Imagine you've built up a nice savings cushion in a certificate of deposit (CD), a low-risk savings account where you deposit money for a fixed term and earn interest over time. You want to make sure it goes to the right person if something happens to you. That’s where understanding the CD beneficiary rules comes in handy.
By naming a beneficiary on your CD, the funds will be transferred directly to the person or people you designate. This process can help your loved ones avoid the lengthy and complex probate process.
In this article, we’ll cover the essentials of CD beneficiary rules, so you know exactly how to keep your savings plan on track. We’ll also touch on what you need to know if you're listed as a CD beneficiary.
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Can CDs have beneficiaries?
Yes, CDs can have beneficiaries. Naming a beneficiary on a CD allows you to designate one or more individuals who will inherit the funds in the account if you pass away before the CD matures. This feature, often referred to as a “Payable on Death” (POD) designation, ensures that the funds bypass probate and are transferred directly to your chosen beneficiary.
Rules for CD beneficiaries
When naming beneficiaries for your CD, there are a few important rules to know. Knowing these details helps make sure everything goes as planned and your loved ones get the funds without any hassle.
Choosing a beneficiary
To name a beneficiary on a CD, you must provide the bank or credit union with the beneficiary's full legal name, Social Security number, and other identifying information. This can typically be done when opening the CD or by updating the account later.
One or more beneficiaries
You can name more than one beneficiary. If you do, the CD's funds will be divided according to the percentages you specify. If no percentages are specified, the funds are usually divided equally among the beneficiaries. Some financial institutions may have a limit on the number of beneficiaries you can name, so be sure to check with your bank or credit union for any restrictions.
Changing your beneficiary
If you’re wondering, “Can a CD be transferred to another person?” the answer is yes—you can change the beneficiary on your CD at any time by updating the information with your bank or credit union. This process can usually be completed in person, over the phone, or online, depending on the institution's policies.
Backup beneficiaries
If a beneficiary predeceases (dies before) you, the funds will typically be divided among the remaining beneficiaries. Some banks allow you to name a contingent beneficiary who would receive the funds if the primary beneficiary passes away before you.
Rules about interest taxed on an inherited CD
Generally, interest earned before the account holder's death is not taxable to the CD beneficiary. However, any interest earned after the account holder's death is considered taxable income for the beneficiary. The tax impact varies depending on the certificate of deposit balance and the interest generated. For smaller CDs, the tax may be minimal, but larger CDs could lead to a more significant tax obligation. Consulting a tax professional about certificate of deposit beneficiary rules is recommended for specific guidance.
What you should know if you’re listed as a CD beneficiary
Managing the process after a CD owner dies can seem overwhelming, but knowing your rights and responsibilities will help you navigate it smoothly.
As a CD beneficiary, you have several options to consider. You can withdraw the funds immediately, although this might incur early withdrawal penalties unless waived by the bank. You can also let the CD continue to mature, allowing it to earn interest until the original maturity date. Lastly, you can roll the funds into a new CD, potentially securing better terms that align with your financial goals.
Each option has its own implications, and can be more complicated if there is more than one beneficiary on the account, so carefully assess your decision based on your financial needs and the specific CD beneficiary rules.
Here’s what you need to know to manage your role effectively:
- Claiming the CD: After the account holder's death, you'll need to provide necessary documentation, such as a death certificate, to claim the CD. You can either withdraw the funds or let them continue earning interest until maturity.
- Tax implications: As a beneficiary, you may be subject to taxes on the interest earned after inheriting the CD. According to new CD beneficiary rules, the interest earned on a certificate of deposit beneficiary account after the original owner’s death is subject to federal income tax. In 2024, federal income tax rates range from 10% to 37%, depending on your taxable income. It's wise to consult with a tax professional to understand your specific tax responsibilities.
- Early withdrawal penalties: Depending on the bank's policies, you might avoid early withdrawal penalties as a beneficiary, but it’s wise to confirm this with the institution before making any decisions.
- Options after claiming: Decide whether to keep the CD until maturity, roll it over into a new CD, or cash it out based on your financial needs and the terms of the CD.
- Legal and financial advice: Consider seeking legal or financial advice to understand all your rights and obligations as a CD beneficiary, especially if large sums are involved or if there are multiple beneficiaries.
FAQs
Can a CD be gifted?
While you can’t directly “gift” a CD like cash, you can name someone as a beneficiary, effectively ensuring they inherit the CD after your death.
What does “death of holder” mean on a CD?
“Death of holder” indicates that the CD account holder has passed away. At this point, the CD's ownership transfers to the named beneficiary, who can choose to withdraw the funds or allow the CD to mature.
What happens to a CD if someone dies?
When the CD owner dies, the named beneficiary can claim the CD by providing a death certificate and any required documentation to the bank or credit union.
Can I cash out an inherited CD?
Yes, you can cash out an inherited CD. However, there might be penalties for early withdrawal unless the bank waives them due to the death of the original account holder.