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5.00% CD or 5.00% Reward Checking Account?

It has been a while since I've seen a 5% CD, but thanks to PenFed, we are seeing them again. However, as I mentioned in this PenFed review, this 5% CD is only a promo that's only available to some PenFed members. Also, this CD has a very long term of 10 years. So I wouldn't call this a hot deal, but at least it is a 5% CD that is available to some. I was told by a PenFed rep yesterday that these new 10-year CDs should be available to all PenFed members starting in January. However, the rate is likely to be under 5%, but hopefully, it'll be higher than their 7-year CD rate which has always been very competitive. The rate is currently 3.75% APY (see review).

Long-term CDs may seem very unappealing in this low interest rate environment. There's the concern that you're locking in your money for a very long time when we may see rates shoot up in a couple of years. An important consideration is the early withdrawal penalty of the CD, and as I showed in the PenFed post, a long-term CD closed early with a penalty can be a better deal than shorter-term CDs closed at maturity.

I thought it would be interesting to see what readers think would be the best deal for their money if you had a choice between a 5% CD like what PenFed is offering (to some members) or a 5% reward checking account. PenFed is not offering a reward checking account, but there are still some institutions offering reward checking with yields of 5% or higher. However, they are only local deals, so only a few lucky people have access to them. We currently list 12 banks and credit unions offering reward checking accounts with yields of at least 5.00% APY and with balance caps of $25K to $30K. Please refer to our reward checking table to see if these institutions are near where you live (select "filter accounts" to select your state).

With most internet savings accounts having yields under 1.50%, the 3% to 5% yields offered by most reward checking accounts have been very helpful for savers. However, reward checking yields and balance caps have fallen over the last year, and they may fall more in the coming years as banks lose revenue due to new regulation that reduces overdraft fees and debit card interchange fees. As with any liquid account, there's no guarantee that the rate will hold. So that's an important downside to consider with reward checking accounts as compared with CDs.

So if you had a choice between a 5% 10-year CD or a 5% reward checking account, which would you choose? The 10-year early withdrawal penalty is one year of interest. Assume the 5% reward checking account has a $25K balance cap with the typical reward checking requirements. I've also included the other two PenFed promo CDs in the poll: 3.50% APY 5-year CD with a 6-month penalty and a 4.25% APY 7-year CD with a 12-month penalty.

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Anonymous   |     |   Comment #1
Tieing up your money for 10 years it is not a wise thing to do.
A 5% interest is not a  great rate for the time span to justify such drastic move.

A 5.00% Reward Checking Account, I will do any time, maybe 2 or 3 of them at the same time. Liquidity is very important in this uncertain times.

I think the comparison suggested is a no brainer for me and the 10 year CD is not for majority of us. However if the 10 year CD is at 10% then you got me interested.

plowking   |     |   Comment #3
In 2007 Penfed offered a 6% CD ranging from 3 to 7 years.It was 2007 we were riding high rates were climbing daily so I opted for the 3 year term.Now I should have known better since I had been stuck in 2% CD`s since the turn of the century and I had never seen deals like this but alas this was all new to me in 07 having stumbled across Kens Money blog so I took the conservative route and invested shot term.I have learned allot from this Kens Web blog,reading it daily since 2007 and If I had to do it over I would have chosen the longer term.With my stock portfolio down 20% from its high , the only income I could count on was my Penfed CD. So I`m going long this time. 5% for 10 years! Lets hope Penfed stays Strong.
Anonymous   |     |   Comment #4
5% CD for a very specific reason:  there's a longer term paying down a mortgage taking place in parallel.

Refinance a 15-year @ 4%.  Get a 10-year CD @ 5%.  Your net worth is now working more for you than against you vs. the institutions.

The CD isn't for everybody.  If immediate liquidity is important, don't do it.  If you don't have something else as a long term liability, don't do it.  If you don't have a strong baseline of finances that allows you to do this, don't do it.
Anonymous   |     |   Comment #5
At my age, I want higher rate now.  I may not be around after 1 or 2 years.
George Brown
George Brown (anonymous)   |     |   Comment #6
I would choose neither.  The requirements for the 5% checking account are too vast.  And the 5% 10 year is liking rolling the dice.  Not a good idea.
51hh   |     |   Comment #9
It is all trade-offs and case-sensitive.  For me, it is a clear cut: 5% RCA.


