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Ken Tumin founded the Bank Deals Blog in 2005 and has been passionately covering the best deposit deals ever since. He is frequently referenced by The New York Times, The Wall Street Journal, and other publications as a top expert, but he is first and foremost a fellow deal seeker and member of the wonderful community of savers that frequents DepositAccounts.

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What To Do With Those Maturing CDs?

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Do you have 5-year CDs maturing? I was looking back at my posts from 2008, and I noticed a few big banks that were offering good 5-year CD deals. One was Wachovia (which is now Wells Fargo). In July of 2008 it was offering a 5-year CD with a 5.25% APY. For those who took advantage of that deal, you’ll likely be very disappointed when that CD matures this month. I just took a look at the current CD rates at Wells Fargo. Its 58-month CD special has a rate of only 0.50%. Wells Fargo doesn’t list long-term standard CD rates, but it’s a safe bet that those rates are below 0.50%. The standard 1-year CD rate is only 0.05%.

Wells Fargo isn’t unique. The CD rates at other large banks are just as pathetic. Bank of America’s 5-year CD rate is only 0.40% in California. Chase Bank’s 5-year CD rate is even lower at 0.35%. Even Chase’s 10-year CD rate doesn’t top 1%. It’s only 0.90%.

When I purchased 5-year CDs in 2008, I was hoping that I would skip over the coming low-rate cycle. It worked in 2001 when rates were going down. A 5-year CD opened in 2001 matured in 2006 which was a pretty good time for CDs. It didn’t work this time.

There are no easy answers if you have long-term CDs that are maturing. I can only provide a few things to consider.

First, don’t let those CDs automatically renew. The CD grace period typically give you 5 to 15 days to close the CD without an early withdrawal penalty. If you forget about the CD and miss the grace period, the CD will likely automatically renew with a very low rate. Then you’ll have to pay an early withdrawal penalty if you want to move your money. That early withdrawal penalty may be larger than it was when you first opened the CD. Bank of America and several other banks have increased the EWPs in the last few years, and those new EWPs take effect when the CDs roll over.

Once you close the CD, you’ll need to decide what to do with that money. If it’s money that you want to keep 100% safe, you’ll probably want to keep it at a bank or credit union. Then you’ll need to decide if a CD is worthwhile today? Or does it make more sense to just keep that money in a savings or money market account?

If you’re thinking about a CD, you’ll have to decide on the best term? Short-term CDs with terms under 3 years don’t have rates much higher than the best internet savings and money market accounts. You can get a 5-year CD with a 2.05% APY at iGObanking.com (as of 7/24/13), but that rate may look very low in a few years. If rates do shoot up, you should be able to close the CD early with an early withdrawal penalty (see our CD early withdrawal penalty calculator). However, there are concerns that banks may not make early withdrawals easy.

If you don’t think CD rates are high enough to make CDs worthwhile, you can just keep the money in a liquid account. If you decide on a savings or money market account, you should consider an internet bank. You can sometimes get good CD deals at local banks and credit unions, but good deals on savings and money market accounts are less common unless they’re just a temporary promotion.

The main issue with savings and money market accounts is that rates may continue to fall. However, we haven’t seen big rate cuts in the last two years at most internet banks. So if you choose an online savings account, the rate probably won’t fall much in the next year or two even if the rate environment doesn’t improve. For this reason, I don’t see much advantage with short-term CDs with terms under 2 years.

If you’re more desperate for higher rates, a high-interest reward checking account is an alternative to savings and money market accounts. I just reviewed the pros and cons of reward checking accounts in my post Finding the Best High Interest Reward Checking Account.

I have more discussion on deciding what to do with matured CDs in my post Strategy for Getting the Best Yields in Deposit Accounts.


  Tags: CD rates

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Comments
31 Comments.
Comment #1 by paoli2 posted on
paoli2
Ken, I am one of those of many who will be having 5 year CDs mature this year and onward.  This morning my manager at my local bank who has a new Financial Agent there insisted I could get much higher than 3% with a Fixed Annuity which allows one to take out one's full amount anytime they decide they want to. I was under the impression that Annuities are with insurance companies and once you turn over that big lump sum to them, they feed it back to you in larger checks than one could get in a CD "but" you lose control over that money.  Do you know of any fixed annuity which works the way that manager says?  Thanks.

