What to Do with Maturing CDs? Choosing Long-Term CDs with the Highest Rates

Many 5-year CDs with interest rates over 5.00% will be maturing this year, and several readers with these CDs have been trying to decide what to do with that money. Unfortunately, there isn't any great option for money that you want to keep 100% safe. No one likes to lock into long-term CDs with today's low rates. Also, no one likes earning less than 1.00% in savings accounts and short-term CDs.

Yesterday I reviewed one strategy in which you choose the best long-term CD with a mild early withdrawal penalty. Today, I'll review another strategy that's similar. That strategy is to choose the best long-term CD regardless of the early withdrawal penalty. As I mentioned yesterday, some of the best CDs have early withdrawal penalties so harsh that it would be too costly to close the CD early for the vast majority of situations. Also, as I described yesterday, there are risks with planning to close a CD early. It may turn out to be more difficult or costly than planned.

One example of a top CD rate with a harsh early withdrawal penalty is at Melrose Credit Union which offers a 2.68% APY 5-year CD (as of 1/17/2012). That's the highest 5-year CD rate that's nationally available. However, Melrose has a harsh and confusing early withdrawal penalty. I have more details of the EWP in my last Melrose Credit Union CD review.

Another example is US Bank which has the best 5-year CD APY at a nationwide bank. It's a special 59-month CD that has a 2.25% APY (as of 1/17/2012). As I described in my US Bank CD review, US Bank will charge a penalty of at least one-half of the interest that would have been earned on the funds withdrawn if held for the entire term. For a 59-month CD, that's 29.5 months of interest.

Capital One is tied with Discover Bank for the highest CD rate at a bank that's nationally available. Both have a 10-year CD with a top APY of 2.55% (as of 1/17/2012). At Capital One, this is available to Costco members. The yield is 2.50% for others. Capital One's early withdrawal penalty may be very harsh since it increases as interest rates rise. I reviewed the details in my Capital One CD post.

If you're going to invest in one of these CDs, it's a good idea to plan to avoid early withdrawals of principal. A CD ladder approach can minimize the risk that you'll need to make an early withdrawal. In a CD ladder you divide up your CD money and invest that money into multiple CDs separated by regular intervals of time (i.e. every year). Once a CD ladder is in effect, you should have a CD maturing in regular intervals. That money can then be used for expenses or it can be reinvested into a new higher-rate CD (if interest rates are rising).

In 2010 I reviewed some CD ladder alternatives. One alternative is to avoid short-term CDs and use savings accounts or reward checking accounts instead. When you start CD ladders, short-term CDs are typically used so that you won't have to wait too long before the first CDs mature. There are some downsides of this approach. First, short-term CD rates are currently so low, they don't have much advantage over savings accounts and reward checking accounts. Second, liquid accounts make it easier to quickly take advantage of CD deals. If a CD deal pops up, you might not be able to take advantage of that deal if your short-term CD still has another two months before it matures.

One question that's hard to answer is how much money should be kept in savings accounts or short-term CDs versus long-term CDs. People might want to keep significant amount of their money in savings accounts even if they won't need that money in 5 or more years. The reason is that they don't want to be locked into a long-term CD when interest rates shoot up. This strategy won't pay off if interest rates stay the same or continue to fall as they have been in the last four years. Below are three possible scenarios about future interest rates assuming you keep the money in a savings account. Each year I list the average interest rate earned on that savings account. I then provide an average for the five years. These 5-year averages can be compared to current 5-year CD rates.

Future Savings Account Rates: Potential Scenarios

• 2012: 1.00%
• 2013: 1.00%
• 2014: 2.00%
• 2015: 3.00%
• 2016: 4.00%
• AVER: 2.20%

• 2012: 1.00%
• 2013: 1.00%
• 2014: 3.00%
• 2015: 5.00%
• 2016: 7.00%
• AVER: 3.40%

• 2012: 1.00%
• 2013: 3.00%
• 2014: 5.00%
• 2015: 7.00%
• 2016: 9.00%
• AVER: 5.00%

In the above scenarios, I assume the savings account rates will eventually rise. Even though you can currently get over 1.00% in a savings account, there's a good chance this will go down so an average of 1.00% is still reasonable. For the first two scenarios, I assume rates don't start rising until late 2013 or early 2014. So the average rate remains 1.00% for 2012 and 2013. For the second scenario, I assume rates start rising faster than the first. I assume a very fast rise for the third scenario. My guess is that the first scenario is probably most likely to occur, but that is just a guess.

The important thing to note above is the 5-year averages. You can compare these to the current 5-year CD rates. If the first scenario occurs, you'll do better if you had chosen a 5-year CD. If the third scenario occurs, you'll lose out on the high rates for the last 3 years if you had chosen today's 5-year CD. I would not consider this a catastrophe.

As I mentioned at the start, there isn't any great option for money that you want to keep 100% safe. Hopefully, this post will help you evaluate the trade-offs between locking into long-term CDs and earning low rates in savings accounts and short-term CDs.

Searching for Top CD Rates

To search for nationwide CD rates and CD rates in your state, please refer to the best CD rates section of DepositAccounts.com.