1. Liquidity and flexibility (as a rate chaser) -- CD would take the fun out of the equation.

2. Part of my fund is borrowed from HELOC, whose rate is variable. 

3. Physical/mental exercise -- with RCAs, it is a routine physical/mental exercise to fulfill the requirements.  Life would be without meaning without the RCA drills:D

4. CD sounds so old, especially with the name tag of ten years.  

5. It will take a margin of 10% (compared to average savings rate) for me to even think about CDs (like in the 80s - rate was around 18%) becuase: CD is boring in nature (no offense).  Like some posts stateed: have no idea where I would be in one year; not to mention ten years!!

Seriously, each has her/his own situation.  Analyze the trade-offs and determine what is best4you.  There is no right/wrong or good/bad for such a selection.

Anonymous   |     |   Comment #12
A no brainer for me. I would choose the 5% CD for 10 years. If you wait 1 year to get more than 5% you have lost over 3% waiting for interest to go up while getting only 2% for your money. If you ladder your CD's you will always have CD's coming due to get the highest available rate. Keep a Reward Checking Account for your emergency fund. Might need two or three but always always always get the highest rate you can for CD's no matter how long you have to go out. I remember getting 10 year CD or 10% and people laughing at me. Don't wait for higher rates. You are losing money waiting. If you are starting out and only have $1000 over and above your emergency fund put $1000 in the CD. Next time you have some saved look for the highest rate no matter how long it is. You can get some CD's for $500. It has worked for us since 1978. We have accumulated nearly 2 million from our first $500 CD using this method. You will be amazed that you most likely will never have to cash a CD in early.
Bozo (anonymous)   |     |   Comment #13
One thing I've learned is that one cannot time the market, or predict with any certainty where interest rates will trend. Accordingly, rather than trying to second-guess everything, I just ladder. Having the luxury of a long ladder, I can take advantage of the modestly-higher rates offered at longer terms. You can gut it out and go short (term, that is) and hope that rates will spike. But if you "guess" wrong, you will be stuck in those one- and two-year CDs paying next to nothing for years. Ask the Japanese.

It's also a very personal financial decision. How much do you "need" from your CDs? Is there a liquidity issue (are we talking IRAs where PenFed's long-term IRA has long yields but short liquidity for those over 59 1/2?).

Another issue is inflation. How much are you or your family really impacted? If you spend 40% or so of your disposable income on "stuff" not impacted by inflation (let's say you have a fixed mortgage and maybe property tax set to a circuit breaker or cap), and some of your income is adjusted "up" with inflation (Social Security, a pension perhaps), then a fixed CD rate of 5% over ten years might be much more appealing.

In short, it's a very complex decision (whether to go long at 5% or thereabouts in a CD). It depends on the kind of CD, its liquidity options, your needs and vulnerability to inflation and the like, etc.

Do the math. I do it all the time.

I still submit anything at or about 4% is quite reasonable. Anything at 5% or above is gravy, and I've said that ever since I started posting here.


Anonymous   |     |   Comment #14
Bolt test
Gary_C (anonymous)   |     |   Comment #15
I think the decision depends on where one projects our economy and interest rates are going.  As a follower of Paul Krugman, I think any meaningful recovery is way off.  I see us entering a long period of deflating prices - or at best a long period of Japan-style drifting along.  So, I think 5 percent looks like a great return today, and I expect it will still be a great return 10 years from now.  I'd go for the 5% CD for 10 years.
Anonymous   |     |   Comment #20
I did read all of the posts here and I'm amazed of how most of you are short sighted.
For starters, what will you money be worth 10 years from now, knowing that the FEDs are printing 1-2 Trillion Dollars per year for the next 10 years?
Second, you have to pay income taxes on this earning, lets say 25%.
Third, the hidden inflation will eat a substantial portion of it, lets stay conservative and say 4% per year.
Fourth, if you have to exit the CD for emergency or better rates in future, you will lose minimum 20% or one year of interest.
Combine all of the above, 10 year CD at 5% will net you nothing or you will be into the negative or red column of your money spreadsheet.
Run some numbers before you jump into such decision, that is my advice to the readers.
Anonymous   |     |   Comment #21
With a 10 year CD, you will live poor and die rich.
Anonymous   |     |   Comment #22
to me, the real question is...  Why is PenFed offering such a high rate when no one else is?  This sounds too good.  What is going on?  How and why is PenFed able to offer such a high rate and stay in business?  Is this just a short term offer so it can re-adjust its asset profile?  I noticed Capital One did something similar when others had much lower 10 yr rates.  But it only lasted a several months. I wanted to jump on that but my money was tied up in other CDs.
Anonymous   |     |   Comment #23
So what are PenFed customers who just opened 7 year CDs at 3.75APY going to do?  I think they would close their CDs if possible and get the 10 yr instead.
Anonymous   |     |   Comment #25
I would put $ in 5% CD as part of a ladder.  You can't get 5% from a checking account for large amounts of %.
51hh   |     |   Comment #26
Anon #12 stated: "If you are starting out and only have $1000 over and above your emergency fund put $1000 in the CD. Next time you have some saved look for the highest rate no matter how long it is. You can get some CD's for $500. It has worked for us since 1978. We have accumulated nearly 2 million from our first $500 CD using this method."

