With your certificate of deposit (CD) about to roll over, now’s the time to ask, are CDs worth it? Sure, you love the safety of investing in an FDIC-insured product, but CD yields have been scraping historical lows and show few signs, according to expert projections, of going up anytime soon.
Do you just robotically roll over your CD again or do you take a stance and shout, “I’m mad as hell and I’m not going to take it anymore,” a famous line from the movie “Network,” released in 1976 when 6 month-CD rates were well over 5 percent compared to today’s comatose rates of less than 1 percent.
Here are some of your CD rollover options. All are fairly conservative in nature, befitting the typical CD saver. If you’re looking to dump your CD to invest in an initial public offering or some emerging market hedge fund, you’ll have to look elsewhere for that advice.
1. Let it roll over
Your bank will notify you by mail when your CD is about to mature. Unless you instruct your bank otherwise, your CD will roll over automatically and be renewed at the prevailing interest rate, which could be higher or lower than the rate you’ve been receiving. You don’t have to do a thing, what could be easier than that?
2. Don’t let it rollover automatically
Reevaluate your option for either a new term (shorter or longer depending on your view on the direction of future interest rates) or a new type of CD or investment product (more about those different kinds of CDs and savings/investment options to come). For example, there may be a new CD with a promotional rate that’s better than the current one you’re receiving.
3. Increase the size of your CD
Of course, one way to increase the size of your new CD deposit is to add to it. Let’s say your CD ended the term worth $1,800. You could add $200 to it and kick off your new CD with $2,000 in it. When it comes to increasing your savings, size always matters!
4. Open a bump-up CD
A bump-up CD lets you take advantage of rising interest rates with a one-time option to bump up the interest rate paid. For this option, however, you’ll receive an initial lower CD rate.
5. Open a no-penalty CD
No-penalty CDs let you withdraw money from your CD without a penalty, which is important should you need money for an emergency or simply want the opportunity to take advantage of rising interest rates.
The drawback is that often the interest rate is considerably less than you’d get on a regular CD of the same term. On the plus side, in a falling rate environment, a no-penalty CD gives you a guaranteed rate and the ability to access your cash versus a regular CD. It’s great to be liquid (easy access to your cash), but you’ll pay a price for the added convenience.
6. Move to a money market certificate
While money market certificates pay less interest than CDs, they provide more convenience. Both savings products are FDIC insured to $250,000, so that’s good.
With a money market account, you can add money to it on a regular basis to boost savings. You can also withdraw from the account without penalty. There may be limits, however, on the number of times and ways you can access your money in a given statement period. Typically, with a CD, you don’t get the option to make regular deposits. Nor can you withdraw savings from a CD without incurring a penalty.
In the past, CDs have offered better interest rates than money markets, but in the new low-interest rate environment, the gap between the two has closed. A comparison of 6-month CD rates and money-markets on Oct. 23 showed that Sallie Mae and Synchrony offered money-markets at .90% and .87%, respectively, while the respective rates for CDs at Doral Bank and Banks Connect were .87% and .85%. So, rate-wise, the difference in yields is minuscule, but as far as convenience and account flexibility go, money markets finish a nod ahead.
See below for more the latest CD rate comparisons.
7. Move to a municipal bond (not FDIC insured)
Municipal bonds, or munis, are extremely popular because interest is usually exempt from federal and often state taxes as well. General Obligation (GO) munis are regarded as extremely safe because they are backed by the issuing government’s ability to collect taxes to pay its debts. When you buy a muni you are buying a debt that the government promises to pay back. Although defaults are rare, they do occur, however.
Unless you need a tax break, you would be better off sticking with CDs. For example, on Oct. 23, 5-year CD rates at CIT Bank (2.35 percent, $100,000 min.), Synchrony (2.30 percent, $25,000 min.) and G.E. Capital (2.25 percent, $500 min.) were double what the national municipal bond average (1.13 percent) was.
Of course, munis are tax sheltered, and CDs (not in an IRA) are not. However, the tax advantages of munis are not always what they’re cracked up to be.
That’s because many tax savings calculators over estimate your tax savings benefits. They often ignore the difference between your marginal tax rate and your effective tax rate. For example, if your family earned $85,000 in 2013 and filed a joint tax return, your marginal federal tax bracket for 2013 was 25 percent. However, not all of your income will be taxed at 25 percent. More accurately, you would have paid 10 percent rate on the first $17,850, 15 percent on then next $54,650, and finally 25 percent on the last $12,500. That brings your effective tax rate closer to 15 percent.
As a result, munis often don’t deliver the tax benefits you think they will and they underperform when it comes to yield as well.
8. Move to a share certificate account
A share certificate is what a credit union calls its CD equivalent. For CDs you are paid interest. For share certificates you’re paid dividends. The FDIC insures CDs up $250,000. The National Credit Union Administration does the same for share certificates.
Generally, credit unions pay slightly higher interest than banks do, and that applies to their CD equivalents. According to SNL Financial figures for June 2014, credit union share certificate rates were, on average, higher across the board compared with CDs (5 year: 1.34 to 1.15; 1 year: .41 to .35; and .27 to .22).
So moving to share certificates could make your money grow a little faster, but you have to ask yourself whether the hassle of leaving your bank for a credit union is worth a few measly basis points.
9. Invest in the stocks of high-dividend paying blue chip companies
In 2013, all 30 blue chip companies in the Dow 30 paid a dividend, and 23 of the Dow stocks have yields of 2 percent or greater. On Oct. 23, household names such as Procter & Gamble (3.05), Verizon (4.55), General Electric (3.49) and Chevron (3.55) were paying more than 3 percent. These are companies not likely to fold up their corporate tents anytime soon.
The point is, you could go out and buy any of these stocks and receive quarterly dividends. For instance, if you bought one share of GE today (Oct. 23) at 25.19, you would receive a quarterly dividend of 22 cents (one-quarter of the annual dividend of 88 cents), which works out to 3.59 percent return. The stock could rise or fall (appreciate or depreciate), but your payout will be 22 cents a quarter, regardless. GE has paid a dividend each quarter for 100 years. That said, it can, and it has, the right to lower or raise the dividend at any time, a decision usually based on company performance.
So if you’re chasing yields, stay conservative by investing in the stocks of high-dividend paying companies with solid fundamentals. Be warned, however, that even the mightiest companies can fall. Of the original 12 members of the Dow Jones Industrial Average index, which launched in 1896, only GE, founded in 1892, remains.
10. Don’t renew the CD so you can pay down or pay off higher-interest debt
Instead of you chasing high yield, you become the banker instead. Here’s how: As long as your CD doesn’t comprise part or all of your emergency fund, apply it to paying off or paying down debt. Whatever kind of debt you have — credit card, student, mortgage, personal loan — it’s likely that the interest you’re being charged on it is higher than what you’ve been receiving on your last CD or what you will receive on your future CD. Not only is the math on your side (paying off debt at 4 percent is better than receiving interest on 2 percent), but eliminating debt is tremendously satisfying.
The $64 answer
Deciding how to invest your maturing CD is a good problem. It means you have money in the bank. You may no longer be able to earn 5 percent in a risk-free account, but you have some options that don’t involve too much risk.
Whether you put more value on safety or creativity, that’s the question you now have to answer.