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Deposit Account Strategies for 2017


As of today, 88% of the readers who took my Fed Rate Hike Poll anticipate three or fewer Fed rate hikes in 2017. This prediction is inline with what the Fed suggested last month with its dot plot and inline with the current Fed fund futures, which indicate only a 14% chance of more than three rate hikes in 2017 (Please take the poll if you haven’t already).

This is a good reminder that rate hikes this year (and in the next couple of years) will likely to be gradual. That’s important to remember when you’re deciding how much of your “safe” money should go into long-term CDs and how much should go into short-term CDs and liquid accounts (i.e. savings, money market and checking accounts). If you put too much in savings accounts, you may lose out while you wait for higher rates. However, rates could rise faster than expected, even though this seems unlikely. In this case, you may be stuck in a low-rate CD that’s earning less than top savings accounts.

So what’s the best deposit account strategy in 2017? I think long-term CDs still make sense, but there are some techniques to use that can minimize the risk of having too much money stuck in a low-rate CD. You may want to depend more on internet savings accounts. If you do, there are some issues to consider. You may also want to consider special CDs like step-up CDs and penalty-free CDs. However, they may not have as much value as they seem. In the following discussion, I’ll review these techniques and issues that should help you form your deposit account strategy for 2017.

CD Ladders and CD Ladder Variations

If you want to keep things simple, establish a standard CD ladder. In a standard CD ladder, you’ll have multiple CDs with CDs maturing at regular intervals. In a rising interest rate environment, CD ladders provide more opportunities to roll over maturing CDs into new higher-rate CDs.

CD ladders are often started with short-term CDs in addition to long-term CDs. When the short-term CDs mature, they are rolled into long-term CDs. Eventually, all of the CDs in the ladder are long-term CDs. Since many short-term CDs have low rates, it can make sense to use an internet savings account rather than a short-term CD. This is especially the case for CDs with terms under one year.

One variation of a standard CD ladder is a barbell CD ladder in which half of the deposit accounts are in long-term CDs and the other half are in short-term CDs. If rates rise faster than expected, you’ll see the benefits quicker with the short-term CDs. As mentioned above, short-term CDs often have lower rates than internet savings accounts. So instead of maintaining half of the money in short-term CDs, it can make more sense to use internet savings accounts or high-yield reward checking accounts (Depending on how much money you have and how much work you want to do.

CDs with Mild Early Withdrawal Penalties

Whether you decide to have one CD or multiple CDs in a CD ladder, it makes sense to choose CDs with mild early withdrawal penalties (EWPs). I consider a mild EWP to be no more than six months of interest for a 5-year CD. In a DA study, we’ve shown that you often don’t sacrifice interest rates when you chose a CD with a mild EWP. You can compare the effective yields of CDs after the early withdrawal penalties by using our CD early withdrawal penalty calculator. Be aware that there are risks on depending on an early closure of a CD ( see article).

Issues to Consider for Your Internet Savings Accounts

If you do plan to keep more in internet savings accounts while you wait for rising rates, keep in mind that many internet banks often don’t remain rate leaders. This is especially true for those that offer introductory rates. After the promotional rates are over or when the internet bank falls behind on its rates, you may want to move that money to the next savings account deal or to a hot CD deal. It’s important that the internet bank makes it easy for you to quickly move that money. The internet bank’s bank-to-bank ACH transfer service should be fast (taking no more than one or two business days). Also, its transfer service shouldn’t have small limits on the amount that can be transferred. I’ve seen internet banks that have limits under $5k which can make the transfer system of little use for those with $100k or more in deposits.

If you’re trying to find the best mix of CDs, savings accounts and reward checking accounts, give this tool a try.

After you have moved your money, be careful about fees. If the savings account has a minimum balance to avoid a monthly fee, that could prevent you from moving some of your money into the better deal. You could close the account, but you have to make sure you had it opened long enough to avoid an early closure fee.

Also, be careful about inactivity fees. If you keep a savings account or reward checking account opened after you have moved most of the money into a better deal, that account may not have any more activity. Some banks start charging a monthly inactivity fee in as little as three months. An easy want to ensure you have an activity is by setting up small transfers that automatically take place on a monthly basis. Just be sure that ACH deposits or withdrawals will be counted by the bank as an activity.

