Is Renewing Your Certificate of Deposit a Good Idea?
Investing has long been one of the most effective ways to grow your money, and a Certificate of Deposit (CD) is a reliable option to consider.
Here’s how it works: When you open a CD account with a bank or credit union, you agree to deposit a specific amount of money for a fixed period—such as 3 months, 1 year, or even 10 years—at a fixed interest rate. In exchange, the bank pays you interest on top of your original deposit at the end of the term.
Many people face a common dilemma when their CD term ends: should they renew it or not?
When your CD matures, you typically have three options: cash out your deposit and the earned interest, renew the CD, or explore other investment opportunities.
If you’re leaning toward renewing your CD but aren’t sure if it’s the right move, here’s what you need to know to make an informed decision.
Should You Renew Your CD?
One thing to keep in mind is that banks often automatically renew CDs when the term ends. But is that the best choice? You won’t know until you weigh the pros and cons of renewing your certificate of deposit.
Advantages of CD Renewal
If you renew your certificate of deposit, here the benefits it comes with:
1. You get a higher APY on your investment:
While it’s not always guaranteed, you may receive a higher APY (annual percentage yield) when you renew your CD. If interest rates have gone up since you opened your CD, you’ll benefit from the new, higher rate.
Additionally, depending on your bank, they may offer promotional rates at the time of renewal, which could work in your favor. Choosing a longer-term CD might also help you secure a higher APY.
2. It’s straightforward:
As mentioned earlier, banks automatically renew CDs, making the process straightforward. You don’t have to do anything—your bank will handle the renewal for you.
Disadvantages of CD Renewal
Here are the cons of CD renewals:
1. You might miss out on better offers:
If you shop around, you may find higher CD rates elsewhere. Automatically renewing your old CD could lock you into a lower rate than what’s currently available with banks.
2. Taxes:
The principal and interest earned on your CD are subject to taxes, unlike investments such as Individual Retirement Accounts (IRAs), which offer tax advantages.
3. Inflation:
CDs may offer a competitive annual percentage yield (APY), but inflation can sometimes outpace it. When this happens, the purchasing power of your CD earnings diminishes despite the interest earned.
So, is renewing your CD a good idea? It can be, as it’s a straightforward option and might come with a higher APY. However, it’s wise to explore other CD rates at different banks that may offer better deals.
You might also consider alternative investments—CD earnings are fully taxable, but options like retirement accounts provide tax benefits that could make them more appealing.
Manuelo is an entrepreneur and a personal finance nerd. He is the founder of Dollars And Freedom. An expert in side hustles, online gigs, and everything about making money. His works have been featured on major financial publications, such as Business Insider, GoBankingRates, Investopedia, Entrepreneur, and more. When he’s not busy with his blog or writing for others, you’ll catch him hanging out with loved ones or reading books on stoicism and self-development.
