Certificate of deposit (CD) accounts offer a safe way to save money for the short or long term. When a CD matures, the initial deposit and interest earned can be withdrawn penalty free. If a CD owner passes away before maturity, that can raise questions about what happens to the money. How that situation is handled can depend on whether the CD owner named a beneficiary or if the account had a joint owner.
Key Takeaways
- Certificates of deposit are time deposit savings accounts that allow you to earn interest over a set maturity period.
- CD owners can name one or more beneficiaries to inherit CD accounts after they pass away.
- Interest earned on CDs prior to the owner's death is not taxable to the person inheriting it, but interest earned after their death is taxable.
- Naming a beneficiary can help to avoid any issues concerning what happens to CD funds when the account owner passes away.
How CDs Work
A certificate of deposit is a time deposit savings vehicle. Unlike a regular savings account, which allows you to deposit and withdraw money as needed, CDs have a set maturity term. This maturity term can be as short as 28 to 30 days or extend up to five years or more. During this period, the money in the CD earns interest, but it can't be withdrawn without triggering an early-withdrawal penalty.
CDs can fund short- or long-term goals, and savers can choose the maturity term that best fits their needs. Interest rates typically correspond to the term length, with longer CD terms earning higher rates in most cases. Banks and credit unions can use the federal funds rate as a guide when setting CD rates.
The money held in a CD can be protected by FDIC coverage if it's at an FDIC member bank. The FDIC's coverage limit is $250,000 per depositor, per account ownership type, per financial institution. The National Credit Union Administration (NCUA) offers a similar level of protection for CD accounts opened at member credit unions.
There are no limits on the number of CDs you can have, but holding multiple CDs at the same bank could result in exceeding the FDIC coverage limits.
What Happens to CDs When the Owner Dies?
How CD funds are handled when the account owner passes can depend on the ownership status of the CD account. Specifically, banks and credit unions can distribute funds based on whether the account was owned jointly with someone else or if the account owner named a beneficiary.
CDs with joint ownership
It's possible to open CD accounts with another person as a joint owner. For example, if you're married, you might open CDs with your spouse as part of your overall savings strategy. What happens to those CDs when you pass away can depend on whether you specify that the money is to be held as a joint account with or without survivorship.
In a joint account with a survivorship arrangement, each person owns the balance of the account equally. So if you own a CD jointly with survivorship with your spouse and one of you passes away, the other would be entitled to all of the money in the account. In that case, the bank may require the surviving spouse to wait until the CD matures before allowing them to either withdraw the money or roll it over to a new CD.
If a bank does allow a joint survivor to withdraw money early from a CD, they may agree to waive any penalty fees.
When there's a joint account with no survivorship, the surviving co-owner has no automatic right of ownership. Instead, the money in the CD would get added to the entirety of the deceased person's estate. At this point, the CD funds would have to go through probate along with other assets. Those assets would then be distributed according to the terms of the deceased person's will or state inheritance laws if they die intestate.
CDs with a named beneficiary
When someone opens a CD account, they have the option to name a CD beneficiary. A beneficiary is a person who will inherit the money in a CD account if the original owner passes away. This person can be a:
- Spouse
- Adult child
- Sibling
- Other family member or friend
Your bank or credit union should ask whether you'd like to name a beneficiary at the time you open a CD. If you're listed as the beneficiary to a CD, you have the right to inherit the money in the account when the owner passes away. You'll likely need to provide the bank with a copy of the death certificate before you can claim the funds.
How you can access the money will depend on the bank. For example, you may be given the option to leave the money in the CD until it matures. Or you may be required to withdraw all of the money and open a new CD in your name.
If you inherit a CD, it's important to understand what that means for you tax-wise. The interest earnings on a CD that accrued prior to the account owner's death wouldn't be taxable income to you. But any interest earned after they pass away would have to be reported as taxable income on your tax return.
When a CD has two or more named beneficiaries, all beneficiaries are entitled to receive an equal share of the money in the account unless the owner specifies otherwise.
CDs with no named beneficiary
When a CD account does not have a named beneficiary, the money in the account is transferred to the deceased person's estate after they pass away. What happens to the funds at that point is then determined by the probate process and whether the person had a will in place.
The executor of the estate will collect all assets, including CDs, and liquidate them as needed to pay the deceased person's debts. Any assets that remain are then distributed to the deceased person's heirs. Again, this may be done according to the terms of a will or according to state inheritance laws.
Do All CDs Have a Beneficiary?
A CD will only have a beneficiary if the account owner designates one at the time the account is opened. Depending on the bank, you may be able to name multiple beneficiaries and designate what percentage of the CD each person should receive.
How Do I Inherit a CD?
If you're listed as a joint owner with right of survivorship on a CD, the money in the account would automatically be yours when the other account owner passes away. If you're listed as a beneficiary, rather than a joint owner, you'd have to contact the bank or credit union that holds the CD to find out how to claim the money.
Do You Have to Pay Inheritance Tax on a CD?
CDs are generally not subject to inheritance tax. Interest earned before the account owner passed away is not taxable to heirs either. But you may pay income tax on any interest earned on a CD after the owner passes away.
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The Bottom Line
CDs can offer a secure way to grow your savings over time. Naming a beneficiary or opening a CD with a joint owner can ensure this money doesn't get lost should something happen to you. When deciding where to open a CD account, take time to compare the best CD rates. Also, consider what maturity term works best for your savings goals.
