by Maurie Backman | Nov. 23, 2020
If you have a certificate of deposit coming due right now, it's important to carefully consider your next move.
Opening a certificate of deposit, or CD, is a normally good way to score some extra interest on your money without the risk that comes with investing on the stock market. CD deposits are FDIC-insured for a maximum of $250,000 per depositor. So as long as you don't exceed that, the principal amount you put into your CD is guaranteed not to lose value.
But what happens if you have a CD that's about to come due? Normally, rolling it into a new CD is a good bet. That way, you can continue to earn higher interest on your money than you would with a standard savings account. But these days, CDs are paying minimal interest, so it makes less sense to tie up your funds in a new one. In light of that, here are a few alternatives to consider.
If you've been housing your emergency fund in a CD, then you'll need to move that money someplace where it's still FDIC-protected. Right now, a savings account is a good bet. Believe it or not, rates are so horrendously low now that savings account rates are comparable to those of a one-year CD or longer. In fact, if you open a shorter-term CD, like a 6-month CD, you're likely to get a lower interest rate than you will with a savings account.
Therefore, it could make sense to roll a maturing CD into a savings account. That way, you're not locking your money away for a set period. With a CD, you must keep your money where it is for the whole of the CD term. If you withdraw cash before your CD matures, you'd have to pay a penalty of several months' worth of interest. Exact penalties vary by bank. But with a savings account, you can withdraw your money at any time and there's no penalty for doing so.
If the money in your CD was extra cash you didn't want to keep in savings and wasn't earmarked for emergencies, now may be the time to look at investing in stocks. Opening a brokerage account will give you an opportunity to earn a higher return on that sum. You'll need to have a solid emergency fund in place because investing on the stock market carries more risk.
If you don't need the money from your maturing CD right now, consider putting it into an IRA. You'll get a tax break on the money you contribute to a traditional IRA. A Roth IRA, won't give you an instant tax break, but you'll benefit from more flexible withdrawal rules (including tax-free withdrawals) during retirement. Of course, if you're going to fund an IRA, you should expect to leave that money locked away until your senior years, so be sure you're willing to commit before going this route. Taking an early IRA withdrawal could result in serious financial penalties.
Storing excess cash in a CD can be a smart move in general, but it's not a great plan right now. Even longer-term CDs are paying so little they're comparable to savings accounts. So rather than lock your money up in another CD, find a better place for it until interest rates improve.
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