Saturday, May 11, 2013

Mountain America Credit Union 5-Year CD

It's sad to say, but these days finding a 5-year CD that earns even 2% is becoming difficult. Mountain America Credit Union (MACU) is one of the few credit unions or banks that currently offers a nationally available CD that earns 2.0% APY. Of course I learned about this CD from www.depositaccounts.com, which is my standard source for good CD deals. About 10 days ago I joined the credit union, opened an IRA account, and started the process of transferring money from two other IRA accounts into an MACU 5-year CD.

Until I started this process, I still had a sizable sum invested in Vanguard Short-Term Investment-Grade Bond fund (VFSTX/VFSUX) in one of my IRAs. The SEC yield on VFSUX now is only about 1.1%, and the distribution yield is about 1.75%. I simply saw no justification for continuing to hold VFSUX, which has interest-rate risk and credit risk, when I could earn a higher return from the federally insured MACU CD, which has no credit risk, and the interest-rate risk is limited to the early withdrawal penalty (EWP) of 180 days of interest, or about 1%.

I also sold about half of my holdings in the Vanguard Intermediate-Term Investment-Grade bond fund (VFIDX) in the same IRA account (which has even more interest-rate risk, but has a correspondingly higher yield), and took some profits in my Vanguard REIT fund (VGSLX) in that account, bringing my allocation to that fund back to its target level. Proceeds from these sales plus some cash already in the account are mostly going into the MACU CD.

Joining MACU was very easy. I filled out the online application in less than 10 minutes, and received a call from one of their representatives the next day. She asked me a few questions, and processed my application.

As with all credit unions, membership is restricted based on where you live, who you work for, etc., but as with some credit unions, there seem to be ways for anyone to qualify. In the online application, I selected  "I'm not sure" as the membership qualification option. I have no idea how they qualified me, but they did.

After my membership was processed, another MACU representative emailed me the IRA application, which I filled out and signed electronically. I then provided her the information required to complete the IRA transfers. She emailed me the filled-out transfer forms, which I also signed electronically.

I was very impressed and pleased that I was able to do everything by internet and phone; I did not have to print out or mail a single form or any other documentation. Apparently the electronic signatures were acceptable to my current IRA custodians, as the checks have been issued and are on the way to MACU.

This is another step in my strategy of moving more and more of my fixed income from bond funds to CDs as interest rates have continued to fall. I now have about 2/3 of my fixed income in CDs, and 1/3 in bond funds (I also have about 4% in cash). I don't want to take too much risk with the fixed-income portion of my portfolio; by having the majority of my fixed-income allocation in super-safe CDs, I'm more comfortable keeping the rest in intermediate-term investment-grade and municipal (tax-exempt) bond funds, which have higher yields, but also higher risk.

For a retail investor, CDs provide a risk/return profile that is far superior to Treasury bonds or bond funds, which are often considered the ultimate in safety. The current yield on a 10-year Treasury is about 1.9% (it recently jumped up a bit,  from less than 1.7% at the beginning of May). While it's true that Treasuries have  essentially no credit risk, they still have interest-rate risk; i.e., when interest rates rise, the value of Treasuries or Treasury bond funds declines. Why take the significant interest-rate risk in a 10-year Treasury when you can earn a higher yield on a 5-year CD, which also has essentially no credit risk as long as you stay within the FDIC/NCUA insurance limits, and has minimal interest-rate risk?

Of course if your entire portfolio is in a 401k or 403b employer-sponsored  retirement plan, you have no alternative but to use bond funds, stable value funds, or money market funds for the fixed income portion of your portfolio. However, if  some of your portfolio is in IRA accounts (Roth or Traditional) or taxable accounts (individual, joint, or trust), then give serious consideration to using something like the MACU 5-year CD for at least a portion of your fixed income.

8 comments:

cwradio said...

Hi Kevin
Good idea.
I know the CDs that you can buy at a brokerage accounts don’t pay nearly as well as the best CDs sold directly by banks and credit unions. Since interest rates are so low is it worth all the time to do the transfer to the bank?
How hard is it to close the CD at a bank and transfer the money back to a brokerage account?
Do you see any other problems with a brokerage CD, except the low interest rate? Thanks Paul

Kevin said...

cwradio,

It really doesn't take much time to transfer money from your existing account(s) to a bank or credit union. For me, the minimal amount of time is well worth it.

I haven't yet closed a CD and transferred back to a brokerage or mutual fund account, since it hasn't yet made sense. I assume it won't be much more difficult than going from brokerage to bank/CU. I think the only thing that will make it a bit more complicated is that you'll have to follow the bank or CUs process to do the early withdrawal from the CD. Of course there's always the risk that the bank/CU will disallow the early withdrawal, but my working assumption is that that won't happen.

However, I do think it's prudent to keep some of your fixed income in bond funds or even money market accounts at your brokerage or mutual fund company for purposes of rebalancing. I wouldn't want to mess around with breaking a CD to rebalance, unless the drop in stocks was quite large.

Other than lower rates, a significant issue with brokered CDs is that they have the same interest-rate risk as a bond, whereas the interest-rate risk of a non-brokered CD is limited to the early withdrawal penalty (EWP), which for the MACU CD is 180 days of interest, or about 1%. You could lose much more than this on a 5-year brokered CD if you wanted to sell it before maturity.

Hope this answers all of your questions,

Kevin

cwradio said...

Thanks Kevin

Reub said...

Thank you for your sage advice, Kevin! That is one aspect of the Harry Browne Permanent Portfolio strategy with which I disagree, namely, that a treasury bill or fund of treasury bills such as SHV is superior to an FDIC-insured CD. You're getting less interest and are subject to some interest rate risk. Keep up the good work!

Kevin said...

Thanks Reub. You've got it!

spencer selby said...

Hi Kevin
I ran across yr excellent blog searching good CD rates. I am wondering if MACU is still the best place to buy a 5 year IRA CD, if this is still what you recommend for that.

Kevin said...

Spencer, the best CDs change all the time. When looking for a CD, I use www.depositaccounts.com.

spencer selby said...

Thanks, Kevin. Seems the situation hasn't changed that much for IRA accounts. Only one credit union offers better rates than MACU--Melrose, which has poor reviews and super harsh early withdrawl penalties.