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. 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 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.

  2. Hi -- I have a similar type of challenging decision.
    Comparing a 3 yr CD, paying 2.75%, with a 90 day EWP.
    5 yr CD, paying 3%, with a 180 day EWP.
    By my calculations, if investing $100k, I'd be about $700 ahead after 3 yrs, if chose the 5 yr...BUT, I'd still be locked in for an addition 2 yrs at 3%...
    Following your "template" above, this means I'd have to reinvest the 3 yr CD at ~3.35% for a subsequent two years, to break-even.
    So after doing all that math, I still don't know what to do...?
    It seems the decision really just comes down to how good your crystal ball is for interest rates....
    I've personally been wrongly betting rates would increase much faster than they have -for the last several years.....And still believe they will(should) increase a lot over the next few years....But who knows!?
    How do you make these decisions...?

    1. Sorry for not replying sooner, and my reply might no longer be relevant. I'd compare a CD with three years left to maturity to other 3-year CDs currently available, unless the yield on a longer-maturity CD is really great. I want to earn enough extra to justify the hassle of breaking and reinvesting, especially in an IRA, which requires an IRA transfer, and can take up to three weeks to complete (by which time the higher yield on the new CD might be gone).

      I have a friend who had some Ally CDs earning 2% with about two years left to maturity; these were originally 5-year CDs. Since he could earn almost 3% taxable-equivalent yield (TEY) on a 2-year Treasury, it was an easy decision to break the CDs and invest in the Treasuries. The EWP was less than 1%, which he will make back in less than one year, and then benefit from the higher yield for the remaining year.


  3. Great advice! I have a 5 year CD maturing this week with an online bank and I was wondering if you have any advice on where would be a good place to put it. I can get a 1 yr CD at the same institution paying 2.55%, a two year at 2.60, 3 at 2.65 a 4 yr at 2.70 or a 5 yr at 3.10. I could also move it out of the bank (which I consider a hassle) and utilize VMMXX or another Vanguard product. What do you think with rates seeming to be rising? I will not be needing this money for the foreseeable future (deep cash). Thanks!

  4. I've posted a lot about what I'm doing on the Bogleheads forum, so you can find lots of details if you search my posts there, but here's a few comments.

    I would not continue to use that bank, as the rates are not competitive. The direct CD deals of today are generally not nearly as good as they were up until a couple of years ago, so I mostly have been transferring proceeds of maturing CDs to either Fidelity, Vanguard or Schwab, and buying either Treasuries or brokered CDs. Schwab is the best for Treasuries, although they're all the same if you buy only at auction. Fidelity is the best for CDs, but you'll usually find comparable deals at Vanguard and Schwab if you buy only new-issue CDs.

    First, it depends on whether this is in a taxable account on which you pay state/local income tax, or an IRA.

    In taxable accounts, I'm mainly reinvesting proceeds of matured CDs into Treasuries with maturities from six months to maximum of two years. At my marginal federal and state tax rates of 27% and 8%, a 1-year Treasury has a taxable-equivalent yield (TEY) of about 3.1%, compared to a 1-year brokered CD at 2.70%. The Treasury yield curve flattens out too much for me to be comfortable extending maturity beyond two years.

    Even in an IRA, Treasury yields are higher than brokered CD yields at maturities of less than one year, and are close to tied at one year. Beyond one year, brokered CDs take the lead over Treasuries, with a 2-year CD at 3.05% and a 2-year Treasury at about 2.90%. At 3-year maturity, the gap widens, with the top-yielding new-issue CD at 3.25% and the Treasury at about 3%. I have not been going beyond 3-year maturity for CDs in IRAs, again, because the yield curve is not steep enough beyond that for me to feel that I'm being adequately compensated for the extra term risk.

    Hope this helps,


    1. Thank you for your fantastic advice. So after reading your reply, I've requested a transfer for my maturing CD to Vanguard (it's a taxable account) and will probably purchase a 2 year Treasury at about 2.91%. Marcus Bank will not transfer the CD funds until the actual maturity date on Wednesday and they say it will take 2-3 days afterwards for the funds to actually transfer. Is there a certain day of the week or the month where the Vanguard treasury rates change? Thanks again!

    2. The Treasury probably makes sense if you pay state income tax--it depends on your state income tax rate. If no or very low state income tax, a 2-year CD could have slightly higher tax-adjusted yield.

      Treasury yields change daily--actually they change during the day when the bond market is open.

      You will get a lower yield at Vanguard on the secondary market if you buy smaller quantities, like less than 100 or 200 ($100K or $200K-- one bond = $1,000 face value). If you buy at auction, you'll get the same yield as institutional investors, but 2-year Treasuries are only auctioned once per month, later in the month.

      Since we don't know how the 2-year Treasury yield will change between now and the next auction, you don't really know whether you'll get a higher yield on the secondary market in the next few days, or at the next auction. All we know is that on the day of the auction, you'll get a better yield for smaller quantities at auction than on the secondary market.

      Hope this helps,


    3. Ok, I just made a purchase of 2 year treasury notes. I hope I did it correctly at Vanguard. It says the maturity date is 12/31/2020, US Treas note, coupon 2.375, quantity 251, price 98.743, yield to worst 2.984, yield to maturity 2.984, face value $251,000, principal $247,845.40, accrued interest $2138.27, accrd # of days 132, net amount $249,983.67. Kevin, this is the first time I've made a purchase like this. Did I do it correctly? Thanks.

    4. Not sure what you mean by, "did I do it correctly?". You bought a Treasury with a maturity of a little over two years, but there's no particular reason to go for something closer to two years, so that's fine.

      You want to be sure to have the net amount in your settlement fund by tomorrow, as Treasuries settle the next trading day.

      For tax reporting, you'll subtract the accrued interest on your Schedule B, since you are paying that to the seller; it essentially reduces your first coupon payment by that amount for tax purposes. When the Treasury matures, you will report the difference between the principal amount and the face amount as interest. Vanguard may include this on the 1099-INT they provide.