While I focus on deals, we're going to continue to have others write articles on timeless banking topics. I'll be reviewing them before publication. The latest one was written by Miranda, and it's on How to Build a CD Ladder. We've also included in this article a neat infographic to better describe the CD ladder process. To supplement this article, I thought it would be useful for me to do a blog post to provide some additional issues to consider when you're planning a CD ladder.
Rolling Over CDs
Part of the CD ladder process is that you roll over maturing CDs. It's important that you don't let them roll over automatically. You often can negotiate a better rate at the bank. Make sure to check what the competition is offering. This can often help you get a better rate. One reader recently reported negotiating a rate that was over a percentage point higher than the listed rate.
Ease of Closing CDs
You won't always be able to negotiate higher rates, so it's important that the bank makes it easy for you to close the CD and transfer your money. I just posted on one internet bank that requires its CD holders to mail in their paper certificates (see my review of Doral Bank). Another example of a bank making it difficult to close a CD is Astoria Federal Savings. If you don't live near a branch, the only option to receive the funds is by check in the mail (see my review of Astoria Federal).
Look for banks that allow CD closure instructions to be done online, by phone or by secure email. Some banks can send you the funds via an ACH transfer. Typically this will be a transfer to the bank that was used to fund the CD. If the bank can't do an ACH transfer, you might want to open a liquid account at the bank. If you have a credit union, you'll already have a share savings account. I've always been able to instruct the bank or credit union to transfer the funds of a matured CD into the liquid account. Once it's in the liquid account, you can either write a check to fund a new CD (if it's a checking or money market account) or you can do an ACH pull using an online bank like Ally.
If you don't want to open a liquid account at the bank (perhaps due to monthly fees), a wire transfer is often a better option than receiving a check by mail. An outbound wire transfer will typically cost you at least $10, but that might be cheaper than the lost interest while the check is in the mail.
Health of the Bank
CD ladders help you take advantage of the higher rates offered by long-term CDs. But this high rate can go away if your bank fails. If you stay below the FDIC limit, you don't have to worry about losing any principal or interest. However, you may lose your high CD rate if the bank fails. It has been very common for banks that take over failed institutions to reset the CD rates at the day of closure or soon after. Customers have the option to close the CD without a penalty. However, with the low interest rate environment, it has been impossible to find comparable CD rates.
Accessing Your Funds
CD ladders are designed to allow you to have access to some of your money each year or some regular interval when one of the CDs matures. It's important to note that most banks allow you to make an early withdrawal with a penalty. So you don't have to wait if you need the money or want to use it to fund a higher rate CD. The early withdrawal penalties can vary widely among banks. An example of an especially harsh penalty is at Intervest National Bank which charges a penalty equal to the interest of half the term. For a 5-year CD, that's 30 months of interest! (see my account review). The best early withdrawal penalty is currently at Ally Bank which has a penalty of only 60 days of interest (see my account review). It should also be noted that many banks include in their disclosures a right for them to refuse an early withdrawal (see post).
Other CD Tips
I have some additional issues to consider when you're planning a CD ladder in my post about the things that banks won't tell you about CDs.
Do you have any CD tips or CD experiences to share? If you do, please leave a comment.