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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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CD Interest: Let It Accumulate or Receive Regular Payments?


Most banks and credit unions give CD customers at least two choices when they open a CD. First, they can choose to let the interest accumulate in the CD, or second, they can choose to have the interest be paid out on a regular interval during the CD term. If you typically use the interest from your CDs to supplement your income, you probably always choose the second option.

For today’s poll, what option do you typically choose for your non-IRA CDs? Do you choose to let the interest accumulate in your CD? Or do you typically choose to have interest paid out to you in regular intervals?

One downside with withdrawing the interest from your CDs is that this will reduce the annual percentage yield (APY). This is due to the fact that you lose the advantage of compounding. The interest rate is only being applied to the principal and not principal and interest.

One advantage of withdrawing the interest from your CDs is that you can use part of that interest to pay taxes. If your non-IRA CD has interest that accumulates, you will generally still owe taxes on that interest that is credited during the tax year even if the interest isn’t paid out to you (see post on CD and taxes).

Every now and then we come across a bank that doesn’t allow interest to be paid out. That was originally the case at Barclays. For the first year it did not allow interest disbursements, but as I reported earlier this month "you can receive an interest disbursement from your CD account on a monthly basis. You have the option to keep interest in your CD account or transfer it to your Barclays Online Savings account or a verified external account."

Frequency of CD Interest Payouts

Some banks and credit unions give the customer many options about the frequency of the interest payments. As you can see above, Barclays pays out its interest monthly. Ally Bank allows CD customers to choose the payouts to be on a "monthly, quarterly, semi-annual or annual basis."

The frequency is often based on how the institution credits the interest. If interest is credited monthly, then the interest can be paid out monthly. That’s the case of Mountain America Credit Union. According to MACU’s truth in savings document, "at the time of opening, you may request to have dividends paid to you by check, transferred to another share or to a different account monthly rather than credited to this term deposit account." Melrose Credit Union credits interest quarterly, so the payouts will also be quarterly. According Melrose Credit Union’s website "members will still have the option of having their quarterly dividend transferred to another share account."

Withdrawal of Accrued Interest

If you opened a CD and specified that the interest accumulate in the CD, you may be allowed to withdraw the accrued interest in the future without an early withdrawal penalty. This can be useful if you need some money, but you don’t need any of the CD principal. It can also be useful if interest rates go up. Some banks like Nationwide Bank specifically allow this in their disclosure:

You can only withdraw interest credited in the term before maturity of that term without penalty. You can withdraw interest any time during the term of crediting after it is credited to your account.

Of course, there’s always a concern that a bank may change its policies regarding early withdrawals, even early withdrawals that don’t include any of the principal. The risks of an institution making retroactive changes to CDs have been seen at credit unions which have raised the early withdrawal penalties on existing CDs. I have more details in this blog post.


  Tags: CD rates

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Comments
22 Comments.
Comment #1 by Shorebreak posted on
Shorebreak
BBZ (Before Bernanke ZIRP)  40% interest paid out, 60% interest accumulated.
ABZ (After Bernanke ZIRP)  100% interest paid out to supplement income.

Some banks and credit unions allow depositors to change how they like their interest treated after the account is opened. PenFed, for example, permits one to change where the interest goes at will, even making the choice online. While, in the case of  Randolph-Brooks FCU, no changes are allowed after the account is opened.

19
Comment #2 by Anonymous posted on
Anonymous
Penfed, Capital One and Navy Federal Credit Union allow switching from accrual to withdrawal at will. Some of these three make it easy to do on line (like Penfed) the others you have to call a CSR to do it. Capital One and Navy Federal Credit Union even allow withrawal of all accrued interest on CD's to be withdrawn (no penalties or fees involved). Penfed allows switching at will but does not allow withdrawal of past interest accruals.

