Gotchas to Avoid When Planning to Close a CD at Maturity
If you have often just let your CDs renew, today's low rates may change your mind. Even if the institution is offering competitive rates, they may not be high enough to renew into another CD. If you can't visit a branch to close a CD (credit union that doesn't have local branches or an internet bank), there are several potential gotchas. I just experienced one at a credit union. Fortunately, I still have several weeks before my CD matures.
My Experience with One Gotcha
Here's an overview of one gotcha that might have complicated my CD closure.
In 2008 I opened an add-on 5-year CD that matures next January. The CD is at a credit union that used to be local to me. It's no longer local now that I have moved to a new state.
As is typical with credit unions, I had to first open a savings account. I used that savings account in the first 3 years to make additional deposits to the CD. I first created a link using my Ally account. I was then able to initiate transfers from my Ally account into this credit union savings account. Once the money was in the savings account, I was able to add to the CD by calling the credit union.
Since the credit union's new CD rates are abysmal, I'm planning to close the CD and withdraw the money. My plan is to have the credit union close the CD and move the money into my credit union savings account. Then I'll pull that money into my Ally account using Ally's transfer service.
I also wanted to transfer some money into my Discover savings account so I thought it would be a good idea to create a link now before the CD matures. I began the trial deposits at Discover, but I found out this week that the two trial deposits and the subsequent withdrawal did not go through. The savings account has been frozen.
In the last two years, I haven't been adding to the CD, and I haven't made any deposits or withdrawals to that savings account. I have regularly logged in my credit union account, but that didn't prevent the savings account from becoming inactive. I learned that the credit union freezes the savings after it has been inactive for 1 year. Now that it's inactive, no deposits or withdrawals can be made. To re-activate it, I need to send the credit union a service request form and a copy of my driver's license.
Once it's reactivated, I'll retry the Discover Bank linking. I'm glad I'm trying this now before my CD matures. I can't go into a branch to pick up a check for the closed CD. Also, I don't want the credit union to mail the check to my house. The post office occasionally delivers my mail to another house in my neighborhood that shares a similar address. I would much prefer to receive the money via an ACH transfer.
Tips to Prevent Gotchas When Closing a CD
This is an example of why it's a good idea to prepare for a CD closure before maturity. If you don't want to let the CD automatically renew, you should plan for CD closure. This is especially important if you can't visit a branch office. Here's a list of things to consider before your CD matures. It's also a good idea to have this information before you open the CD, but you should recheck before maturity since policies often change, especially after 5 years.
- How will the institution accept CD closure instructions? Online? By phone? By mail?
- If you have to mail the closure instructions, make sure the institution doesn't close the CD before maturity which will cost you an early withdrawal penalty (This happened to a Discover Bank customer)
- How can you receive the funds? Check by mail? Wire transfer? ACH transfer to another institution? Internal transfer to another account at that institution?
- As I learned this week, if you plan to transfer the money to another account at that institution, make sure it's an active account.
- If you plan to make an internal transfer from the CD to a savings account and then do an ACH transfer initiated at another bank, make sure there are no restrictions on ACH withdrawals (I had this problem at Navy Federal).
- If you had multiple beneficiaries on the CD to allow for FDIC/NCUA coverage over $250K and you are planning to make an internal transfer to a savings account when the CD matures, make sure the savings account also has the same multiple beneficiaries. Otherwise, there may be some time when your money won't be fully insured.
- Make sure you are aware of the CD grace period. This is the period you have to close the CD after maturity without an early withdrawal penalty. If you or the bank delays past the grace period, you'll have to pay an early withdrawal penalty if you want your money. Otherwise, you could be stuck in a CD at a low rate.
- Check with the management at the institution to see if they can offer you a higher rate on the CD renewal. It's common for institutions to offer higher rates for long-term customers and for large deposits. Also, you probably won't have to renew into the same CD term. You may be able to renew into a different term and still get a renewal bonus (Ally Bank is one example).
- If you are thinking about letting your CD renew, make sure you review the CD disclosure before you make your decision. Policies like the early withdrawal penalty may have changed since the CD was first opened.
Do you have any other tips to prepare for a CD closure? Or do you have past experiences in closing CDs or IRA CDs that may be helpful to others? Please leave a comment.