Thursday, August 13, 2015

USAlliance Financial 2-year CD, 2.27% APY

Today I became a member of USAlliance Financial credit union, and opened a new 2-year CD with an APY of 2.27%. This is an incredible rate on a 2-year CD, with most of the 2-year CD competition in the 1.5% ballpark, and the 2-year Treasury yield at about 0.7%. This 2-year rate is even a bit better than the 5-year CD rate at Synchrony Bank (2.25% APY). This premium rate is available only to new members, and is a limited-time offer, with a maximum deposit of $100,000. I haven't paid much attention to laddering CDs, because generally I can earn a better return doing early withdrawals from longer-term CDs, than by holding shorter-term CDs in a ladder. But this CD is an exception to the rule, and provides a nice 2-year rung in a CD ladder.

The early withdrawal penalty (EWP) is a bit high at 12 months of interest (I look for six months), but with a term of only two years, I don't plan on doing an early withdrawal.

If you do an early withdrawal after one year from a 5-year CD earning 2.25% with an EWP of six months of interest, you earn you about 1.13% after the penalty--a bit more than a decent savings account, so that can make sense. But if you were to do an early withdrawal after one year from this CD, you would earn nothing, and then after two years you would earn the full 2.27% per year, so the early withdrawal option for this CD is almost irrelevant to me.

I filled out most of the USAlliance online application last night, and saved it, since I hadn't yet figured out exactly where the money was coming from to fund the CD. This morning I received an email from a USAlliance representative, Avery, asking me to email her a copy of my driver license to complete the application. So even though I hadn't completed and formally submitted the application, she had started working on it.

I emailed her a copy of my driver license, and also asked a few questions in the email. She called me back a bit later, answered my questions, and completed the application over the phone. I had figured out how to raise the cash to fund the CD, so gave her my account number and routing number to set up the ACH transfer to fund the CD.

Avery was very nice, very helpful, and was able to answer all of my questions: She told me partial early withdrawals are allowed (I was just curious), the CD rate is guaranteed while the ACH transfer is in progress, and there would be no charge to join WARC, the organization I joined (by clicking a check box in the online application) to meet one of the membership eligibility requirements; typically there is a nominal charge for joining an organization to qualify for membership in a credit union.

As with all credit unions, there are membership eligibility requirements, but as with some credit unions, they are easy to meet at USAlliance. Avery said that now that I was a member, my relatives and friends could qualify without even joining an organization (although the online application only mentions relatives,  not friends).

Avery also completed the application for me, and set up the POD beneficiaries (discussed below), so I didn't have to bother using a form to do that. I asked if folks who prefer to use the phone could join the credit union and open the CD by phone instead of using the online application. She said that would be fine, and to feel free to pass on her contact info, so if you want to talk to a rep I can vouch for, shoot me an email and I'll provide Avery's contact details.

This is a taxable account, so it was quick and easy to open the account and set up the ACH transfer to fund the CD from an existing checking account (as opposed to an IRA, for which it can take 2-3 weeks to do a transfer from an existing IRA).

As I typically do with taxable accounts, I opened the CD as Payable on Death (POD) to my designated beneficiaries, to avoid any possibility of having my estate go through the expensive and time-consuming probate process in California upon my death. A living trust accomplishes the same thing, but setting up POD accounts is faster and easier, requiring much less paperwork. Using a POD account is similar to naming a beneficiary in an IRA, 401k, or 403b account, in that the beneficiary designations take precedence over bequests in a will or living trust, and as already mentioned, the account is not then subject to probate upon death of the owner.

Another benefit of POD accounts is that the federal deposit account insurance limit is $250K per beneficiary, for up to five beneficiaries, making it easy to get up to $1.25M of deposit account insurance in a taxable account at one bank or credit union. That's not relevant in this case, since the limit for the CD is $100K.

Since this is a taxable account (as opposed to an IRA), in addition to comparing to the rate on other 2-year CDs (1.5%) or Treasuries (0.7%), you also might want to compare it to rates on top-rated (AAA) 2-year municipal bonds. I'm seeing rates of about 1.05% - 1.1% at Vanguard and Fidelity. Assuming a federal marginal tax rate of 25%, the taxable equivalent yield on a federally, tax-free rate of 1.10% is 1.47%, so even after taxes this CD is a great deal in a taxable account.