Beware of Special CDs

Step-up CDs (also called bump-up, raise-your-rate CDs or ramp-up CDs) may seem like a good deal in a rising interest rate environment, but they probably won’t be as useful as you think. These are CDs that give you one or more options during the term of the CD to increase your rate to the current rate of that same step-up CD product. DA contributor, Charles Rechlin, wrote about these in this article and explains why these CDs are dubious in value. As he described in the article, he’ll “pass on step-up CDs unless the initial rate offered is at, above or at least reasonably competitive with the best rate available nationally for a CD of the same maturity with no step-up right.” I will also add that it can be difficult to determine when to exercise the option to bump-up the CD rate. If there’s only one option to step-up the rate, there will always be the worry that you’re bumping up too soon. If you wait too long, the benefit of the higher rate will be small.

Another useful special CD in rising rate environments is the penalty-free CD. This type of CD may provide a totally free early withdrawal of the entire balance (Ally Bank’s No Penalty CD is one example), or it may provide a free withdrawal for only a portion of the balance. There are also types that only allow penalty-free withdrawals during specific periods of the term (such as within a year of maturity). First, this type of CD should have a rate that’s higher than the best internet savings account rate. The savings account rate may not be guaranteed to last like the CD, but in a rising rate environment, this guarantee is less important. If you can find a penalty-free CD with a competitive rate, make sure you are aware of the withdrawal requirements and limitations. For example, Ally Bank does not allow partial withdrawals. If you do an early closure of its No Penalty CD, you have to close the CD and withdraw the entire balance. For a case like this, it makes sense to open multiple CDs rather than just one in case you need that money in the future. Be careful if there are too many rules to a penalty-free CD. If the penalty-free feature allows only a partial withdrawal or allows withdrawals only during specific periods within the CD term, it may not be worthwhile, especially if the rate isn’t competitive to standard CDs with similar terms.

Hot Long-Term CD Deals

What if a bank or credit union comes out with a very competitive rate on a long-term CD that does not have a mild early withdrawal penalty? We may see more of these since banks and credit unions have been raising their early withdrawal penalties in recent years. PenFed Credit Union is one of these. This can be a difficult decision since no one can be sure about future interest rates. If interest rates rise only gradually, putting at least some of your money into these types of CDs will be good deals. I’m sure many of you are glad you opened those PenFed 3% CDs in 2013 and those PenFed 5% CDs in 2011. At those times, many people thought rates would be higher now than they are. Interest rates may surprise us on the upside, but based on history, interest rates are more likely to disappoint us.

Previous Comments
  |     |   Comment #1
For those with money not required for living expenses, when it comes to CD's a bird in the hand is worth two in the bush.
  |     |   Comment #2
Folks with IRA CDs who are approaching the age of 59 1/2 (or between the ages of 59 1/2 and RMDs) might also consider "longish" IRA CDs from those financial institutions which permit withdrawals (partial or total) without EWP. It's not a terribly long list (PenFed, StateFarmBank, NWFCU and Patelco come to mind), but it might obviate the need for a ladder, if one anticipates withdrawals during the specified age period.

