$5000 Cash Bonus for a CD?

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United Community Bank is offering a unique type of CD. It's called the UCB Bright Future CD. Here's a summary of how it works. More details are availabe at the bank's website.

Initial Deposit: $500, $1K, $2,5K or $5K

10-Year Term

Additional Required Deposits: For each of the next nine years, a deposit equal to the initial deposit selected above is required.

Cash Bonus: If you make the nine consecutive yearly deposits equal to your initial deposit, UCB will pay you a cash bonus that will match your initial deposit at maturity.

Interest: The interest rate is equal to the 1-year certificate of deposit and will change annually on each anniversary date of your Bright Future CD to the current One-Year CD rate.

So if you choose a $5K Bright Future CD and continue to add $5K for the next 9 years, UCB will pay you a $5K interest bonus at maturity.

The bank's webpage lacks some details on early withdrawal penalties. It does have the following small print:
Penalty may be imposed for early withdrawl and bonus will not apply. Certificate cancelled if required annual deposit is not made.

To avoid the chance that you may miss an annual deposit, it does say that you can make an annual deposit in excess of the required deposit and that amount above may be carried over to meet next year's requirement.

Is this a good deal?

The first thing to consider is to compare this CD vs. investing in the top one-year CDs at other banks for 10 years. For example, UCB's current 1-year CD rate is 3.80% APY. This is about 1% lower than the top 1-year CD available. If you assume that UCB's future CD rates will always be about 1.0% lower than the best 1-year CDs available, you can do a simple comparison.

In the example, I'll assume investing $1000 annually in the UCB Bright Future CD vs. $1000 annually in the best 1-year CD available nationally. I'll assume a UCB rates will always be 4% and I'll assume the top 1-year CD rates will always be 5%.

After 10 years, the Bright Future CD will have a value of about $12,486. Then the bonus will add another $1,000 for a total of $13,486. The one-year top CD investment plan would have a total value of $13,207 without any bonus. The Bright Future CD beats the 1-year CD plan by $279.

In the end you may come out a little ahead with the Bright Future CD. However, you had to live with withdrawal limitations for 10 years. It might also be useful to compare the Bright Future CD with a 1-to-5 year CD laddering technique. One good point with this type of bonus system is that it's a form of interest deferral. The bonus is not received until maturity so I would think it wouldn't be taxed until then.

So the $5K bonus seems legitimate, however, it's not really easy money, and if you're not careful over the 10 years, you could lose out.

It looks like this offer is only available at UCB's branches, and UCB only has branches in Milford, Iowa and a few other Iowa cities.
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