CD account beneficiaries: Everything to know

High and persistent inflation over the past couple of years has caused interest rates to rise, and while that's made borrowing costs more expensive, it's also helped savers earn a higher return on their cash.

For accounts like certificates of deposit (CDs), high interest rates can mean earning upward of a 5% annual percentage yield (APY), depending on factors like the CD term. With these high CD rates, it's all the more important to ensure that in the event you pass away, your returns pass on to whoever you'd like to receive those funds.

That's where a CD account beneficiary comes in. We'll take a closer look at the most important things to know about CD account beneficiaries below.

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What is a CD account beneficiary?

You may have come across the term beneficiary in other areas of your finances, like when setting up a checking account or a retirement account.

"A CD account beneficiary is like the beneficiary on any financial account: simply the person who will inherit the account if the owner of the CD passes away," says Saeid Kian, CEO and co-founder, Ribbon Financial.

How do you list a CD account beneficiary?

Listing a CD account beneficiary — or beneficiaries, such as if you want to split the assets among multiple family members, for instance — tends to be a straightforward process.

"For most institutions, you can list the beneficiary online. There's usually a section to list beneficiaries in the profile section that allows you to add beneficiaries, though different institutions have different ways of updating beneficiaries. Institutions try to make this easy to avoid the headache of transferring over accounts when no beneficiaries are listed," says Kian.

If you can't list the beneficiary online, you might need to fill out some basic paperwork.

"Typically, you need to contact the financial institution, then request beneficiary designation forms and provide your information and the beneficiary's personal information — such as name, address, Social Security number and date of birth. Review and sign the form and submit it to the institution," explains Justin Stivers, financial advisor and founding attorney at Stivers Law.

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What are the rules for CD account beneficiaries?

CD account beneficiary rules can differ a bit based on the financial institution you open the CD with, but these tend to be relatively simple.

"Usually, there are basic rules, such as all the owners of the CD must have passed away for it to go to a beneficiary and that the beneficiary themselves should be living," says Kian.

There can also be rules around who can be listed as a beneficiary.

"For example, you may not be able to put a minor," says Stivers. And "depending on the state's laws, you may have to put a spouse on certain types of accounts."

Some CD accounts also give you the option to add both primary and contingent beneficiaries, he adds. 

That means if your initial beneficiary passes away before they can claim the CD funds, your contingent beneficiary could claim them.

Also, "some designations can be changed, but others might be irrevocable, meaning they can't be changed," says Stivers.

If you're not sure what rules apply, ask.

"Checking with your institution is the safest bet to make sure," says Kian.

What happens if you don't have a beneficiary listed?

If you don't have a CD account beneficiary listed, that could make your estate more complicated, unless someone like your spouse is the beneficiary by default.

"It depends, but there could be a default beneficiary designation depending on the type of account and/or institution. More likely though, there will be a probate process in which those funds will have to pass through probate and will go to your heirs at law or to the people named in your will or trust, if you have one," says Stivers.

It's also possible that none of your heirs end up receiving the CD funds, such as if you don't have a will and the probate court can't find your heirs.

"After a certain amount of time, if no one claims the money, it could end up with the state," says Stivers.

Do beneficiaries need to pay taxes on interest earned?

The tax implications for CDs can vary based on the type of CD account the funds are held in. But in general, CD interest is only taxable after your beneficiary takes over.

"It really depends on various factors such as if the funds from the CD account are rolled over into an inherited IRA. However, in most cases, beneficiaries who inherit funds from a CD account do not pay taxes on the principal amount they receive, while interest earned on the CD account after the original account holder's passing is typically considered taxable income to the beneficiary," says Stivers.

That said, depending on the amount inherited, it's possible more could be taxed.

"Generally, tax is not paid on inherited accounts, but there are limits in which estate taxes kick in, and different circumstances have different tax consequences. Check with your tax advisor," says Kian.

The bottom line

Overall, designating a CD account beneficiary is typically a straightforward process, and it's an important way to help ensure your funds pass on according to your wishes if you die before the CD matures. If you're opening a CD now to take advantage of high interest rates, especially before the Fed starts cutting interest rates as many expect, take a few minutes extra to also designate your CD account beneficiaries.