 Example: Joe is "retiring early" at age 60, but anticipates he might well need to cash in some of his IRA CDs before he hits FRA. Joe could maximize his IRA CD yields by purchasing a 5-year CD from, e.g., StateFarm, and pecking away at it as necessary during the term. Whatever Joe withdraws is done without penalty. The balance of the IRA CD clicks along at the stated rate.
  |     |   Comment #4
bozo ..veeeerry interesting...I am 60 and have several hundred k more I want to move from my 401k to an ira cd somewhere ... can I put it in a penfed 7 year for 2.38% for the time being and then if rates go up just withdraw it and reinvest at the higher rate ? seems too good to be true..its like having a super high yield saving account ...why would anyone 59 1/2 plus have money in lower yielding short term accounts when they could do this ..maybe because there are limits to how often you can move ira money? ...is there a listing anywhere of banks that allow this ...is there something I am not seeing ?
  |     |   Comment #5
Why not move the 401k funds to a cd type fund still within the ira...probably better rates and if properly managed, i.e. low fees...why not that? But for sure out of equities within 401k
  |     |   Comment #8
Why not move the 401k funds to a cd type fund still within the ira.......yes that's the plan... specifically an in service rollover from my company 401k to a traditional IRA somewhere like Penfed...so no current tax consequences, the funds retain tax deferred status...I did this last year with a couple hundred k to take advantage of the Andrews deal
  |     |   Comment #14
# 8 you state "Why not move the 401k funds to a cd type fund still within the ira.......yes that's the plan... specifically an in service rollover from my company 401k to a traditional IRA" Perhaps I wasn't clear... why move from 401K to an IRA at your age AND/SINCE you'll probably get a higher rate within the 401K than in any IRA?
  |     |   Comment #18
our plan at work not that great.. high fees..want to rollover the funds from 401k to IRA outlier cd's and to IRA at my broker where I have access to low fee ETF's ..at interactive brokers fee's disappear @ > 100k balance
  |     |   Comment #6
decades, there is a lot you are either not seeing or understanding about CDs inside an IRA, required minimum distributions, and banks that allow partial CD withdrawals to meet RMDs without an early withdrawal penalty. It doesn't work the way you are currently looking at it.
  |     |   Comment #7
#4 is only 60...reread his post...no rmd for him
  |     |   Comment #11
Decades, you could do a partial withdrawal at PenFed (say, all but $1000). You would get a check. You then have 60 days to re-invest in another IRA CD. I believe you are limited by the IRS to one such rollover every 365 days. You will receive a 1099 from PenFed for the withdrawal, but you note "rollover" on your Form 1040. The taxable amount is zero. As always, consult with your tax advisor.
  |     |   Comment #3
I just found out my LMCU HSA, which went from 2% to 1% a year or so ago, will let me bu CDs within the HSA. (They didn't mention this when I griped about the rate decline) My HSA is not large but I don't expect to need the money for many years. If I go below $5000 in the HSA, my rate goes below 1% but Im not clear if they mean the total value or just the savings value. In any event, it seems like the 2.05% 5 year rate for half and their 1.41% for 18 months for the other half is the way to go. Half & half. With nothing left in the 1% savings. That way when half come do, I can decide what to do in 18 months. Unless I should go 1/3's and keep 1/3 in the 1% savings.
  |     |   Comment #9
I predict there will be only one interest rate hike this year, although I expect here will be a lot of talk about interest rate hikes. No different than the last two years.
  |     |   Comment #12
I agree wholeheartedly. Plus, with so much more of a promising outlook for Fed increases this year I fail to understand why the availability and rates of CD promotions were actually better at this time last year than they are now. What gives?
  |     |   Comment #15
Could be because rates have decreased throughout the year since then and are just recently starting to climb. CD rates don't increase in anticipation or Fed rate hikes, nor even in lock step with the Feds. Any increase in savings rates come sometime after the fact.
  |     |   Comment #13
Pen Fed in the past let you re-invest your IRA CD's in Dec. (we did the last week of Dec) because their rates in the past went up in Jan. They discontinued doing this in Sept of 2007. You will not get a penalty for a RMD. You can take withdrawals after 59 1/2 if you leave a $1,000 in your CD with out a penalty. Not sure you can transfer this into another IRA CD though.
  |     |   Comment #16
I just got off the phone with a PenFed IRA CSR. According to him, other than keeping the minimum amount in the IRA CD, they have no restrictions on how you can take the money out.

If that's correct, it should be possible to do an IRA trustee-to-trustee transfer to another institution. This would avoid a lot of the issues that are inherent in receiving a check directly and having to do a rollover to another institution.

However, I've yet to find this in any of their disclosure agreements. If I can't find it anywhere, I'm going to send them a secure email so that I can get something in writing. We'll see how that plays out.
  |     |   Comment #17
Below is the fine print for withdrawals from  PenFed's IRA CD's. One gotcha is that they can require 60 days prior notice.

However, there's also one worrisome bit of wording in the disclosure.

