Inherited CDs: How and When to Reinvest Your Funds

Certificates of deposit (CDs) are a low-risk way to put some money aside for the short- to medium-term future and earn a modest return in the meantime. This makes them suitable and popular for seniors who have extra savings in retirement, and a common part of inheritance settlements.

There are several ways to inherit a CD, such as through a joint account, if the original owner named a payable-on-death (POD) beneficiary, or through probate. Similarly, CD providers have different rules about what you can do with a CD once you’ve inherited it. Some will allow you to take the money out of the CD immediately; others will make you wait until it matures.

Either way, you can’t generally convert a CD directly into another investment vehicle. In this article, we’ll explain why that is, and the other options that are open to you.

Inheriting a Certificate of Deposit

What happens to a CD when the original owner dies depends on a number of factors. There are three main ways to inherit a CD:

• If the CD was a joint account, it will automatically become the property of the co-owner. This is often the case for married couples who own a CD jointly. If you inherit a CD in this way, the CD will typically continue to run in the same way it was before. Once it reaches maturity, you can close it and withdraw the funds. 
• If the original owner of the CD is named a POD beneficiary, this person will automatically gain ownership of the funds in the CD. If you inherit a CD in this way, you should contact the bank or credit union that holds the CD and provide them with a copy of the death certificate of the person who has passed away and proof of your identity. What happens next depends on the policies of the bank. Some banks will terminate a CD when the account owner dies and allow you immediate access to these funds. Other institutions will make you wait until the CD reaches maturity.
• If the owner of a CD passes away, and the CD was neither held as a joint account nor had a POD beneficiary, the CD will be treated just like any other asset. In most cases, that means it will be part of the probate process. Again, it depends on the policies of the provider of the CD as to when they will grant the inheritor access to the funds.

In all cases, it’s important to contact the financial institution that holds the CD to inform them that the original owner has died. CD providers are not obliged to do anything with a CD until they have received this notification; in most cases, the CD will keep running—and may even roll over into a new CD.

Converting a CD

As may be apparent from the process described in the previous section, CDs are generally not converted into other investment vehicles when the original owner dies. Though the CD will pass to their heirs (via a variety of different processes), it will still be a CD. What the inheritor can do with the CD depends on the policies and rules set by the institution that provides it. These should be set out clearly in the terms and conditions associated with the CD, though there is also some room for negotiation. 

Most CDs have high penalties for early withdrawals. This is, in fact, an inherent feature of CDs. The bank or credit union benefits from the certainty that you will leave your money in the CD, and in exchange, they will pay you an interest rate that is higher than more liquid accounts. This is true whether you have just inherited a CD or are the original owner.

Some institutions do have special rules that apply to inheriting CDs. Some may allow an heir to withdraw the money and earnings immediately—effectively moving the maturation date. Others may require heirs to wait until the original maturation date to access these funds. If the CD is held with a smaller credit union or bank, this may be negotiable, and there is no harm in asking if you’ve inherited a CD and would like access to the funds immediately.

Once you are granted access to the funds, it becomes non-taxed cash for you whether the financial institution allows you to have it before maturity, or if it sits after the holder's death and you obtain it at maturity. CDs are commonly taxed the year the interest income is earned and not at maturity, however, an inherited CD and its income accrued before the holder's death are not taxable for the recipient. The only part that's taxable is the interest income from the date of death.

The Bottom Line

When the original owner of a CD passes away, the CD can be passed to their heirs in several ways. No matter how they inherit it, however, a CD will still be a CD once the inheritance process is complete—it will not be converted into a different type of investment.

Some CD providers will allow heirs to access the funds and returns on a CD immediately; others will require them to wait until the original maturation date of the CD. In either case, heirs must wait until they have access to these funds before they can be reinvested in a new vehicle. It is not possible to convert a CD directly into another type of investment or asset.