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I Am Just Not Too Excited About a 1-Year CD at 2.85% APY

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There are several well-known online banks that are offering 1-Year CDs at 2.85%.  In fact, some banks may even be a little higher.   You can see the list of the best online 1-year CD rates here.   You may also find better one-year CD rates offered by local banks near you or credit unions near you.

BestCashCow, of course, provides the most comprehensive list of CD rates in the US.   At various points, I have highlighted what I believe to be great one-year rates.

I, however, have not been particularly eager to recommend that people get heavily into one-year CDs at 2.85% and that has caught many of BestCashCow’s readers by surprise and been the source of a lot of queries that I have received.

Here are the reasons why I would be hesitant to jump in heavily:

First, the Federal Reserve is still raising rates, most recently moving the Fed Funds rate to a range of 2.25% to 2.50%.   The Fed has also most recently guided towards a neutral rate of 2.80%.  But, they also said that there are 2 more moves in 2019 and one in 2020 and that would take the Fed Funds rate to 3.00% to 3.25% in a little over a year.

Second, I see a risk of real inflation in 2019 and into 2020 as I outlined at the end of this article.  If that happens, we are looking at higher rates and a Fed that will raising faster and higher.

Third, savings rates are pretty high and getting more so.   Even if I believe that they aren’t going higher, they really are unlikely to go lower over the next twelve months.   I count no fewer than ten nationally available online savings offerings at 2.25% and many more available at banks locally and at credit unions.   $100,000 deposited in any of those places paying 2.25% is going to deliver no more than $600 less than a one-year CD (and that $600 difference is fully taxable).   The savings account could also wind up delivering roughly the same amount or even more than a one-year CD if savings rates continue on their upward trajectory. 

Fourth, you are locking your money up and even though 1-year is a short period of time, it is still locked up.   In return for that extra fully taxable $600 (or less) on $100,000, you are locking your money up into 2020.   If you need your principal back, Sallie Mae or Live Oak Bank are going to charge you three months’ interest (other online banks, such as Marcus or Purepoint will actually charge you more to break a one-year CD).  A three-month’s interest penalty on $100,000 at 2.85% is $712.50.

If you have money that you don't need for a year, you can always put some of it into 1-year CDs.  However, if you think that there is even a remote chance that you will need the money back or that rates could go much higher, then the risk-reward of the 1-year CD just is not very exciting.   I’d stay primarily in online savings accounts.


Avoiding Early Withdrawal Fees on CDs by Withdrawing Only Accrued Interest

Like many people who realized three or four years ago that interest rates were not going to go up at the time, I locked some money into 5-year CDs back then.

These CDs are now within a year or two of maturity.   The early withdrawal fees on these are either 6-months’ interest or 12-months’ interest.   As long as you don't need the cash, a quick calculation that most people can do in their heads shows that the penalty would be more than any additional yield that you can get and it therefore makes more sense to hold them until maturity.

Yet, as rates have risen, the interest that these CDs are now paying is a little lower than today’s best online savings rates and is quite a bit lower than current best online one-year CD rates.

All online banks that I am aware of will allow you to withdraw the interest that has accrued to the CDs without any penalty.   While the release of accrued interest is not a transaction that can always be done online, I found that with some online banks it is a 2-minute phone discussion.

It releases a small part of the money in the CD, freeing that money to earn a higher rate.


Sexy and Dangerous: Avoid the 3.50% Toronto Dominion Callable Step-Up CD

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TD Ameritrade is sending out notices to some of its clients offering a new callable step-up CD offered by Toronto Dominion, its parent.

This new product - which offers an initial 3.50% APY interest rate - is dramatically more sexy than their offerings just a few months ago which we discussed and recommended against here.  

After two years, the newly-offered Toronto Dominion CD will pay 4.50% APY for years 3 and 4 and 5%, if it isn’t called away sooner by the issuer.   The issuer has the right to call the CD any time after year 1.   

BestCashCow has never liked brokered CDs.   We recommended that they be avoided when rates where much lower and we basically recommend against them now for the same reason.  Since they cannot be broken with the payment of an early withdrawal penalty, they represent a significant risk to anyone who may require earlier liquidity.   Since this CD has a maximum maturity of 5 years, should you need to get out of it in the early years, you could take a real bath trying to find liquidity in a market that doesn’t exist (where TD Ameritrade is the only buyer).    Should you die before the CD’s maturity, your heirs will likely inherit a fraction of what they would inherit were you to buy a straight 5-year CD.

Moreover, interest rates are presumably still rising and the Fed is likely poised to bring the Fed Funds rate above 3% by the end of 2019.   If you must reach for yield, you can get 2.70% on a one-year CD and then have the liquidity in 12 months to find a new product with a higher rate.  

But, we’ve just had an election that has left the US in an even worse place than we were immediately after the Russians handed Trump the Presidency 2 years ago.   And, that opens up the prospect of falling rates.   Should that happen, this product will be called away on the first possible call date in November 2019.   While you may have brought in 80 basis points more than you would have made in the 1-year CD that pays 2.70%, you will not have been compensated for the risk that you took. 

Sexy?  Yes.

But, dangerous as hell.  

Your better bet is to look at online one-year CDs.

Editor’s Note: The Toronto Dominion product is listed under CUSIP 89114QER5.