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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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Strategy for Getting the Best Yields in Deposit Accounts - Part 2


I reviewed some strategies to get better yields on liquid accounts yesterday. Today I'll review some strategies for certificates of deposit. As I mentioned yesterday, this record low interest rate environment is making it very difficult for those who depend on interest from their bank accounts. With rates so low, you'll want to take every opportunity to maximize the rates. The first decision for savers is how much if any of their money should go into CDs.

CDs or Savings Accounts?

Liquid accounts can be tempting when many have yields higher than 1-year CDs. But as we have seen over the last two years, savings and checking account rates can fall substantially. At least with a CD, your rate is locked until the CD matures. A good example of this was in 2007 when PenFed was offering 3-to-7 year CDs with 6% APY. During this time FNBO Direct was offering a savings account with a 6% APY and State Bank of Toledo was offering a reward checking account with a 6% APY on all balances. Locking your money into a long-term CD didn't seem as appealing as a liquid account with the same rate. Now FNBO Direct's savings account pays only 1.10% APY. State Bank of Toledo's reward checking account only pays 2.51% APY on balances up to $25K.

Of course the rate lock feature of a CD can be a downside when rates start to rise. The problem is that no one knows when this will be. So it makes sense not to put all your eggs in one basket when you decide about how much to put into CDs and how much to put into liquid accounts.

CD Ladders

One common way to hedge you bets is to use a CD ladder approach. In this approach, your long-term CDs are staggered so some mature on regular intervals (i.e. every 6 months or every 1 year). If CD rates start to rise, you can slowly start rolling those maturing CDs into higher yielding CDs.

If you're just starting a CD ladder, the common approach is to start with short-term CDs for most of the CDs, and when they mature, you roll them into long-term CDs. With most short-term CD rates so low, you may want to consider just keeping that money in savings or reward checking accounts.

Early Withdrawal Penalties

Another important consideration for long-term CDs is the early withdrawal penalty. Instead of waiting for a long-term CD to mature before you buy a new CD with higher rates, you usually have the option to close the CD early. You'll have to pay a penalty for the early withdrawal, but if that penalty is mild, you could earn more than if you just wait for the CD to mature.

As many of the regular readers of this blog know, I've been writing a lot about long-term CDs with mild early withdrawal penalties. Two good deals continue to be the 5-year CD at Ally Bank and the 5-year and 7-year CDs at PenFed. I reviewed these CDs in this blog post and looked at effective rates if these CDs were closed early. As you can see in that post, you can earn more with these CDs closed early than you could with short-term CDs.

There are some potential risks with depending on the mild early withdrawal penalty on long-term CDs. I reviewed these risks in this blog post. One risk is that the bank could refuse an early withdrawal. Some banks give themselves that right in their disclosures. So it's important to review the bank disclosures so you're aware of any possible gotchas.

Tips to Earn More Interest on CDs

If you do decide to go with CDs, there are some basic steps that can help you get higher rates. First, remember that CD rates are negotiable. You often can get higher rates than the rates listed by the bank. This is especially true if you're a long-term customer at your local bank. If you request a higher rate, try to have rates of a few of the bank's competitors handy.

Another important step is to make sure you don't let CDs automatically roll over at maturity. This is especially true if your original CD was a special CD at any large bank. These special CDs are typically rolled over into standard CDs which can have very low rates.

If your CD matures and your bank isn't willing to offer a rate that's competitive, you should consider moving that CD to a new bank or credit union. When the CD matures, you typically have a grace period of 5 to 15 days in which you can close the CD without a penalty. However, some banks won't pay interest during the grace period if you close the CD. So if you decide to move your money, try to move it as soon as the CD matures.

For non-local banks, it can be problematic to receive the funds from a matured CD. Make sure you plan for this and check with the bank before the CD matures. It's not a good option to have the bank mail you the check. This can take one or more weeks. During this time the money isn't earning interest. A better option is a free ACH transfer to your other bank account. Unfortunately, not many banks provide this option. However, most will transfer the CD money to a liquid account that you have with that same bank. Once it's in that liquid account, you can then write a check or pull the money using the ACH service of another bank. Finally, a wire transfer is an option to receive the funds. However, there's almost always a fee for an outgoing wire transfer, but this fee may cost you less than the loss of interest while waiting for the check in the mail.