 " Unlike other financial institutions, members can take partial qualified distributions from their certificates without an early withdrawal penalty".

Exactly how does Pen Fed define a "qualified distribution"? Does the withdrawal have to be a check made-out to the IRA owner? Or, would an IRA trustee-to-trustee transfer be considered to be a "qualified distribution".

Since I'm already a member, I guess I could find-out by sending Pen Fed a secure email and insist on getting a written reply. The other way is just go ahead and try to do a IRA trustee-to-trustee transfer for a small amount of money and see if that flies.

The fine print.

f. Withdrawals: (1) Only you may request a withdrawal from your IRA certificates; beneficiaries have access to the account only upon your death. Funds are available for withdrawal on the business day following the maturity date. If the maturity date is a Sunday, funds will be available in two business days. (2) Partial withdrawals may be made, subject to early withdrawal penalties as described in paragraph (g) below, providing the requested withdrawal amount does not reduce the original issue below a minimum of $1,000 for 1-, 2-, 3-, 4-, 5-, or 7-year IRA Certificates, in which case the funds will be transferred to the IRA Share account. (3) The credit union reserves the right to require a written notice of up to 60 days of intention to withdraw funds from your IRA certificate(s). g. Penalties. In the event of early withdrawal, the following penalties apply: (1) If redeemed within the first year, all dividends will be forfeited. (2) If after the first year, but prior to the maturity date, the early withdrawal penalty will equal 30% of what would have been earned if the certificate had been held to maturity, not to exceed total dividends earned. (3) Exceptions. The penalties described above will not be applied if the withdrawal is made: (i) Subsequent to the death of any holder of the Certificate. (ii) As a result of the voluntary or involuntary liquidation of the credit union. (iii) If the owner is permanently disabled, as defined in the Internal Revenue Code Section 72(m). (iv) If the owner has reached age 59½ and takes a partial withdrawal.
  |     |   Comment #19
•"Normal distributions will be allowed on IRAs without incurring an early withdrawal penalty for customers who have reached age 59½. Transfers or rollovers to another IRA are not considered normal distributions." This is the verbiage from the StateFarmBank disclosure. I've never pressed the issue, although I have made two "normal distributions" over the past few years from SFB. I suspect the logical intent of the language is that State Farm won't do a C-to-C transfer or rollover for you, but you are free to do whatever you wish after the check is cut.
  |     |   Comment #20
To: Jimbeau and Anonymous (Comment #16). The devil's always in the details. I quoted the StateFarmBank language for guidance. It always boils down to what the "back room" is, or is not, willing to do. If they view a "normal" or "qualified" distribution as just cutting a check (i.e., no transfers, no rollovers), so be it. Just get the check, and go about your business. As a practical matter, once the check is cut, the issuing entity has lost control over what you do with the funds. Go to Vegas, or do a rollover within 60 days. No matter to them.
  |     |   Comment #23
Penfed sent me an email today. Their policy is the same as State Farm's. They will only waive the EWP on an IRA CD for those over 59 1/2 if it's a normal distribution. Trustee-to-Trustee transfers would be subject to the normal EWP. To quote. "...if any partial or full amount of an IRA certificate is redeemed early to transfer the funds to an IRA at another institution, a penalty will be assessed regardless of age or type of IRA."
  |     |   Comment #24
PenFed's policy regarding EWPs when transferring all or part of an IRA CD to another institution is understandable. It's really not a negative on their part. It would be an early withdrawal of the CD, plain and simple.
  |     |   Comment #21
I'm very leary of the "cd type" funds that have been mentioned in other comments. Many of these funds lack government-guaranteed (FDIC of NCUA) insurance on both principal/interest. People touting these funds will tout the safety of the underlying debt instruments . . . but I remember in late 2008 and early 2009 a lot of those "safe" debt instruments didn't look that safe. For me, a big part of the purpose of investing in individual CDs, either brokered at Fidelity/Vanguard or from the institution itself, is to have government-backed insurance. I've gotten a couple checks from the FDIC in the past. I didn't like the fact that insolvency had interrupted my income stream, but I loved the fact that the FDIC made me completely whole.

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