Your smartest move when a CD is maturing

By Sabrina Karl

When you have a certificate of deposit approaching its maturity date, your bank or credit union can make things very easy on you. Do nothing and they’ll conveniently roll your funds into a new CD. But for the savvy saver, it’s usually a mistake to let them do this.

The CD marketplace is chock full of options from hundreds of institutions, in a wide variety of term lengths, interest rates and special features. And because investing in a new CD requires committing those funds for usually at least a year, and often several years, it’s wise to lock into a good deal.

In contrast, letting a CD mature without any instructions on how to handle the proceeds typically results in the bank rolling the funds into a new CD that’s as similar in length as possible to the maturing CD. So if your original certificate was a 21-month special, they’ll likely move your money into their current 24-month standard CD.

While it’s theoretically possible the standard CD offers a good return, chances are exceptionally high you’ll find a better yield by shopping around. That’s because many top-earning CDs are special odd-month terms or limited-time promotions, not standard issue certificates.

Fortunately, it’s easy to have your CD liquidated instead of auto-renewed. In the weeks before expiration, your financial institution will notify you of the impending maturity date, with instructions for informing them what to do with the funds. Generally, they provide the option to transfer the proceeds to a linked savings account, and from there, you can do what you like with the funds.

The important thing is to submit your liquidation request in time for their deadline, as the grace period is slight. You’ll then have whatever time you need to figure out the next best step for your funds.

Opening a CD? Make it bulletproof.

By Sabrina Karl

It’s true: Certificates of deposit are among the safest places to save. But that’s not to say they’re risk-free. A few important precautions will ensure the money you sock away in CDs will be there anytime you need it.

CDs are safe because they’re bank savings accounts, not investments that depend on the stock or bond market. When you open a CD, you enter into a signed agreement that stipulates exactly how much interest you’ll earn and on what schedule. Read the deposit agreement before signing and you’ll be safe from surprises.

Choosing the institution for your CD is one area where you should be vigilant, however. Most CDs you encounter will be offered by banks and credit unions that are federally insured: by the FDIC for banks and the NCUA for credit unions.

This is important because even if the bank or credit union fails, your deposits are protected. FDIC or NCUA insurance guarantees your balances up to $250,000 will suffer no loss as a result of the institution’s failure.

But be careful. There are banks and credit unions that hold private rather than federal insurance. Although they provide some protection against failure, the coverage and reliability won’t match the security provided by the U.S. government. So for complete peace of mind, do business with institutions that carry the FDIC or NCUA seal.

For some savers, the $250,000 limit can also come into play. Federal insurance covers that amount per person, per institution, with all deposits held at a bank counting toward the threshold. With amounts above $250,000 unprotected, you’re smart to spread balances among multiple institutions if you’re holding that much in bank accounts.

Sticking to federally insured institutions and staying below the maximum insurance ceiling are easy steps to ensure your CD savings will be positively bulletproof.

How will my CD earnings be taxed?

By Sabrina Karl

With the year winding down, the start of tax preparation season is just weeks away. That means employers, banks and investment firms will soon be sending you (and the IRS) forms indicating what you earned with them during the year.

If you owned any certificates of deposit in 2017, you’ll be included in these January mailings. That’s because CD earnings are considered “interest income”, making them taxable in the same way as interest earned from savings or money market accounts.

But some savers wonder when CD earnings become a taxable event. Does it matter if the interest compounds within the certificate versus being paid to a linked account? Does it depend on when you cash out the CD or when it matures?

The answer is generally no, none of those things will have an impact on your tax liability. Simply put, CD earnings become taxable when the bank or credit union applies the interest. Typically, that will mean four quarterly or twelve monthly interest payments throughout the year.

Each institution will then combine all of the interest payments into a lump sum for the calendar year, and will report this to you on a 1099-INT form. Whether the CD is still open or has matured will have no bearing on the tax obligations for that year.

One exception is CDs opened within an IRA account. Because the same rules apply to all IRA investments, interest earned on retirement CDs is not taxable until the funds are dispersed post-retirement.

Whether you own one certificate or a portfolio of dozens, the tax implications of CDs are straightforward, and unfazed by any attempt to strategize your timing. So invest your CD funds whenever it makes good sense for you, and let your bank help you do the simple tax math in January.

How much do I need to open a CD?

By Sabrina Karl

If you’ve never opened a certificate of deposit before, you might think CDs are a complex option for investing a large sum of money. While they certainly can be good investments for those with ample cash, you might be surprised how accessible they are to savers with any modest amount to sock away.

The minimum requirement to open a CD varies by individual bank or credit union – there is no set standard. And in addition to each institution choosing its own minimum, many offer multiple rate tiers for different investment amounts. Generally, the more you can deposit, the higher the rate you’ll earn.

But putting away more isn’t always necessary to earn the highest rate. Some banks have one across-the-board minimum, and saving more with them won’t change your rate. It might be $5,000 or $2,500, or even just $500 or $1,000.

That’s right. Even if you’re shopping around for a top rate (which you should always do), you can find plenty of CDs requiring just $500 to open. In fact, there are even a good handful of banks – including some large nationals – that require no minimum at all.

But small minimums can help robust savers as well. Have $10,000 available to deposit? You may be able to earn the same return on two CDs of $5,000 or four of $2,500 as you can by lumping it into a single $10,000 certificate. This gives you flexibility to cash out a portion of your CD savings should you unexpectedly need some, but not all, of the funds for an emergency.

One search of the nation’s top rates on any given day will quickly reveal there’s no rule of thumb for CD minimums. The only thing you can count on is that good options exist for savers at every level.

Why can I only make 6 withdrawals from savings?

By Sabrina Karl

If you frequently transfer money out of savings, or cover checking overdrafts with a linked savings account, you’ve likely discovered there’s a limit to how often you can do this in a month. Exceed six withdrawals per statement cycle and your bank will warn you at best, or close your account at worst.

But before unloading your anger at your bank, or moving your savings to a seemingly friendlier institution, know that banks have no say in this. The mandate comes down from the Federal Reserve in a rule called Regulation D.

The six-withdrawal limit applies to all liquid savings instruments, so that includes savings and money market accounts. It also applies equally to banks and credit unions. And while the Fed doesn’t dictate fees, most institutions will ding you with a charge – often $10 – to teach you that your savings account can’t be used like a checking account.

If you’re a first-time offender, you may escape with a warning, or may be able to score a one-time courtesy waiver. But even if you pay the fee, repeatedly exceeding the limit will eventually lead the bank to close your account, as they simply can’t abide by their own Fed requirements if you keep breaking the rules.

Fortunately, only withdrawals authorized online, by phone, via bill payment or as auto-transfers count toward the six. So if you’ve hit your monthly limit but still need to take out funds, you can avoid the penalty by withdrawing at a branch or ATM, or by requesting a mailed check.

With an understanding of the rule, and the ability at many institutions to see how many withdrawals remain for the month, most consumers can plan accordingly to use their account as the Fed requires, and avoid their savings being diminished by fees.