Island FCU - Should I Put $107K IRA With Them At 2.50% 7 Years Or 2.25% 5 Years?

John Sears | Apr 17, 2017 | 67 posts since 2015

Principal Rate Interest (1 yr) Diff. EWP (6 mos.) Diff.

$108K 2.25% $2430 $1215

2.50% $2700 $2700 $1350 $135

This doesn't take into account how long it would take with a new 5 year CD to recoup the money lost from 1+ years worth of interest.

I've never done anything more than 5 year CDs so any input would be greatly appreciated. Thanks.

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Answers

Bozo | Apr 17, 2017 | 1,375 posts since 2011

My general rule is 20-25 bps for each additional year on the curve. The 2.25% for 5 years is "competitive" (not as good as Mountain America or StateFarmBank, but still, not too shabby). Going out an additional 2 years for a mere 25 bps, in a rising-rate environment, would give me pause.

Were it my money, I'd shop around, but certainly not lock up 2.5% for seven years.

In a rising-rate environment, a seven-year CD "should" yield something approaching 2.75% to be considered "tasty". Should the Fed continue its tightening, we could easily be looking at a FedFundsRate in excess of 2.75% seven years out.

John Sears | Apr 17, 2017 | 67 posts since 2015

Good advice. Mountain America however is 360 days EWP and State Farm is 540 days EWP.

RickZ | Apr 17, 2017 | 218 posts since 2010

Between the two, the 7 year is clearly the better choice in my opinion. If you plug both of them into Ken's CD Early Withdrawal Calculator, the 7 year is ahead of the 5 year every step of the way even when the 5 year matures. https://www.depositaccounts.com/tools/ewp-calculator.aspx I know the caveat -- Fort Knox etc. -- but I think the risk of a problem with an early withdrawal is very low even in a rising rate environment.

That being said, there may be better options out there. You could put $50K in Navy's 17-month 2% CD and they offer some IRA bonuses which I believe are ending soon.

Kaight | Apr 18, 2017 | 1,192 posts since 2011

As you go about making your decision, you might want to take into consideration the following:

IRS rules related to IRAs require that early withdrawal penalties (EWPs) be paid out of IRA funds.

Since IRA money is special money from a tax perspective, it would be ideal if an IRA EWP were permitted to be paid with funds from outside the IRA. After all, any EWP should be between the account holder and the financial institution. The government should not be involved. And the financial institution collects the same amount of penalty either way.

This consideration is less important with shorter CDs. But over five or seven years it could happen that rates rise so high as to prompt early closing of your IRA CD.

Ally6770 | Apr 18, 2017 | 4,292 posts since 2010

Depending on your age and the credit union, many will allow you to take the money out of the CD leaving a minimum amount in the CD to get a higher rate someplace else. Ask and get in writing your
credit unions policy. It also may be in your disclosure.

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