Top CD Rate Drops to 3.31% APY - Savings and CD Averages Down

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Savings and CD rates continued to drop last week, although the decline in average savings rates slowed to a crawl. Some of the top CD rates dropped though, effectively lowering the best rates available.

Savings and CD rates continued to drop last week, although the decline in average savings rates slowed to a crawl. Some of the top CD rates dropped though, effectively lowering the best rates available.

Savings Rates

Average savings rates dropped by only 1 basis point last week from 1.37% APY to 1.36% APY. The top rates also remained the same with Southern Community Bank's Ready Saver 2% APY Savings Account leading the pack of non-promo rates. For promotional rates, Everbank remains on top with their 3-month introductory bonus rate of 2.25% APY. After the three-month period, the rate drops down to 1.26% APY for a blended one year APY of 1.51% APY. Banks that dropped their rates include:

  • Franklin Synergy Bank falling from 1.7% APY to 1.65% APY.
  • Palladian Private Bank falling from 1.55% APY to 1.5% APY
  • Savings Square from 1.35% APY to 1.25% APY

CD Rates

The average 1-year CD dropped from 1.63% APY to 1.61% APY. First City Bank continued to hold the top spot with a 1.80% APY CD.. First City Bank is in bad financial shape and has been operating under a FDIC Cease and Desist Order since 10/09. Southern Commerce Bank which last week had the second highest rates dropped its 12-month CD to 1.50% APY, moving Tennessee Commerce Bank into the second spot at 1.70% APY.

The average 3-year CD rate had the biggest drop last week, falling from 2.52% APY to 2.47% APY. The top rate also dropped from 2.75% APY to 2.65% APY. Bank United which held the top rate dropped its CD to 2.50% APY. The top spot is now occupied by USAA Federal Savings Bank, which requires a minimum deposit of $175,000. The next highest rate is Acacia Federal Savings at 2.65% APY and a $500 minimum deposit.

The average 5-year CD dropped from 3.19% APY to 3.16% APY.

The top two rates on the 5-year CD fell with USAA lowering its rate from 3.41% APY to 3.31% APY. It's still the highest rate even though it's 10 basis points lower than last week. Everbank continues to have the second highest rate at 3.30% APY versus the 3.39% APY it was offering last week.. One thing to note about Everbank is their penalty for breaking a CD early. According to their terms:

"This penalty will be equal to one-fourth of the total interest that would have been earned on the principal balance of the account if funds had not been withdrawn prior to the maturity date."  On a 5-year, 60 month CD, that's 15 months of interest.

The spread between average savings rates and 3-year CD rates dropped again for the sixth week in a row. To me, that constitutes a trend. Savings rates have slowed their descent while 3-year CDs have been plummeting lately. Thus, the spread has been narrowing. This is not consistent with an economy that expects to see inflation and interest rates increases anytime soon. The other spread we follow is between the 1-year CD and 5-year CD. It has remained relatively flat, dropping from 1.56 to 1.55 after hitting a record high last week of 1.56. Shorter term CDs continue to fall while longer maturity CDs have held up. It also seems that we are close to a bottom in savings and money market account rates.


Annuities: Why You Shouldn't Take The Big Payout

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The annuity, an often overlooked investment product, is enjoying a revival. But just because you're promised big payouts doesn't mean you should jump at the opportunity.

I was definitely surprised to hear about the comeback of annuities, so when I started taking a harder look at them, I found definite possibilities for investors to consider, along with some serious dangers.

Annuities, in case you don't know, are basically incomes that you purchase from insurance companies.  You hand over a big wad of cash in the beginning, and the insurance company pays you a fixed stable amount for the rest of your life.

For instance, the company Presidential Life offers a lifelong immediate annuity that costs you three hundred grand up front, but will pay out just under two grand a month for the rest of your life.  That means, in about fifteen years or so, you'll start making a profit on the annuity while getting a regular consistent income that isn't affected by interest rate fluctuations like CDs and bonds.

But there's a risk--that same company, Presidential Life, has a rating from AM Best, a consulting firm that rates insurance companies, of a B+.  This may not SOUND bad, but considering that the top rating is A++, a B+ suddenly looks like an F.  Especially if it's YOUR three hundred grand you just dropped with them.

See, some lower-rated companies will often offer higher payouts in a bid to get their hands on more capital to invest and of course pay their own bills with.  They've been described as the equivalent of junk bonds, which also offer higher payouts due to enhanced risk.  But with a little bit of searching and some careful planning, an annuity may be just the thing to protect your savings long term.


Savings and CD Rates Flat - Top CD Rate Steady at 3.41% APY

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Unlike two weeks ago where we saw a steep drop in CD and savings rates, rates were mostly flat over the past week.

Savings Rates

Average savings rates held their ground last week, remaining at 1.37% APY. The top rates also remained the same with Southern Community Bank's Ready Saver 2% APY Savings Account leading the pack of non-promo rates. For promotional rates, Everbank remains on top with their 3-month introductory bonus rate of 2.25% APY. After the three-month period, the rate drops down to 1.26% APY for a blended one year APY of 1.51% APY

CD Rates

The average 1-year CD remained steady at 1.37% APY. First City Bank continued to hold the top spot with a 1.80% APY CD.. First City Bank is in bad financial shape and has been operating under a FDIC Cease and Desist Order since 10/09. Southern Commerce Bank has the next highest rate at 1.75% APY but as the BestCashCow rate tables show, it also has some financial problems.

