Bank Wants Your Callable CD Back? Here’s What You Should Do Next!

The era of securing 5% or higher interest rates on virtually risk-free certificates of deposit (CDs) is drawing to a close. Furthermore, some investors might see these opportunities disappear sooner than anticipated as banks and financial institutions opt to redeem CDs prematurely.

Callable CDs allow banks and brokerage firms the option to buy back a CD before its set maturity date. This is more common when interest rates are on a downward trend, as financial institutions aim to avoid paying out higher rates than the current lower market rates.

Following the Federal Reserve’s decision to start reducing rates in September, industry experts predict that an increasing number of CDs will be called in the near future. The Fed has cut its benchmark short-term fed funds rate by half a percentage point, marking its first rate reduction in over four years from a 23-year peak. Further rate cuts are anticipated throughout the upcoming year.

“It boils down to basic arithmetic,” explained Sean Mason, an investment advisor at Fresno Financial Advisors. “If a CD is offering a 5% return, and the rates fall to 3%, banks are not inclined to keep paying 5%. They’re also earning less on the money they lend. Hence, the likelihood of your CD being called increases in a falling rate environment,” he added.

Can Any CD Be Called?

It’s important to note that not all CDs have a callable feature, so savers should carefully review the terms of their CDs, particularly those that offer high yields. Generally, callable CDs offer higher interest rates than non-callable ones due to the risk of early redemption.

“Understanding the fine print of a callable CD is crucial,” stated Mary Grace Roske, a spokesperson at the CD rate comparison website CDValet.com. “Investors seeking predictable returns from CDs may be caught off guard if their investment is called early, abruptly ending their anticipated high returns.”

Callable CDs usually specify a noncallable period, which is an initial phase during which the CD cannot be redeemed. For instance, a five-year CD might include a one-year protection against early calls.

Additionally, these CDs have a defined call schedule outlining potential dates for early redemption, typically every six months, although this can vary.

What Occurs if My CD Is Called Early?

When a CD is called, investors receive their initial investment plus any interest earned until that point.

“However, you’ll miss out on the additional interest that would have been accumulated if the CD had reached its full term,” Roske noted.

What Should I Do if My CD Is Called?

Don’t panic, but you should start searching for new investment opportunities promptly, experts advise.

“If your CD is called, you’ll want to quickly look at other savings options and choose the best one that aligns with your financial goals so your money doesn’t remain unutilized,” Roske suggested.

Initially, savers might place their funds in a money market account, where they can earn between 3.5% to 4.5% interest while they assess their next steps. However, these rates “won’t last,” according to Mason, so it’s crucial to move swiftly.

Mason recommends considering annuities or Treasuries if you’re looking to maintain a similar risk level as CDs. Annuities provided by life insurance companies can offer returns comparable to those of the redeemed CD, with commitment periods ranging from two to ten years or more, similar to CDs. The downside is that withdrawing more than the agreed amount from an annuity could result in higher penalties than those for early CD withdrawals.

For instance, if you commit to a two-year annuity at 5%, the contract might allow yearly withdrawals. “But if you need more, they could charge a 10% penalty on the excess amount during the surrender period,” Mason explained. The surrender period is when withdrawing funds incurs a fee.

Alternatively, Treasuries—almost risk-free government securities—currently offer 4% to 5% interest rates, depending on the maturity period. Investors can hold these until maturity to receive their complete investment back along with regular interest payments, or they can sell them prior to maturity through a bank, brokerage, or dealer. The selling price will depend on the demand for that particular Treasury, and transaction fees may apply. “If your Treasury is yielding 4% and rates drop to 2%, you might be able to sell it for a premium,” added Mason.