5
Comment #2 by Anonymous posted on
Anonymous
With the national debt over $17 trillions and growing, any movement upwards in the interest rates will make USA go bankrupt.

Printing money does not help either, the banks do not know what to do with the inflow of unlimited supplies of money. Inflation will be counter productive either, only God know what the future holds, therefore, just enjoy life as much as you can and do not expect much from the future interest rates.

I just down-sized as much as humanly possible and try not to think about it to much.

20
Comment #3 by Anonymous posted on
Anonymous
paoli2 - #1,
If you buy single premium immediate annuity today, the interest rate is around 1.5% and you lode control of the money forever.
The pay-out is dependent on age and **** and other features like, single life or joint, period certain or not, cost of living adjustment or not and other factors.

All those feature cost money and the pay-out will be even lower then 1% in many cases. On top of that you are receiving your principle back and the broker count that as interest received but is only return of your money.


It is very bad time to buy annuities at present time, the pay-outs are at historic lows.

22
Comment #4 by Anonymous posted on
Anonymous
Anon#2

I wish people like you would quit painting such a postitive picture of things.  Hells bells, bankruptcy the least worst outcome.  Complete failure of electricity, nuclear war over water supplies, and mass starvation more likely.  I still may be a little to optomistic.

5
Comment #5 by Bancxman (anonymous) posted on
Bancxman
Who's got the money to stash in a CD for five years? The best I can do is two years. I've set a floor of 1.50% for my CDs. That sometimes means keeping my cash available in my Capital One 360 account until Ken unearths something like the recent 2.0% deal offered by USAlliance. My hat's off to those of you who can lock in a rate for longer periods, but I'm not that flush.

8
Comment #6 by paoli2 posted on
paoli2
#5  It depends how much you want any income.  Since we have no idea what is really going to happen in the next 5 years, I go for at least 2% income and that has to be a 5 year CD.  It is the pits but better than 1%.

6
Comment #7 by Anonymous posted on
Anonymous
To Anonymous - #4,

It the foreigners stop buying US treasury, the dollar will collapse and with that the USA. We are already insolvent, just look the national budget of money coming in and going out.
Being bankrupt only is state of mind and only occurs when we will fail to pay any obligation to anyone claiming money is owned. Any nation that prints money to pay some or all of the obligation, is technically bankrupt.

10
Comment #8 by Anonymous posted on
Anonymous
Banks with affiliated brokerages feel they will have a field day with those maturing high interest CDs because they believe you'll have no choice but to put the money into risk assets such as stocks and mutual funds. I've started researching some of their suggestions, and most of them yield very little when you take into account commissions, fees, expenses, market fluctuations and the state of the market when you need to take your money out. The return on my principal is less important than the return of my principal. Stick with CDs and keep a month's supply of food and water.

8
Comment #9 by Shorebreak posted on
Shorebreak
Oh, what to do, what to do?

Too much thinking is involved in this type of decision. Since no one knows what the future holds for interest rates, just put half of your funds in liquid savings or money market accounts and the half in CD accounts that mature in 5,6, or even 7 years. That's usually called the "barbell" approach.

http://banking.about.com/od/cds/a/CDbarbells.htm

7
Comment #10 by Anonymous posted on
Anonymous
I have a couple of those old Wachovia CDs maturing this month and next.  I don't know what to do with the money any more than the rest of you do!  What I did was bought a 10 year CD at 3.05 from Scott Trade (CIT Bank). I never bought a CD from a broker before, but it seems okay except the interest comes back twice a year instead of being compounded. No fees to buy or to handle.  I hessitated to put it that long at only 3% but who knows when interest will go up past 3%.

10
Comment #11 by Maecl posted on
Maecl
Paoli2, I'm not an expert on annunities, but I would be especially carefull with banks.  They make lots of money selling them.  If you educate yourself and feel comfortable look at Vanguard.

