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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.


  Tags: CD rates

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Comments
13 Comments.
Comment #1 by Paoli2 posted on
Paoli2
Ken:  I prepare for my CD closures in town or out of town by the same examples you gave.  However, one thing puzzles me.  Unless I read your post incorrectly, you mentioned more than once "you added additional funds to the CD".  I have never had a CD I was allowed to add to unless it matured.  Maybe yours were short term CDs and you added additional funds as you allowed them to renew but regular CDs I have do not allow that before maturity.  Just curious.

2
Comment #2 by me1004 posted on
me1004
I note, your issue there is not simply in closing a CD. This CU is applying dormancy rule per deposit account rather than per member account. Your CD remains active, but your saving account is declared dormant! Ibeleive dormancy rules norlally apply per isntition, not per deposit accont. Well, at least federal rules for it apply that way; I guess the institutions can add more of their own. I believe the feds require dormancy after one year of non-use, or actually I think that might be non-contact, which is very different -- and that does not apply per account but per accountholder or membership.

(An article all about dormancy rules might be worthwhile.)

I also note, you are very lucky they did not take out a dormancy penalty, and that even could have brought your balance to below the minimum required or below zero. If it had, I would not put it beyond them to break your CD in order to take the penalty fee from it if no other liquid account was available to take it from. 

There are other things to be careful about too. I have had at least one institution require that I wait until maturity to give instructions about closing. But they also quietly apply a minimum advance notice requirement, in the case I had, two weeks in advance (but would not accept it more than a month in advance). And don't forget about counting that differently if a holiday is involved -- when the say so many days, you will find out the hard way that they really meant "business" days, not calendar days. Bottom line: ask whether any advance notice is required. In my case, because of a holiday, I missed their advance notice deadline by one day -- and they would not take any more notice until AFTER my CD matured, at which point they created a "processing" delay in giving me my money. Lesson: be careful, because some institutions operate like a criminal enterprise!

I also note, regarding your first consideration in the list, one possible way to handle these instructions is via fax. Many banks and CUs will take most all materials, even those requiring a signature, from opening applications to closing instructions, via fax. That can get it there right now instead of waiting on the mail to deliver. 

I also note, I prefer to close a CD to a checking account (presumably a free checking account, of course). That way, I can deposit the check same day, rather than lose a day (or more) to the ACH. 

I also am now finding some will take it via e-mail (that is new. In the past, e-mailed submission of anything was never allowed). Banks and credit unions are starting to offer a secure e-mail service for such via Zixmessagecenter.

Also, if you are moving the money from one CU to another CU, you might be able to do it direct from a liquid account if they both are part of the shared branch system. If so, you can just go into a local shared branch, and make the transfer from one CU to the other immediately and as cash. (Double check that they are doing it as cash.) I have done that in the past.

Finally, regarding your mention about ACH restrictions, many institutions limit the size of an ACH transfer, so ask about that well enough in advance.

13
Comment #3 by KenBDG posted on
KenBDG
@Paoli2, The credit union used to allow unlimited add-on deposits for all of their CDs. In 2009 they changed the rules for new CDs so that the add-on feature only applies to CDs with terms of 1 year and less. I think the credit union management realized that the add-on feature was too generous especially in an environment in which interest rates were falling. BTW, I had thought that the 5-year CD would be long enough to get me through the low-rate cycle. I probably would have been better off over the long term by opening new 5-year CDs instead of adding to this add-on CD.

@me1004, Thanks for your comments and suggestions. That is a good idea about a post on dormancy rules. For those of us who have several CDs at different credit unions, this could be an issue for many of us since the savings accounts are probably not being used.

6
Comment #4 by george1837 posted on
george1837
Over the years I've had several banks tell when I've called on the date of maturity to make sure the cd was closed that they never received my instructions to close and how to dispose of the funds.  Consequently I've made it standard practice for the last couple of years to mail my intent twice.  And if faxing and scanning are acceptable at least once by this means.  So while the post office may miss making one correct delivery, the probability of two might be considered as more than remote.

 

5
Comment #5 by pearlbrown posted on
pearlbrown
Ken, add-on CDs were indeed great finds.   I opened several as placeholders, anticipating that rates would continue to drop.   I now have only 4 add-on CDs maturing at various dates through September 2016 and all have better rates than I can find today for the same term. 

FWIW, a 6-month rule of thumb has worked well to help avoid problems with dormancy rules.  That is, I make sure each institution where I have an account has some activity every 6 months, even if it is just a modest deposit to the savings account.    The rule of thumb is also useful for use with credit cards - each one is used for a charge at least every 6 months, even if it's only a cup of coffee. 

7
Comment #6 by irene1 (anonymous) posted on
irene1
I think the easiest way to keep activity in an account, is with reoccuring ach deposits.  That way, you don't have to do anything.

3
Comment #7 by Anonymous posted on
Anonymous
This dormancy issue is news to me.  By the way, which credit union was it that froze your savings account?

I knew that a lot of institutions would charge an inactivity fee on your savings/share account if there was not any activity in the account for a year and you did not have any current certificate of deposits, but I never heard of freezing the share/savings account.  Could this be just a handful of institutions doing this? 

It would be good to have a list of credit unions and banks and time limits on when they freeze your savings/share accounts for no activity.

3
Comment #8 by Wil posted on
Wil
Interesting world, isn't it? A credit union freezes an account for inactivity, thus making account activity impossible! Does anyone see a contradiction here?

4
Comment #9 by Anonymous posted on
Anonymous
WITH REGARD TO PENTAGON FEDERAL CREDIT UNION (PENFED)

ONE ACTIVITY ON ANY OF THE ACCOUNTS YOU MAY HAVE WITHIN

YOUR PENFED MEMBERSHIP DURING A 12 MONTH PERIOD, 

SERVES TO AVOID "DORMANCY" IN ALL ACCOUNTS YOU HOLD

WITHIN YOUR MEMBERSHIP AT PENFED.

HENCE, IF YOU HAVE A MONEY MARKET WITH CHECKS AT PENFED,

SIMPLY MAKE A DEPOSIT (LIKE $1) AND YOUR GOOD FOR A YEAR

ON ALL ACCOUNTS--NO DORMANCY.

THANKS--and now I can go back to sleep

3
Comment #10 by Paoli2 posted on
Paoli2
#9  Sorry to wake you up but I called Penfed about the Dormancy rule with savings account.  They said as long as I have CD I don't have to be concerned because it is a part of what I have to do to get CD.  I also go every month to their Shared Branch in my city and withdraw the interest so that shows activity.  Now you can go back to sleep and have dreams about HIGHER CD rates! :)

2
Comment #11 by Kaight posted on
Kaight
Hyperbole, at times, can be inappropriate.  I'll risk it anyway:

I believe application of inactivity sanctions on an account by account basis is a scam.

My own experiences, and I'm doing keep-alive on a LOT of CU accounts, has been along the lines outlined by #9, to wit:  activity in any account within my membership, at whatever CU, keeps all my accounts at that CU up, running, and alive.  And that's the way things ought to be!!

8
Comment #12 by Anonymous posted on
Anonymous
Some institutions like Bank of America don't count automated/ACH transactions as keeping an account active. You need to confirm before relying on those to keep accounts from going dormant.

2
Comment #13 by Bozo posted on
Bozo
Count me among the paranoid. I learned my lesson years ago, assuming that nothing could get ****ed up in a custodian-to-custodian IRA CD transfer. I now assume nothing. About a month before maturity, I double-check to find out what, exactly, is required by both the current custodian and the prospective custodian. And if the prospective custodian won't lock the rate offered, they get a huge "never mind".

2