I would like a bit more details on how you accumulated $2M over 32 years with only the CD approach.  It is a long time horizon, equaling a retirement time span.  Thus what you are saying is that CD can accomplish retirement investing without any equity or bond exposure.  I, for one, would like to know exactly how you did that (say how much CD per year and what is the average APY/earning per year).  If you have a "huge" CD investment every year, it is definitely possible.  But with amount like $500 or $1,000, I am not clear how it can accumulate to $2M with such a fix-income vehicle. 

This is just for my own education, thanks much!
Monice (anonymous)   |     |   Comment #27
I go with 5% reward checking account because I have more flexibility on when/how much/how long for my money.

I don't want to be tied with a CD for 10 years. I rather invest.

If I'm retired, I might go for 10 years CD though.
tomlawler   |     |   Comment #28
A 5% 10yr CD, to paraphrase the ex-Illinois governor, would be "bleeping" golden.  I'm with PenFed already and would welcome the opportunity to lock in this deal. 
Anonymous   |     |   Comment #30
I opened a 7-year CD with Capital One in December 2008 yielding 5.25%. Ask me if I have any regrets going out long term. I've been laddering CDs from 1 year to 7 years for many years now. In February 2011 I have 5-year and 7-year CDs with Penfed maturing with both yielding 5.5%. It will be interesting what Penfed will be offering at that time.
Anonymous   |     |   Comment #31
In 2008 when I saw rates begining to drop I closed out all my T-Notes (and made a killing since they were 51/2% and people booought them up like vultures!) and closed out and paid the 3 month and 6 month penalties on my Cd's (that were maturing in 2009 and 2010) and invested all my money in 5 and 7 year term CD's at a 5%-51/2% return. WHY? Because I looked back over 20 years and when was there ever a period when we had a 5% return or higher for 5 years or more (without an up and down period--and when you figure out the ups and downs on int. rates it averaged 3%) so I decided to lock in a 5% for 5 -7 years----and am I glad I did---so it sit "pretty" collecting interest checks each year and live off my income. -When you see a good rate--take it and be happy--especially if it is 4-5%. Too long greed has run this country--and people got so use to it--no one ever had enough so look at them now---5% is good--take it--and run for the hills!! What can be a better investment then CD's???? If rates go up, pay the penalty (be sure you checkout penalties before opening an CD-even if you get a little less int. for less penalty) and open up a new Cd for a higher rate. It is a no brainer. Munis are too chancy. The stock market is for the super rich who can afford to lose money --not the average person like we have been "talked into" by out 401K plan managers) The classic quote "you have to keep up with inflation" does nothing if you lose your principle --you will never come close to ever catching up to inflation--and besides--it is a joke--no one ever keeps up with inflation--just protect your principle. Remember the return of your investment is more important then the return on your investment. So FDIC and NCUA banks and credit unions seem like the best option to me.--Too long have people been brainwashed that they need to own a home---and if they do not they are a loser...renting is great!!! No strings, and no worries if your neighbors have problems financially---you can rent something nicer if you make more money an dif you lose money or a job--you can easily "move down"
Anonymous   |     |   Comment #32
@Anonymous - #4, Friday, August 20, 2010 - 10:57 AM:


You are not factoring the tax on the 5% CD in your calculation with 4% mortgage. Assuming 30% tax, your net CD rate is 3.5% while your mortgage is 4%. So in essence you are losing 0.5%, not beating the instituitions.
Anonymous   |     |   Comment #33