Allstate just sold their  annunity division.  It is getting more difficult for annunities to find investmenst that will give them the income they need to pay out dividends.

 

8
Comment #12 by Anonymous posted on
Anonymous
Just look at Japan, 23 years with unterest rates of 0-1% and no end in sight. The national debt is the main reason for it.

8
Comment #13 by scottj posted on
scottj
I've been putting matured CDs into my 1.17% MM and then hoping to find deals like the USalliance which I moved a chunk into. Still hoping to see some local deals since RE is booming here. Think by the end of the year I should be able to get either 2.5% 3 year or 3% 5 years

6
Comment #14 by Anonymous posted on
Anonymous
Scottj Could you please post the name of your 1.17% MM account?

2
Comment #16 by CTM posted on
CTM
Paoli2 -

I would love to have the name of the specific annuity / provider.  I have never seen a Fixed annuity with those terms.  The best CD-Type annuity (also called GIC's) I can find is 3.50% for 10 years, with a 250K minimum.  The surrender charges are 7/6/5/4/3/2/1/1/1/.75.  You can withdraw interest once a year. This annuity also has a Market Value Adjustment (MVA) clause in some states.

I am currently working on a spreadsheet to demonstrate a particular Equity-Indexed annuity that a neighbor purchased.  As an example, the saleman got 7% off the top.  Base maintenance charges are 0.95% to 1.50% per year, with a yearly 8.00% ($X.XX * 1.08) increase. 

The fixed account pays 1.25% (Net 0.30% per year, declining until fee waiver kicks in.)

An S&P 500 account is capped at 3.00% per year (guaranteed minimum 1.00%), with the calculation based on the difference between two specific dates. (Maximum net of 2.05% per year until fee waiver kicks in.)

The third account is also based on the S&P 500, with a 1.50% positive monthly cap, but no negative monthly cap!  The guaranteed positive cap can be lowered to 1.00%.

Surrender charges are 12/11/10/9/8/7/6/5/4/2!  Twelve "free" withdrawals, 1 per year, subject to limitations.

4
Comment #17 by paoli2 posted on
paoli2
CTM:  Thank you for sharing your info with me.  I have no idea what Fixed Annuity this guy was talking about.  I was angry with him for something else going on at the bank today and ending up reporting him to his district manager.  I don't think he and I will be talking about any annuities he has in mine.  I don't like to invest in anything that doesn't meet my criteria especially if it takes a large amount of money.  I will just stick to my CDs even if I have to go out of town to find them for the interest I need.  Much appreciation for your input.

3
Comment #18 by Anonymous posted on
Anonymous
Anyone thinking of using annuity, will regret later.

The main purpose of annuity is income and not as investment vehicle.

They are complex, they pay very little ar present time and only person that makes money is the agent.

14
Comment #19 by Noel (anonymous) posted on
Noel
Since I moved to this country 3 years ago, my finances are in ruins, mainly because the interest does not even cut the inflation so keeping money in the CDs is like devaluating your money, albeit slowly. So I wonder, if there is REALLY a point in keeping a (or more) CD.

3
Comment #20 by Shorebreak posted on
Shorebreak
Re: Noel (anonymous) - #19,Thursday, July 25, 2013 - 4:42 AM

Rock-bottom interest rates are not confined to this country Noel.

Management of global economic bellwether Caterpillar just announced its guidance for the year.

Because CAT is so closely tied to the economy, it has unparalleled insight into what's really going on.

Contained in the guidance are these snippets regarding interest rates:

·  Most central banks reduced interest rates over the past 19 months, and average short-term interest rates in the world are near lows reached during the financial crisis. We expect further rate cuts in coming months.

·  With interest rates at or near record lows in many countries, some central banks injected more funds (quantitative easing) into financial systems to promote lending and economic growth. With both Japan and the United States following aggressive quantitative easing policies, we expect other countries will eventually implement similar policies.

·  Unprecedented central bank easing has raised concerns about potential inflation problems. Central banks that raised interest rates to address inflation concerns have returned to lower rates as most economies have not shown an ability to support higher interest rates or reduced liquidity.

