Best Interest Rates

There are numerous terms and conditions, as shown in the Truth in Savings booklet or other disclosure documents that an investor should read and comprehend before purchasing a CD.

CDs – Terms and Conditions
First, the terms may state that the institution selling the CD can close the CD prior to its maturation.  Second, institutions may have the right to delay withdrawals in case of a bank run, where many, often panicked depositors try to withdraw their money from a bank because they think it will fail.  Third, the terms will discuss how interest will be paid out.  Fourth, the terms will dictate how and when the CDs will start earning interest.  Fifth, an institution may not be required to send in a notice of automatic rollover at a CDs maturity; the terms and conditions will explain this in detail.  Sixth, the terms will discuss the penalties for early withdrawal. And seventh, the terms may specify fees for providing certified checks.

Various CDs
Banks can issue callable CDs, where they reserve the right to buy back the investment.  On a certain date, the banks will determine whether or not they should leave the investment outstanding or to replace it.  For example, a five-year CD with a six-month call protection would be callable after the first six months of the term.  Callable CDs shift the interest-rate risk to the depositor and thus have a higher yield than those without the call provision.

Brokered CDs, which are offered by brokerage firms, financial advisors, financial consultants, and financial consultant, are held by a group of unrelated investors where each one owns one piece.  Like other CDs, the investor agrees to keep his money deposited for a specified term, and the bank or credit union will then pay a certain amount of interest.

Liquid CDs allow the investor to withdraw certain amounts of the principle without any penalty.  There are limits as to how much money can be taken out and how may withdrawals he can make,  The interest rates of Liquid CDs are likely higher than the bank’s money market rate, but lower a traditional CD.

Bump-Up CDs allow for great flexibility, as bank can increase the interest rate of the CD to a rate offered by the issuing bank.  This clearly benefits the investor as he will now receive the highest rate without incurring any penalties.  Those who invest Bump-up CDs anticipate interest rates will increase in the near future.  Additionally, most banks tend to offer bump-up CDs with maturity of two year.

There are numerous other kinds of CDs.  Variable Rate CDs are tied to the outcome of market indices.  These CDs allow investors to earn the highest CD rates during the term of your certificate of deposit, and they are linked to US Treasury note rates.  Add-On CDs allow for additional deposits during the term.  Zero Coupon CDs have a massive discount from the CD’s face amount, though the maturity terms are far longer and they do not pay interest until the date of maturity.

IRA accounts are tax-deferred savings accounts that investors often use for their retirements.

Investors often make such investments because the funds deposited in IRA accounts will grow without any taxes on interest, dividends or capital gains until the money is withdrawn at maturity. An IRA asset can be a mutual fund, a specific stock or simple cash, or a CD.  One of the draws to using a CD is that they are usually insured and so the investors’ assets are generally safe, despite a somewhat low return rate.  Presently, the FDIC and NCUA raised the insurance limit for IRAs to $250,000 per banks and credit unions.

Most banks market CD based IRA accounts to their customers, which creates a misperception that there is a difference between CD-based IRA accounts and traditional investment-based IRA accounts.  In fact, the difference is nominal, as an IRA is simply a special tax status applied to various investments, and the rules and regulations for such accounts are the same for all types of investments.       

Time Frames for IRA CDs
CDs have time frames equal to the money left within the CD; in other words, a three-year CD would thus have a time frame of three years.  IRA CDs differ, however, as they have various rules and regulations regarding the use of the funds.  Such rules include substantial tax penalties if money is withdrawn from the account before its owner turns 59 1/2.  However, an owner can purchase a new CD or have one rolled-over into his IRA account without tax implications.

Benefits
IRA accounts shield the owners from paying interest from taxes until the money is withdrawn.  Because of this, IRA accounts allow the investor to accumulate additional funds for retirement, as taxes need not be diverted from their retirement goals.  This allows the investor to have more money to put into his retirement.

There are other benefits to possessing an IRA CD.  First, the investor is in total control of the funds as the CD is opened under the owner’s title and social security number.  And second, banks and credit unions are sometimes willing to waive early withdrawal penalties.  As such, if the investor can find the best CD rate elsewhere or if he simply needs the funds immediately, the investor may have the opportunity to forego such penalties.

Concerns
While CDs pay a higher interest rate than other savings and checking accounts, they traditionally do not return as much as other investments over a longer period of time.  For example, an investor would be better off putting his money into some securities if he is seeking a substantial profit and is willing to absorb the risk.  As such, an investor with several years until retirement may be much better served by investing for their retirement in other opportunities within their IRA rather than a CD.