After I went back to work in 1978 I worked for another 30 years and had a second job for 23 years, (part-time). I did this when our oldest said he had picked out a private college. My husband then also got a second job. We had promised our boys a free college education if they carried a 3.5, no car and stayed on campus and carried 16 hours. They also worked in the summers, one year one worked 107 hours at 3 jobs and the other 96 hours at 2 jobs. We had paid off our first house in 6 years and then bought 58 acres and built our second house and paid it off in 7 years and it was paid off before the boys graduated. We never borrowed for cars etc, just for the house. We always saved 10% grew our own vegetables, cut wood to heat with.  My husband  worked 2 jobs for about 9 years and in 95 was put on disabilty. He had funded his pension fully and when he was put on disability even though he had worked 33 years at this job he had worked so much overtimes he had 43 credit years for his pension and also he funded his  401K at 20% when it started in 87 all in money markets or fixed income. I did the IRA's on the first business day of Jan. when I went back to work in 1978 all in CD's and when in 1998 when I could join a 401K I did it at 13% and when it changed to 20% I did that. We always put in CD's what was left every year. We did go on trips to Florida, Washington DC and Hawaii, but mostly camping with the boys. We ate a lot of fish from the lake across the street and ate a lot of venison, heated with wood etc. Last year was our first year of full retirement. We spent only 23,000 while gifting $3000 of that. We still save. One child is a doctor and the other plays guitar and is a partner in a recording company, has a business degree and does the company books. The secret is to spend less than you make, stay out of debt and pay cash for automobiles except for the first one. Debt only makes the bond holders wealthy. I think we had a good start when we were married. I had saved all my baby sitting money and paper route money and the money I made in the grocery store and we married at 18 and had 30% down payment on our first house. After the boys were born and I went back to work evenings, my husband babysat and I worked Mon, Wed Friday night and all day Sunday (cuz that was double time). I would take my paycheck on Friday and go to the bank and put my paycheck on the house. We only had 1 car. When I went to the grocery store I took my husband to work so I could shop and do the banking.  After we built our second house I did not go back to work until 1978 and then worked for another 30 years. We were married in 1961. We now have bought a lot and hope to build our retirement home.
Inforay   |     |   Comment #35
My understanding is that with CDs you can, at any time, ask that the interest be paid to you monthly, and in some cases you can withdraw all of the earned interest without penalty.  That feature made investing in long term CDs very attractive to me.  I have a ten-year CD that is still earning 7.25% but will unfortunately mature in early 2011; I also have a number of 5 - 10 year CDs that pay between 5.25% - 6%.  If I needed funds, I have in the past been able to withdraw only the interest on various CDs without penalty, and I always check to make sure that if I needed the income, I could have the interest paid to a checking or share account where it is accessible.  So when putting money into long term CDS I would recommend that you inquire about these issues.  To me, this is the only investment that seems secure, other than the rare occasion when a bank may fail, e.g., Mutual Bank, and you may not get the high interest rate you anticipated -- but at least your money is safe.
Anonymous   |     |   Comment #37
Inforay   |     |   Comment #38
Responding to #37, I doubt that the type of people interested in this blog are interested in trading in currencies or speculating as to which currency will rise or fall.  Many of us are even worried about investing in stocks, let alone foreign currencies which depends on the political climate of the country whose currency has appreciated.  Many of us who follow this blog, live in the U.S., and just want the highest interest we can get in a safe and sound environment.  In the event the dollar gets devalued it would be because there are too many dollars in circulation.  At that point, one would imagine that the Federal Reserve Board would raise interest rates for everyone.  Then, people invested in 10 year CDs can decide whether they want to stay in the CD at 5.00% or pay the penalty and do an early withdrawal of their funds.  My experience is that generally if you agree to pay the penalty (about 180 days or 365 days of interest) then your funds are as liquid as if they had been placed in a money market account.  Unless there is a condition in the CD which says you cannot withdraw your money by paying a penalty, all it means is that you have to forego some interest before you can withdraw your funds.
Anonymous   |     |   Comment #39
RE: #32 - "You are not factoring the tax on the 5% CD in your calculation with 4% mortgage. Assuming 30% tax, your net CD rate is 3.5% while your mortgage is 4%. So in essence you are losing 0.5%, not beating the instituitions."

Using your figures, for me the 0.5% = rent or a lease option with the right to buy any rise in value that might occur. If this is on a multiple rental unit - WOW! Your choice of Tenants buying you the units, giving you a paycheck, a place to live, you pick the days/hours you work/hire workers  when you sell = more of a nest egg ... and it keeps up w/inflation, all pretty much under your control as you help the homeless find a home. = ;>D

Yes, real estate is about location, location, location  length of holding just like CDs are about which institution and for how long. Even without the units, 0.5% as rent sounds pretty good. Going for the 5%/10 yr.