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1-Year CD Rates from Online Banks 2021

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Should You Really Be Buying 1-Year CDs Right Now?

Rate information contained on this page may have changed. Please find latest cd rates.

I was at the gym yesterday and a friend who manages money for wealthy New Yorkers asked me if his clients (a married couple) should be putting $500,000 into a 1-year CD here and now at 2.00%.

He believes that with the stock market at an extremely elevated valuation and likely to correct, with the 10-year bond at 1.60% and yields likely to rise, and with little opportunity for appreciation in gold and other alternative assets, a one-year CD seems like a good place to hide out.

I quickly explained that 2.00% is not the highest one-year CD rate.    You will find higher rates online here (hyperlink), and you may find still higher rates at banks and credit unions where you live.

Then, I turned to the cash versus CD discussion.

For some time, I have recommended one-year CDs as a way to improve your return on cash that you want to keep liquid but know that you will not need for over a year.   As the Fed was increasing rates and the expectations was for further increases, the spread between CDs and savings was also increasing.   This time last year, the best online savings rates stood around 2.30% and one-year online CDs were around 2.85%.   

While BestCashCow’s surveys still reflect a wide spreads nationally (see the chart on the top of our online one-year CD page), the highest online savings rates are not much below the best one-year CD rates today.  

Savings is always going to give you more flexibility.   It can be accessed without penalty in an emergency.   It can be deployed instantly should you see a market opportunity or some sort of other opportunity.   So, I think that there is a strong argument for holding cash in savings or No Penalty CDs here and not now buying new short-term CDs (or allowing short-term CDs to auto-renew).

At the same time, I’ve always argued that there is very little risk in a one-year CD.   You are never very far from maturity, and the standard early withdrawal penalty on one-year CDs is only three months’ interest (but, you should always check on the early withdrawal rules and fees before buying a CD).   And, while it is hard to get excited about the narrowing margin, there is a real risk as we work through 2020 that President Pence will try to raise money from real estate developers and try to force Fed Chairman Jerome Powell to continue to lower the Fed Funds rate to zero (as Trump did).       

Be Careful Not to Rush Too Heavily Into Long-Term CDs Here

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Interest rates have collapsed over the last several weeks and that may be good news for those interested in remortgaging or buying a new property.   It is also good news for anyone considering taking out a new home equity loan or line of credit or an auto loan.

It may not be good news for your savings.   Many banks dropped their online savings rates going into the July rate cut and still others are dropping their rates now based on the assumption that the Fed is not done cutting.

We are getting a lot of notes from savers who remember well a lengthy period from 2009 to 2016 when savings rates were below 1%, and are terribly fearful that we may be heading back there.   Indeed, anyone looking at Japanese or German rates and watching the talking heads on CNBC or Bloomberg can get the feeling that there is a real paradigm shift and that interest rates are never going up.

There are still banks and credit unions that are offering online 5-year CDs over 3%.   In your local market, you may even find brick and mortar opportunities at banks and credit unions to get these kinds of rates.

Here are two reasons why you should be cautious.

First, we’ve seen a panicked move in Treasuries.   Rates may not stay this low for very long.   We could be in a completely different environment in a year or 18 months with the 10-year back over 3% and perhaps even with the Fed Funds rate back over 3%.   If that happens, you will regret having limited your liquidity by locking into a long-term CD.

Second, even if rates go back to zero, you are still going to see attractive 5-year CD offers as banks will still need to lock up long-term deposits from depositors to fill their capital needs.   From 2011 until 2015, while the Fed Funds rate was at zero and the best savings rates were below 1%, it was still always possible to find 5-year CDs at or just under 2.50%.    So, even if we see a continued complete collapse in interest rates, you will always be able to get a premium for locking in for a long period.    And, yes, there is a difference between 2.50% and 3.50%, but the difference is not a matter of life or death (especially after you calculate the net income from the CD after tax).

If you see 5-year CDs as a sort of insurance against collapsing rates, then you can go ahead and devote a small amount of your savings to provide some level of protection against falling rates (be sure to check the best rates here).  But, we’d be much more inclined to direct that energy towards one-year CDs where the rates may be slightly lower, but so is the risk of getting this wrong.

Avoid The TIAA 4-year Diversified Assets Marketsafe CD

I’ve written about TIAA’s “Marketsafe CD” products, and those issued by Everbank prior to its acquisition by TIAA.   I’ve suggested that the offering of these products violates the 1933 Securities Act, and I maintain that position.  More importantly, I have always written to advise depositors to avoid thinking of these products as CDs (they should not be called CDs), and I am doing that again here.   

The latest product purports to give depositors so-called “safe” exposure to the Brazilian Real, the Euro and gold and emerging market equities.   In this case, these assets are all priced using ETFs on a pricing date, and then measured against the price of those ETFs in 4 years.   The investor gets back their principal and the weighted appreciation, if any, at maturity.   Interestingly, the video, featuring Chris Gaffney, uses the hypothetical appreciation of 6% over 4 years which would underperform by at least half the compounded performance on a 4-year CD (where you can still earn well over 3% per year).

With its past products, TIAA and Everbank provided some rationale for tying their products together.   They represented earlier products as a play on oil currencies here and here a play on emerging market currencies here or emerging market equities here or a rise in interest rates here or here.  

I am not sure of the rationale for tying together the Brazilian Real, the Euro, gold and emerging market equities.   It now seems to be a kind of “we think you’ll like this” type of thing.  A prudent investor might look at which of these things they want to own and invest in them though the ETF directly or some other means.  For example, my own personal opinion is that while gold and the Euro might appreciate against the dollar over the coming 4 years, the Brazilian Real and the emerging market ETF could easily fall quite severely.    I would look at the gold ETFs (IAU or GLD) as one alternative, and interest-earning Euro accounts as another.

As anyone who has invested in any of TIAA’s or EverBank’s Marketsafe products knows, it just takes one nasty thing in the basket to destroy it and to leave you waiting for maturity to get your principal back.  Previously, however, TIAA damaged your wealth but did not hit you with a 1099 reporting Original Issue Discount (OID).    However, if you read the terms of the latest offering, TIAA will hit you with an OID statement for imputed interest in each of the four years that you are holding this product.   While the bank would have had an obligation under Federal Tax law to have reported OID, EverBank did not do this prior to its acquisition and the fact that they are now doing it means that their products go from a dreadful idea to a ever worse one.

Bottom line: Continue to avoid TIAA Marketsafe CDs.