Because certificates of deposit (CDs) are one of the safest types of investments available, countless consumers are attracted to them. However, when it comes to investments, less risky typically means less reward. If you have lofty financial goals, you may want to consider rolling over your CD into a more potentially higher-earning investment vehicle when the time comes.

With a CD, you collect interest on your money much like a savings account. However, your earnings typically are greater with a CD because banks pay higher interest on these accounts. Why? Unlike a savings account, which you can close at any time, banks expect you to keep your money in the CD for a specified amount of time, and you pay a penalty if you withdraw funds early. This allows the bank more flexibility to use your money for other purposes, such as investments or loans for other customers.

Besides the fact that CDs are low-risk, consumers also are drawn to them because of their convenience and simplicity. It’s extremely easy to open a CD. You simply tell your bank or credit union that you want to buy a CD, complete a few simple forms and disclosures and then move cash or funds from your checking or savings account into the CD.

Once you start receiving interest on the CD, you can either spend or reinvest it. Most financial experts would encourage you to reinvest the interest you earn on a CD because this will allow your account to grow much more quickly.

When your CD reaches its “maturity,” or the end of its term, most banks will give you seven to 10 days to decide what to do with the funds. You can either withdraw the money as cash or roll over the funds into a different investment. However, if you don’t give your bank any guidance, it will automatically reinvest the funds into a new CD.

Because CDs are such safe investments, the interest they pay tends to be pretty low (depending on the current economic and interest rate environment). This puts CDs at a relatively high risk of losing purchasing power due to inflation over the long-term. Therefore, if you’re saving for the long haul, you might want to roll over mature CD funds into a different savings vehicle. However, if you’re still seeking an investment that most consider safe, you may want to check out:

· Savings bonds: These relatively safe investments are securities issued by the U.S. Treasury Department. Because savings bonds provide funding dollars for the U.S. Government, the government pays you interest in return. As interest rates rise, so do the interest rates on savings bonds.

· Fixed annuities: These are contracts offered by insurance companies that typically offer guaranteed interest rates for the first 1-10 years. Unlike CD’s, where interest is taxed in the year of receipt, annuities offer tax deferral of gains. The insurance company guarantees both earnings and principal.*

· Equity indexed annuities: This special class of annuities, which can also be purchased from an insurance company, yields returns on contributions based on a specified equity-based index. Much like other types of annuities, the terms and conditions of payouts depend on the details included in each annuity contract. Because insurance companies typically offer a guaranteed minimum return with these annuities, there is limited risk of loss even if the stock index does poorly.*

There are innumerable savings vehicles available, each with potential advantages and disadvantages. Therefore, when your CD is about a month away from reaching maturity, you might want to meet with a financial advisor to discuss potential rollover options. A financial professional can help you evaluate your long-term goals, investment risk tolerance, and current interest rates to determine what type of investment is best for you.

* Annuity withdrawals are generally taxed as ordinary income and may be subject to surrender charges, in addition to a 10% federal income tax penalty if made prior to age 59 1/2. The guarantees and payments of income are contingent on the claims paying ability of the issuing insurance carrier.

Return To Index