Is CD Renewal a Good Idea Right Now?

A certificate of deposit (CD) is a savings vehicle that pays interest over a certain amount of time, ranging from months to years. At the end of that term, you can renew it or cash it out and enjoy the interest. But when is CD renewal a good idea?

It’s a tough decision. You could renew at the same rate, choose a different term or put the money into another income-generating option. We’ll explain it all to help you weigh the options.

How CD Renewals Work

When you put your money into a CD, it comes with a term. Some terms are as low as three months, others are for five years or more. Many lenders automatically roll the funds over into a new CD of the same length at the end of the term. The interest you scored on that original investment also is rolled into the new CD.

“In the current economic climate, where interest rates are relatively high, CDs can be an attractive investment option for those seeking a low-risk, fixed-income investment,” said Cliff Ambrose, FRC, founder and wealth manager at Apex Wealth. “Higher interest rates mean that the yields on new CDs are more favorable than they have been in recent years, which could provide investors a decent return with very low risk.”

And you don’t have to go with the default CD renewal term. You can cash out the funds and put them into a different investment or even choose a new CD with whatever term you want. But if you do nothing, the funds will probably renew, so it’s important to decide before the expiration date.

Aamir M. Chalisa, MBA, LUTCF, MDRT, serves as the general manager at Futurity First Insurance Group. He said most banks are currently renewing the same or slightly higher rates on an auto-renewal, which means you likely won’t improve your rate. But this is reflective of the industry as a whole.

“Most banks will only offer good rates on six-month or one-year CDs as they are not sure where rates are headed,” Chalisa said. “There is so much going on in our world—with elections, war, protests, earnings reports — that banks are hedging rates for short-term gains.”

5 Tips for Expiring CDs

Whether you’re happy with your current CDs or not, there’s no harm in taking charge of your CD renewal. Here are some tips to help you make sure you’re making the most of your savings.

1. Note Your Expiration Date

It’s easy to set and forget CDs, letting a CD renewal date come and go. Once it renews, you’re locked in for another term. It’s important to set a reminder so you won’t miss the expiration date.

But if you do happen to miss a CD renewal, it’s not the end of the world. Some lenders charge penalties equal to only a couple of months of interest. While it often doesn’t make financial sense to break a CD term to take advantage of a better rate, if you’re accidentally locked in for another term, it’s worth looking into.

“It’s essential to evaluate any penalties or fees associated with withdrawing funds before maturity or closing the account with the current lender,” said Doug Roller, founder at Crossroads Financial Group. “These costs could offset any potential savings from a higher interest rate offered by another institution.”

2. Understand Your Options

There are various types of CDs available. They are:

• Standard: The majority of CD options fall in this category. You’ll choose a term (more on that later) and deposit your funds with the agreement that you won’t touch them until the term ends, known as the maturity date. If you withdraw the funds early, you’ll pay a penalty.
• High-yield: A high-yield CD offers a rate above the going market rates. Typically, you’ll see high-yield CDs from online lenders striving to earn your business.
• No-penalty: With a no-penalty CD, you’ll accept a slightly lower interest rate with the benefit of being able to withdraw the funds at any time.
• Jumbo: A jumbo CD offers a higher interest rate in exchange for a larger deposit. In most cases, you’ll need to deposit at least $100,000 to qualify for a jumbo CD.

3. Choose a Term

Your biggest choice when purchasing a CD is your term length. Normally, a longer term pays higher interest rates, but that isn’t the case right now. With interest rates so high, lenders are hesitant to lock themselves in for more than a year or two. That means you’ll currently find better rates for a six- or nine-month CD than one with a five-year term.

But a higher interest rate isn’t always the best idea. Doug Carey, CFA at WealthTrace, still thinks a longer-term CD is worth the lower interest rate.

“I strongly believe in locking in rates for the longer term at this point, even if they are slightly lower than short-term rates,” he said. “Within the next year, the Federal Reserve will begin cutting interest rates. They have told us this many times now and we should believe them. When the Fed begins cutting rates, short-term CD rates will decline nearly in lockstep with the Fed Funds rate. But if you lock in longer-term rates, you will get this interest rate each year until the CD matures even as shorter-term rates decline.”

It’s tempting to go with the same term you had previously because automatic CD renewal is so easy. But even a small increase will add up over the months you’ll have the CD, so get the best deal possible.

4. Comparison Shop Rates

It’s also tempting to stay with the same lender from one CD renewal to the next, but you shouldn’t let that deter you. It’s easier than ever to move funds from one lender to another. In most cases, you’ll simply set up an account and initiate a lender-to-lender transfer.

As your CD’s expiration date approaches, note the rates your lender currently offers. Then shop around to see current CD rates at other lenders.

“Financial institutions often vary in the interest rates they offer on CDs, and sometimes promotional rates are available that significantly exceed standard rates,” Ambrose said. “Therefore, it’s advisable to compare rates from various banks and credit unions to ensure you are securing the best possible return on your investment.”

5. Consider Other Investments

Don’t limit your comparison shopping to other CDs. Another low-risk investment may give you a better return on your money. Chalisa recommends annuities for risk-averse consumers.

“I am seeing rates as high as 6% for a three- or five-year annuity,” Chalisa said. “Additionally, please understand that annuities offer tax deferral, which CDs don’t. So, the equivalent yield, even at the same rate, will be much higher on an annuity. If an annuity pays 6% a year, that’s the net rate, compared to a CD at 6%. For a consumer in a 30% tax bracket, the after-tax rate would be 4.8% on a CD.”

As the date for CD renewal approaches, you could let the auto-renew go through. But a little extra time on research can help you maximize your earnings over the coming months or years. With interest rates potentially rising next year, it’s important to make the most of the higher interest while it lasts.

Stephanie Faris is a professional finance writer with more than a decade of experience. Her work has been featured on a variety of top finance sites, including Money Under 30, GoBankingRates, Retirable, Sapling and Sifter.