Thursday, April 27, 2017

Monitor Your CD Maturity Dates

This is a quick reminder to those of you with CDs to monitor your CD maturity dates. I have an IRA CD maturing at a credit union in mid-May, and the rates there aren't great. So I logged on, and used online chat to request that the proceeds be deposited into my IRA savings account instead of being rolled into a new IRA CD (which is the default at most banks and credit unions). Within a few seconds, the rep responded that it had been done, and followed up with an email confirmation.

Typically there's a 10-day grace period after the maturity date during which time you can cancel the renewal, but I prefer to do it in advance if possible. It turned out to be very easy at this credit union. Now I'll be hunting for a good IRA CD at a bank or credit union at which I don't already have an IRA CD (I typically put enough in these to get close to the federal deposit insurance limit, which I don't want to exceed). We've been seeing some pretty good deals in recent months, so I'm optimistic.

1 comment:

  1. I received this question by email (in response to this post):

    "I'm currently looking at the USAlliance 2.2% 36 month CD. What do you think about it?"

    I joined USAlliance Federal Credit Union in 2015 to take advantage of their 2-year CD with an APY of 2.27%. At the time, that was a yield premium of 1.55 percentage points (pp) over the 2-year Treasury yield of 0.72%, so well over my average yield premium of 1.17 pp. Even the 7-year Treasury yield was only 1.94% at the time, so that was a really great CD deal.

    Currently the 3-year Treasury rate is 1.44%, so the 3-year CD at 2.20% provides a yield premium of 0.76 pp. Not bad, but lower than my goal of 1 pp. The 5-year Treasury yield is 1.81% and the 7-year is 2.10%, so the CD provides higher yield and much less term risk than even a 7-year Treasury.

    Regardless of whether or not the yield premium is as good as we'd like, we have to go with whatever currently is available, so what are the alternatives?

    If you are able to qualify for membership, the best CD I know of is the Patelco Credit Union 5-year CD at 2.75% with an early withdrawal penalty (EWP) of six months of interest. If you did an early withdrawal after three years, you'd end up earning 2.31% annually after paying the penalty, so better than 2.20% with the USAlliance 3-year CD, and even better if you end up not being able to get a better rate in three years, and end up holding to maturity.

    If unable to become a member at Patelco, the next best 5-year CD I know of at a credit union I'm familiar with is at Mountain America CU, with an APY of 2.50% and an EWP of one year of interest. Anyone can join this CU. With the steeper EWP, you'd only earn 1.71% if you did an early withdrawal after three years, so if your main concern is rising rates, then the 3-year at 2.20% is better for you.

    To put this in perspective, with the 3-year CD at 2.20%, you'd have to reinvest at about 2.96% for the final two years to beat the 5-year annual return of 2.50% of the 5-year CD bought now. So assuming you don't plan to use the money for something else in three years, going with the 3-year CD is a bet that you'll be able to invest in a CD at 2.96% or higher in three years.

    After doing this for more than 6.5 years, my preference generally is to go with longer-term CDs at higher yields with low EWPs. There's some recency bias and hindsight bias involved, because we haven't seen generally increasing rates during that time. It's a harder decision if you can't find a longer-term CD with an EWP low enough that you can beat the shorter-term CD after paying the EWP on the longer-term CD.

    Another consideration for an IRA CD is that I'd rather not mess around with another IRA transfer sooner than I have to, so this pushes me more toward 5-year or 7-year CDs in preference to 2-year or 3-year CDs.

    I would go with the Patelco 5-year CD with the proceeds of my maturing CD, but I already have IRA CDs at Patelco that will approach the federal deposit insurance limit when they mature. I also have IRA CDs at Mountain America, so that's out too for me.

    I mainly use DepositAccounts.com to find good CDs, so that's where I'll be looking when my IRA CD matures in mid-May. I'm willing to let the money sit in an IRA savings account for awhile while I wait for a good CD deal, but the longer I wait, the better the deal has to be for the higher CD yield to compensate for the lower yield of the savings account.

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