A certificate of deposit (CD) should be closed only when it reaches its maturity date, but if you need the money earlier you'll pay a penalty for withdrawing it.

If you wait until the maturity date, you have several options to choose from.

Closing a CD When It Matures

Certificates of deposit issued by banks and credit unions typically offer a slightly higher interest rate than their other types of accounts like checking or savings. In exchange, the buyer agrees to leave the money in the CD untouched for a set period of time.

You can buy CDs that run for a few months or for many years. A month or two before your CD's maturity date, the financial institution should notify you that the CD is about to mature and ask for your instructions on what to do with the funds.

Typically, you'll have three options: 

• Roll the proceeds into a new CD at that institution: You can opt for a CD with the same term as your old one or a term that's shorter or longer.
• Transfer the funds into another account at that bank: Options include a savings, checking, or money market account.
• Withdraw the proceeds: You can have the money transmitted to an account at a different financial institution or mailed to you in a paper check. 

The financial institution will give you a deadline for providing instructions and indicate what it will do in the absence of any guidance from you.

Generally, its default move will be to roll your proceeds into a new certificate with a term similar to your old one. For example, if you had a one-year certificate, your balance would be rolled into a new one-year CD. The interest rate may be higher or lower than the old CDs, depending on where rates are at the time.

It's important to act quickly once you receive this notice. After the CD reaches maturity, the account enters a grace period of about 10 days. If you do nothing, your bank may automatically roll over your CD into a new one and you may then have to pay a penalty if you want your money before the next maturity date.

Closing a CD Early

It's is possible to close a CD and withdraw your money early. The downside is that, for the most common types of CD, you will face a penalty for doing so. 

The amount of that penalty will depend on your agreement with the financial institution. Federal law specifies a minimum penalty of at least seven days' interest, but there is no maximum, so your actual penalty could be many times that. You could even lose some of the money you put into the account.

Most often, the early withdrawal penalty is calculated as a number of months' interest, with a greater number of months for longer CD terms and fewer months for shorter CDs. A typical policy might be to deduct three months' interest for CDs with terms up to 12 months and six months' interest for those with terms up to three years. 

There are some types of CDs—such as liquid CDs or no-penalty CDs—that charge low or no penalties if you close the account early. However, they pay lower interest rates than standard ones.

Another exception is brokered CDs. These are certificates that you purchase from a brokerage firm or an independent sales representative. Unlike conventional CDs, brokered CDs trade on a secondary market, making it possible to sell one early if you wish to. You won't incur penalties, but you may have to pay a small fee.

The Bottom Line

CDs are intended to remain untouched until the end of their term, but it is possible to get your money out early, if necessary. However, you will most likely have to pay a penalty, and you might even get back less money than you put in. For that reason, it's best not to invest in a CD unless you're reasonably certain you won't need the money before it matures.