurring an early withdrawal penalty (the "grace period"). 

I notify them that I want to close the CD that matured today, providing the last four digits of the CD account number, and that I want the proceeds deposited into my savings account or checking account, providing them with the last four digits of that account too. They ask a few questions, like why I'm closing the CD (better rate elsewhere), what is my phone number and social security number, etc. It takes about 5-10 minutes, and since I'm doing it using online chat, I can do something else in another window at the same time, keeping an eye on the chat window in the corner of my screen.

You may be able to notify your bank or credit union ahead of time to close the CD at maturity, but Ally Bank told me to just do it within the 10-day grace period of the maturity date, so that's what I do.

Closing the CD works the same in a taxable account or IRA. Just be sure that in an IRA you have the proceeds deposited into an IRA savings account within the same IRA at the bank or credit union. You don't want to unintentionally take an IRA distribution. 

You can then transfer the money from the savings or checking account elsewhere if so desired, but for an IRA you'll want to do a direct, custodian-to-custodian IRA transfer. An alternative is to do an IRA transfer directly from the maturing CD into a new CD elsewhere, which is what I described in the blog post I referenced above (Kevin On Investing: First bank-to-bank IRA transfer from a maturing IRA CD).

Hopefully this is enough information to help you to decide what to do with your maturing CD, and how to do it. If not, don't hesitate to ask questions, either in comments to this blog post, by email, or on the Bogleheads forum. I've done a Bogleheads forum post linking to this blog post, so Bogleheads can post additional comments or questions there, and we can learn from each other.


  1. Kevin,
    Here is a 12 month CD paying 5%. Maximum investment is $5,000

    1. Thanks, but I don't think this is enough to entice me to join another credit union, especially one that splashes religious stuff all over their web pages: "Best of all, you're sowing seeds towards building God's Kingdom!". Not my thing.

      Having said that, five percent is a great rate for a 1-year CD, but the maximum of $5,000 really limits the benefit. You earn up to $250 in one year. There are lots of bonus offers out there in the $100-$500 range--for getting credit cards, opening savings or checking accounts, etc. These typically are easier to do than joining a credit union, and I'm looking to deploy much more than $5,000 from CDs that are maturing over the next few months.

      Maybe this will be of interest to Christians who want to earn a great rate on a small amount of money for one year, and contribute to this particular Christian community.

  2. They seem also in the fine print to continue it to a one year share account, so the averaged interest would be not so great.

    1. With a CD special like this, you'd move the money somewhere else after the CD matures. Of course the credit union is hoping you'll forget about it, and perhaps that they'll get more business from you.

  3. This comment has been removed by the author.