I originally heard about this CD deal via a private message from a fellow Boglehead in late June, but at the time didn't have excess cash to take advantage of it; the rate then actually was a little lower, at 2%. This Boglehead messaged me again on August 8, telling me about the increased rate, but I still didn't think I had the cash. Then a few days later, I realized that I had several fairly large CDs maturing in the next few months, the first one in mid-September. However, since this is a limited-time offer, I didn't know that it still would be available a month or two from now; but seeing the maturing CDs on the horizon got me thinking about how nice it would be to have a CD at this rate maturing in two years.

It was an interesting puzzle figuring out how to raise the cash to buy the CD without shifting too much out of bond funds; my current target allocation is to have about 70% of fixed income in direct CDs (like this one), 25% in bond funds, and 5% or less in cash, and I'm pretty close to that, so I didn't just want to sell shares of bond funds to buy the CD.

I ended up raising much of the cash by selling bond fund shares in a taxable account, but offset much of this by exchanging from money market funds (cash) to bond funds in IRA accounts. So netting the transactions across all accounts, I only shifted a small amount from bond funds to CDs, and while at it, significantly reduced what I had been holding in very low-yielding money market mutual funds in the IRAs (as opposed to high-yield savings accounts that are conveniently available for taxable accounts).

So if you have up to $100K in a savings account earning 1% or less, and you don't plan to spend it in less than two years, this CD would be a much better alternative. Or if you have a short-term bond fund in a taxable account, this CD almost certainly has a higher interest rate for the same amount of risk (the comparison to 2-year Treasury and municipal bond rates proves this). Or if you are building a CD ladder, this CD would make a great 2-year rung in the ladder. Or maybe like me, you have a CD maturing soon, and can figure out a way to shuffle things around to raise the cash to buy this CD before it's gone.


  1. Nice find and thanks for passing it along….!

    Also glad to see you keeping your site going….

    Finally, a question about FDIC/NCUA limits.

    The comment in your article about "up to 5 beneficiaries" seems to imply that 5 is a limit.

    I've been under the impression that there is no limit.

    By example, I've set up a joint account with 7 beneficiaries identified.

    Per the credit union, this translates to $3.5M in NCUA coverage (e.g. 2*7*$250k)

    Do you have a different understanding of how the limits of the NCUA coverage works?

  2. Where does one find the "Terms and Conditions " for this US Alliance 25 month CD?

  3. For up to five beneficiaries, the FDIC insurance is simply five times the number of beneficiaries, regardless of how much each beneficiary gets. So you could designate that your children get most of it, but name one or more charities or friends as beneficiaries, but leave them only a small amount, just to increase the insurance to $1.25M if less than five children.

    In practical terms, I don't know if this can be implemented at any given institution, since typically you just name beneficiaries on POD accounts, without designating the percent each gets (unlike an IRA or 401k), but I would investigate it if applicable to me.

    For more than five beneficiaries, it gets more complicated, but if you research it, you can find the answer. I believe it's covered in an FDIC training presentation for bankers that's available on the internet. As I recall, for more than five beneficiaries the insurance coverage depends on how the beneficiary interests are split.

    I got the terms and conditions with the membership application. USAlliance uses DocuSign, so you receive the T&Cs by email, then sign it electronically. This gives you a chance to review them before you decide. I did this all while on the phone with Avery, so quickly scanned the T&Cs, then clicked the button to "sign".

    For some banks and credit unions, you can find the T&Cs online. I didn't look on the USAlliance site to try and find them. Another alternative is to call and request them.

  4. Ahhh, thanks! In my case I actually want to evenly distribute to all 7 so think I'm fine….but I now understand why someone might want more than $250K to go to their kid, but still want the higher FDIC coverage in the interim.

  5. Can a husband and wife each buy a $100k cd as individuals and name each other POD beneficiary thereby allocating $200k? Thanks.

    1. Sure, but if by "allocating" you mean getting $200K in FDIC insurance coverage, you already get more than that as an individual. Naming one beneficiary gets you no more coverage than just owning the account as an individual. Just using a joint account with two owners gets you $500K in coverage.