·  Inflation has shown few signs of becoming a problem, particularly in developed economies. After nearly five years of near record low interest rates, average inflation in the world is near a 40-year low. We believe that high unemployment and modest economic growth will keep inflation under control at least through this year.

http://www.businessinsider.com/caterpillar-2013-economic-outlook-2013-4

Unless one wants to assume more risk by investing in dividend producing equities or junk bonds there is little choice in the deposit account arena. Either close to 1% yields on liquid savings or money market accounts or going out to 5,6 or 7-year maturities which some institutions offer around 2% yields. There are some decent reward checking account (RCA) yields out there but these entail stipulations like making a minmum amount of debit card transactions each month and/or direct deposit requirements.

8
Comment #21 by Anonymous posted on
Anonymous
With near zero interest rates, the retirees are being forced to live off their principal.

7
Comment #22 by scottj posted on
scottj
So less to leave to our kids, wonder if they will still be happy they voted for Obama then. 

5
Comment #23 by Anonymous posted on
Anonymous
Happy or not, I don't think the alternative choice for president wound have been any better for different reasons.   #1 being...a war monger!

3
Comment #24 by paoli2 posted on
paoli2
#23  I think you posted the wrong number.  How does my post, in any way, come off as a "war monger"? You might want to reread your post.

2
Comment #26 by Anonymous posted on
Anonymous
#24 - I don't think that #23 called _you_ a 'war monger", but  rather was simply stating his/her #1 opinion/reason as to why they would not prefer the alternative choice for president. You may want to re-read #23's post. I think you jumped the gun a bit.

1
Comment #27 by paoli2 posted on
paoli2
#26:  Oh, he was giving his #1 reason not pointing to the poster.  I reread it and it does read the way you indicated.  Thank you for bringing this to my attention.  I did misunderstand the post.  Sorry #23.

2
Comment #28 by Anonymous posted on
Anonymous
#27 - You're welcome and have a great evening.

2
Comment #25 by Anonymous posted on
Anonymous
Re: #21: "With near zero interest rates, the retirees are being forced to live off" cat food.

2
Comment #31 by CuriousDave (anonymous) posted on
CuriousDave
Paoli2: was your bank quoting you the rate of earnings in the annuity during the "accumulation" phase of the contract (before you begin taking payouts)? If so, you need to ask what the implied interest rate will be when you do start taking distributions, based on your estimated life expectancy. If they quoted you the annual payput rate, that would include both the partial return of your principal as well as the return on your principal. Since the prevailing interest rate is one of the major components used by actuaries in figuring the payout rate, it makes no sense that your bank can offer an annuity product with a payout that includes an income return of over 3% in today's ultra-low interest rate environment. Your money is usually locked up for good once you begin annuitizing (taking withdrawals) and you may well be regretting the annuity idea if interest rates go up later, when much more favorable payout rates will be offered. Today you would need about $15 of principal to generate $1 of total annual payout, compared with only $10 around 7 years ago. Finally, unlike a CD or a whole life insurance policy, the contract cannot be used as collateral for a loan.

1
Comment #32 by paoli2 posted on
paoli2
#31  I never allowed him to explain it to me because I don't do annuities and think he was just trying to get me to sit down with his "new" financial person so she could try to sell me something else.  From other encounters with this guy, I don't think "he" even knows what product he was talking about.  I am not handing any money over to some insurance company to peter it back to me over the years, take big commissions and make me think they are doing me a favor.  Suzi Orman hates most annuities and warns against them.  I like Suzi cause she has spunk so he can sell his great annuities to someone who hates Suzi.  I know this is not an intelectual way to make financial decisions but I have never done what the "brains" say I should be doing and I'm doing fine doing it "my way". :)

1
Comment #33 by Maecl posted on
Maecl
I think when Suzi started out in the business she sold annunities.  I heard her say once that she didn't like bond funds and said investors should buy individual bonds.  That didn't work well for those that owned GM and Chrysler bonds.  It's also not a good option if you don't have a lot of cash.  I don't what she likes now.  I stopped listening long ago.  I do like her advice on spending on what you don't need with money that you don't have.

1