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Comment #3 by Anonymous posted on
Anonymous
In earlier years when we were still trying to accumulate money, I used to let the interest compound.  However, after retirement, I started just withdrawing all interest and using it for other purposes.  Something to be considered is that if one has a certain amount in a CD and does the math, letting the bank or institution keep the money and "compound" it might mean only about $1.00 or so more a month than one would get just taking the money out.   Compounding to me is only feasible if you have quite a lot of money to compound or maybe in the beginning when every dollar is important to your goal.

15
Comment #4 by QuickSilver posted on
QuickSilver
I don't buy CD's unless I am getting a very attractive rate.  Since compounding is a key component of realizing a projected return, I have a very strong preference to have the interest reinvested at the initial rate of the CD.

Say, for example, that you found a 2yr Cd at 1.75%.  If at all possible, you should direct the interest payments to be reinvested at that rate.  If not, that money is probably going into a money market account where it will get ~.50%.  So, every interest payment is losing a reinvestment rate of 1.25%, compared to the MMkt. until you find another attractive CD rate and accumulate sufficient funds to buy it.  That difference adds up surprisingly quickly.

8
Comment #5 by Anonymous posted on
Anonymous
Before I retired, I always left the interest accumulate.  Socked as much money away as I could for my retirement years. (Those were the days when compounding the interest really added up) 

After I retired, I have the interest automatically withdrawn and transferred to my checking or savings account to augment my retirement income.  (Compounding the pittance of interest earned today doesn't amount to much at all and is not missed.)  Thanks to Bernanke! 

Of course Greenspan didn't help matters either.  His lying words still resonate in my ears today:  "The crises in the housing market is well contained and will not spread to other sectors of the economy."   

9
Comment #6 by Anonymous posted on
Anonymous
This is yet another question that depends on the person involved. like when to draw SS, 62, 65, or 70, or weather to even open a CD, its too varied to say one way or the other.

I personally have always taken the interest on a monthly basis to a MMA, yes I knew the differance, but I wanted the money as a suppliment to my income, after all this is why I use CD's at all anyway, I'm not saving for a house, college or whatever, I just use my savings to generate  some added  monthly income. It hasn't been any problem for me, I have also used it to just pay my estimated tax, so I didn't have one big bill later, anyway as I said its more a personal thing,, to each his own.

At this point in my life I don't need but so much to maintain my lifestyle, and by time I reach 75 I could care less what the interest  rate is as I will start to just use up as much principle as I need too, I'll most likely not run out in the 10 to 15 years I would have left with my lifestyle.

13
Comment #7 by pearlbrown posted on
pearlbrown
I consistently elect to have the interest accumulated in the CD. 

8
Comment #8 by scottj posted on
scottj
If I don't have a liquid account that pays more than the CD I let it accumulate. Only CD that has a chance of me taking monthly interest might be my 10 year 5% Penfed since all my shorter terms ones are sure to stay higher than liquid accounts 

2
Comment #9 by Anonymous posted on
Anonymous
The 10 year 5% is the one I would definitely let accumulate, imo.

8
Comment #10 by Anonymous posted on
Anonymous
I should have said... the 10 year 5% cd is the one I would definitely let compound..... compound being the key word not accumulate,imo.

1
Comment #11 by scottj posted on
scottj
Just saying with 7 years left on it I'm hoping we might see liquid accounts over 5% in that time. 

7
Comment #12 by Anonymous posted on
Anonymous
This is an interesting poll and is suprising to me as to the large percentage of accounts that are left to accumulate/compound.  Since I must take my interest on a monthly basis to live on, I wrongly assumed that most others were in the same boat as me. In any event, congrats to all who are able to take advantage of the compounding option.