CDs may not have the appeal of online savings accounts or reward checking, but if you want to earn the most on your safe money, CDs shouldn't be dismissed. Hopefully, the above tips can help you make more on your CDs. If you have any tips, please leave a comment.

  Tags: CD rates

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Comments
10 comments.
Comment #1 by Anonymousogrady (anonymous) posted on
Anonymousogrady
will take my chances with reits right jeffy boy pilsner/?

1
Comment #2 by HARI SINGH (anonymous) posted on
HARI SINGH
TO RJ KEEP THOSE INDIAN COMMENTS TO YOUR SELF WE DO NOT APPRECIATE THEM

2
Comment #3 by cactus posted on
cactus
Beware of wire transfer reliability.

They get goofed up very easily - because they are not as common as other transactions and require special skill and authority in a financial institution. I had one delayed because the one person authorized to do them was out.

Unlike a check or an ACH, the details of a wire transfer are not visible to you. It was not fun to determine what happened on both ends with a goofed-up wire transfer from a major insitution.

I don't use them any more. If you do - track them very closely from end to end.

If you can't do ACH, sending a check via FedEx costs the same than wire transfer and is much more visible to you and under your control.

 

12
Comment #4 by cactus posted on
cactus
Very good article, Ken.

5
Comment #5 by Jo (anonymous) posted on
Jo
Wire transfers have gotten such a bad rap due to the amount of terrorism activity and money laundering phenomenon. Having been a bank teller, I trained extensively on the nuances of wire transfers.

I have used this means of transferring money from one account to another a time or two, but not without a bit of the jitters. The amount being transferred was extensive, but I think what it was that got me off the hook (needing to be questioned) was the check I was depositing in a local account was issued by the government.

6
Comment #6 by Macinfla (anonymous) posted on
Macinfla
My wife and I recently went through transferring our IRAs, and learned that in most cases, the receiving bank does the requesting. In our case, the receiving bank faxed the largest discount broker for funds from two IRA accounts. My funds were sent overnight FedEx, and they charged my account 20 bucks for that service. From the same request, they mailed my wife's funds by ordinary mail, and it took a full week to arrive. No explanation as to why the two transfers were handled differently, they were for the same amounts, or why the brokerage charged me for expedited service that was not requested.

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Comment #7 by Anonymous posted on
Anonymous
Thanks Ken, very helpful to someone like me who inherited a small sum and know little about money matters. 

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Comment #8 by ChrisCD posted on
ChrisCD
As far as wires vs. Fed Ex vs. ACH, it all depends on your experience.  We deal with primarily instiutional clients and funds are wired between backs day after day with very, very few problems.  Many banks waive wire fees for institutional clients so that isn't an issue either.  A wire is basically instaneous whereas ACH transfers can take up to 24 hours to post. 

ACH is almost always free, although I've seen some banks charge minor fees ($2.00) when compared to retail wire fees ($20 on average). 

With earnings so low, ACH is probably the most cost effective for retail investors, but may take longer for the customer to set-up than a wire.

3
Comment #9 by Judy from Jackson Heights (anonymous) posted on
Judy from Jackson Heights
Thanks for this article on CDs - it was very clearly written and very helpful!

1
Comment #10 by Anonymous posted on
Anonymous
my husband work at the moment in oil rig in aberdeenin, and our daugther at the moment is in Malasia, which she is intense care in the hospital kuala lumpur,for reasons of money i can see her, and my husband cant to take money because is in USA and is cds wich he can took or transfer any money, i dont have good enough money to send to my daughter and, my husban told me , the rules bank is he need to be in person and he cant left his contract at the moment to fly to MALAYSIA, WHAT we need to do, there some options /? PLESE HELP ME THANKS I WILL APRECIATED THAT

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