What is a Jumbo CD?

Smiling Piggy BankLast week I looked at callable CDs, a type of CD that lets the bank “call” it in earlier than the maturity. Today, we’re going to take a look at Jumbo CDs. Jumbo certificates of deposit are just CDs with a very large deposits – usually over $100,000. They have all of the features of a regular certificate of deposit, except the minimum deposit is over $100,000.

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High Yield IRAs

Nest Eggs!All throughout tax season, from about mid-February to early-April, I received letters from my banks telling me it that I was running out of time to contribute to an IRA. This happens every year because brokers and banks want your business. They want you to open your IRA with them. The letters pitch various products and the most intriguing one I saw this year was a letter from Everbank advertising a high yield IRA.

Everyone likes a high yield IRA, right? Reminds me a little of this insight into retirement wealth:

  1. Open high yield IRA.
  2. ???
  3. Profit!

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What is a Callable CD?

Calling all CDs!As I was reviewing the CD rates of PNC Bank, after learning of PNC’s $100 checking account promotion, I saw that they offered a 36 and 60 month callable CD on their promotional rates page.

A callable CD is a CD where the bank has the option of closing it after the fixed period. The CD is usually “sold” as a fixed month CD with call protection, so a 60 month CD with 12 months of call protection. In that case you have a 60 month CD that the bank cannot call, or close, within the first twelve months. After the twelve months of call protection expires, the bank can close the CD if it chooses to. You, however, cannot. This shifts interest rate risk onto you, the depositor. If rates go up, you don’t benefit because you’re locked in. If rates go down, the bank can simply call the CD and you have no choice but to close it.

The payoff is in the rate. A callable CD will usually have a higher interest rate than a regular CD because the depositor is bearing the risk. In the case of PNC, the 36 month callable CD had a 2.00% APY yield while the 36 regular CD had a 1.15% APY yield. The difference for the 60 month CDs were even greater, with the callable yielding 3.00% APY and the regular yielding a mere 1.55% APY. By the way, according to our best CD rates, a 5 year CD currently yields at least 3.00% APY so don’t bother with PNC’s callable CD if that rate appeals to you.

(Photo: djbrady)

 Bank Deals 

Costco/Capital One InterestPlus Online Savings Account

Costco SignCostco and Capital One have joined forces to offer an InterestPlus Online Savings account that offers a fairly competitive 1.50% APY. It doesn’t appear that a Costco membership is required for this account but there is an incentive for members. If you are an Executive, you can get a $60 bonus. If you’re a Gold Star or Business member, then it’s only a $20 bonus. In terms of bonuses, these are probably the best you can expect for an online savings account but brick & mortar checking account bonuses (where you need to setup direct deposits and make bill pays) will usually pay far more (without a third party paid membership requirement).

This offer is attractive if you don’t already have an online savings account and you are already Costco member.

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Top Long-Term CD (Certificate of Deposit) Rates

Certificates of deposit are an important financial planning tool because they represent the safest investment you can make. You deposit funds, you get a guaranteed interest rate until the CD matures. You have to deal with inflation risk, that the rate of inflation could outpace your return, and the risk that you may need the funds. If you close a CD early, you will usually have to pay an interest penalty unless it’s a no penalty CD.

Personally, I don’t deposit funds into a long term certificate of deposit, especially with these CD rates, because I’m at an age where it doesn’t make sense from a financial planning perspective. We’re in our twenties so we’re thinking about things like starting a family and buying a home so a three-plus year CD wouldn’t make sense because our situation is changing so quickly. However, once it stabilizes, I see the value in saving money in longer term CDs as a way of planning for the future.

What I do use long term CD rates for is when I make investment decisions. CDs represent a 100% safe “investment” opportunity, so any potential investment is compared against a three or five year CD. If I can get a guaranteed 3% for a 5 year CD, why would I want to invest in something that has risk and only returns 3%?

Top Long-Term CD Rates

The following table lists the top CD rates for maturities of more than 24 months. In general, most will be 5 or 6 year CDs since the longer the maturity the higher the rate.

All of the banks on this list are FDIC insured up to $250,000.


What To Do When Your CD Matures

We put our emergency fund into a CD ladder and every month one of those certificates of deposit matures and is automatically renewed. As an added bonus, ING Direct, where our CDs live, gives us a CD rollover bonus whenever we renew (currently the bonus is 0.15% on CDs of at least 12-months long). For us, the decision is simple. It’s a CD ladder and you simply renew the CD each month for the 12 month term.

What if you’re money isn’t in a CD because it’s part of a CD ladder, what should you do?

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Ally Bank Ten Day CD Rate Guarantee

10 DaysOne of the most annoying things in personal finance is opening a bank account and then seeing the interest rate drop. This happened very often in the falling interest rate environment of the last year and a half. I remember opening an online savings account only to see the rate fall the next day! It’s not bait and switch, it’s not sneaky, and banks don’t do it on purpose because nothing stops you from leaving. Interest rates aren’t guaranteed. It’s just how it is.

There is only one thing more annoying than falling interest rates, it’s rising interest rates after you’ve opened a new certificate of deposit! With CDs, if you close one before it matures, you will pay a penalty of three to six months’ interest. Again, it’s not bait and switch, it’s just the nature of fluctuating interest rates.

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New ING Direct Added Value CD

Yesterday, ING Direct announced a clever new take on CDs – it’s the Added Value CD. The idea is very simple, you can get a 12 month CD with a rate of 2.25% if you open it and fund it with “new money” from a non ING Direct account. According to their terms and conditions, the new money must increase your total deposit balance as of yesterday, October 7th, 2009. Withdrawing money and then contributing it again will not work.

The 2.25% APY rate is a 0.15% premium on ING Direct’s current CD rates and it beats the best CD rates in that maturity range. With inflation at a scant 0.19%, getting 2.25% looks pretty good.

The Added Value CD [ING Direct]

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