4
Comment #13 by pearlbrown posted on
pearlbrown
 

Re Anonymous - #12, Tuesday, May 28, 2013 - 10:08 PM

I think your assumption that others are not in the same boat as you is flawed.  Circumstances vary from one individual to another.  Also, variables such as the total amounts and terms of the CDs and what other assets might be available to fund expenses are important to consider too.  An extreme example:   someone has assets totaling $100 million, all in CDs with maturities of 5, 10, 15 and 20 years.  Unless someone else is going to pay the bills for the next 5 years until the next CD matures, they must take the interest to live on.   But monthly interest on $100 million certainly buys a nice boat ;), which of course may/not be enough depending on one’s personal situation and choices. 

For others, their choice might be to take a maturing CD out of a ladder, using it for living expenses and not reinvesting it so that others with better rates might continue to compound. 

My point is that the decisions vary from one individual to another and how they handle interest on CDs is not necessarily an accurate indicator of which boat they are in.

6
Comment #16 by Anonymous posted on
Anonymous
#13 - Regardless of your 'extreme' examples, I remain surprised as to the rather large percentage of compounding accounts in this day and time, for whatever reason, no further anaylis needed since it is an observation only.  Perhaps my 'boat' analogy in the previous post took your focus off of my primary point. And, yes, you are correct, different strokes for different folks.

3
Comment #14 by scottj posted on
scottj
Probably a big reason some of us can let it compound is because we have had some CDs mature and are waiting for some improvement before locking it up again. I have funds sitting in a money market making 1.17% so makes sense to just take from there to live on

4
Comment #15 by Anonymous posted on
Anonymous
I have the interested credited monthly to my money market account.  When I ran the numbers to see what the difference would be if left to compound versus being distributed, the difference was so small as to be rendered insignificant. Thus, I'll take the interest now, thank you very much.

 

7
Comment #17 by lou posted on
lou
I kick myself for not investing twice the amount in those Penfed 10 year 5% CD's. I did take advantage of them with all the liquid funds I had available at the time from CD's maturing in the fall and winter of 2010, but in retrospect I should have taken an early withdrawal on some of the other shorter term CD's I owned at the time. I thought about it but didn't do it. At the end of 2010 it looked like interest rates were going up so it made the decision more difficult than it would appear today.

4
Comment #19 by Anonymous posted on
Anonymous
How in the world can Pen Fed, a Not for profit CU afford to payout 5 percent interert over 10 years when the Fed rate is near zero?  Where is the money coming from?  Are they really able to lend money at greater than these rates?  Doesn't make any fiscal sense.

1
Comment #20 by lou posted on
lou
#19, in late 2010 and and early 2011, interest rates moved considerably higher. Penfed and many others made a calculated bet that they would continue to go up so they probably felt that over 10 years it was a reasonable bet. Many people passed over the Penfed 10 year CD because they thought the rate wasn't sufficiently high for a 10 year term. Also, many people keep their money in Penfed Money market accounts which earn no interest. Their cost of funds is probably very low so I don't think in the aggregate that promotion hurt them all that much.

4
Comment #21 by Anonymous posted on
Anonymous
When I have a smaller CD maturing, I try to figure out if I am going to be needing extra funds to help ourselves or family since in coming interest is so low.  I prefere to closed out the smaller CD and keep it in a savings account for the unexpected problems which do seem to pop up.  If they don't, I can always take advantage of a new CD if I find someone giving a decent rate.  The major question today is what do we consider a "decent" rate?

2
Comment #22 by paoli2 posted on
paoli2
When I see the amount of money from the Polls that some in this group "claim" to have invested with Penfed, I would love to see a Poll as to how many did EWPs from other CDs to be able to get the large amounts they put in Penfed.  I would love to grab more Penfed CDs but everything else I have is already locked in to other CDs.  Wonder how many did EWPs just to get the Penfed CDs???

1
Comment #23 by scottj posted on
scottj
I never close CDs early, but was a no brainer for me to help my brother do his. He opened a Penfed 24 month 1.50% 12 months ago, bal is now $250k+, so only lost 6 months of interest to close that and reopen as 5 year 3.04%. From using that tool for breaking CD it shows his CD will be worth over $2k more when it would have matured in 12 months

2