The average 3-year CD rate, which had the biggest drop two weeks ago, remained at 2.52% APY. Bank United remains in the top spot with a 2.75% APY CD. Bank United is not yet rated because it is a relatively new banking entity, having emerged from the ashes of the old, failed BankUnited. The new bank has been recapitalized and appears to be in much better financial shape than it predecessor.

The average 5-year CD, which has been fairly steady since the beginning of the year, held steady at 3.19% APY.

USAA continues to have the top 5-year CD rate at 3.41% APY but it does have that $175,000 minimum balance. Everbank has the second highest rate at 3.39% APY. One thing to note about Everbank is their penalty for breaking a CD early. According to their terms:

"This penalty will be equal to one-fourth of the total interest that would have been earned on the principal balance of the account if funds had not been withdrawn prior to the maturity date."  On a 5-year, 60 month CD, that's 15 months of interest.

The spread between average savings rates and 3-year CD rates rose slightly fro 1.14% to 1.15%. That means the average 5-year CD pays 1.15% more in interest than a savings account. The high for this spread was 1.24% in early March. The spread between 1-year CDs and 5-year CDs hit another record high last week. You can now earn on average 1.56% APY more in a high yield 5-year CD than a high yield 1-year.


Bank in New York offering 2% on Savings Account through 2010

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I have come across a bank in New York offering a 2% savings rate, guaranteed through the end of the year. This offer beats any short term CDs.

A New York City-based bank is offering a money market account with a 2.00% APY guaranteed to last to 12/31/2010.  It is only available through the branches (not on the internet).  The bank is a small bank called Metropolitan National Bank which seems to only have offices at 46th and 5th, Park and 39th, Broadway and 36th and some remote place in Brooklyn.

This offer isn't well publicized.  It is not mentioned on the bank's website or in the branches.  I overheard someone asking about it when I was in 46th Street branch and the first representative denied that it existed although the second came up with some information.  I then got the information and opened an account.

According to the information that I received, the minimum balance required to earn this APY is $2,500.

The bank has poor service even for New York, and seems to be rated on 2 stars on bankrate and 3 stars on Bauer.  But, it is FDIC insured, and I'll put up with the bank's shortcomings to earn 2% through the end of the year (staying below FDIC limits, of course).


iShares Barclays TIPS Bond ETF (TIP) Offers Decent Yield and Inflation Protection

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The iShares Barclays TIPS Bond ETF (TIP) provides a decent yield currently at 4.09% as well as future inflation protection and little to no risk of default or loss of principle.

As savings and CD rates have come down, I've begun to look anew at other sources of reliable income. After all, earning 1.5% on my money just isn't going to do it right now. So I've begun to look at options trading again (see my post on QQQQ) to generate income and also moderate to high dividend ETFs.

In the ETF space, I'm looking for an investment that is relatively safe, can provide a yield over 3%, and has a good track record of performance. If the ETF is comprised of bonds then I'd like some hedge for interest rate risk and a relatively short duration.

The iShares Barclays TIPS Bond ETF (TIP) fits those categories. It provides a current yield of 4.09%. Because the ETF is comprised of TIPS, Treasury Inflation Protected Securities, the value is protected against inflation. So, while most bonds will lose value as interest rates rise (if they do) TIPS should do a much better job of maintaining their value. Read a full explanation for how TIPS work.  TIPS are a form of Treasury Security, and thus they are backed by the full faith and credit of the US Government. Defalt risk is virtually 0.

What's nice about buying the ETF versus individual TIPS is that you can benefit from the ETF having some older TIPS that have higher interest rates. Thus, while the current 20 year TIP is only yielding 2.06%, the TIP ETF is providing over 4%,

Is It Better to Invest in an Individual Bond or a Bond Fund?

There are risks in the TIP ETF not present when deposting money into a savings account or a CD. If interest rates spike but inflation does not, then the fund will lose value. This could happen if the markets decide to stop buying Treasuries. So far though, investors have been more than eager to scoop up US debt (Strong 1-Year Treasury Auction Quells Rate Fears - For Now).

 


Roth versus Traditional IRA: The Age Old Question

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A guide to help readers determine which is better for their financial situation: the Roth or Traditional IRA.

There is no right answer.  Real helpful, huh? To elaborate, the answer depends on your unique financial circumstances and goals.  To determine which retirement plan is best, you will want to consider a few important questions.  Where are you now?  Where will you be when you retire?  How will you get there?

Both forms of the IRA are great ways to save for retirement, although each offers different advantages.

Traditional IRA:

  • Tax deductible contributions (depending on income level)
  • Withdraws begin at age 59 1/2 and are mandatory by 70 1/2
  • Taxes are paid on earnings when withdrawn from the IRA
  • Funds can be used to purchase a variety of investments (stocks, bonds, certificates of deposits, etc.)
  • Available to everyone; no income restrictions
  • All funds withdrawn (including principal contributions) before 59 1/2 are subject to a 10% penalty (subject to exception).

Roth IRA:

  • Contributions are not tax deductible
  • No Mandatory Distribution Age
  • All earnings and principal are 100% tax free if rules and regulations are followed
  • Funds can be used to purchase a variety of investments (stocks, bonds, certificates of deposits, etc.)
  • Available only to single-filers making up to $132,000 or married couples making a combined maximum of $194,000 annually.
  • Principal contributions can be withdrawn any time without penalty (subject to some minimal conditions).

Tax Deferred vs. Tax Free

The biggest difference between the Traditional and Roth IRA is the way Uncle Sam treats the taxes. If you earn $50,000 a year and put $2,000 in a traditional IRA, you will be able to deduct the $2,000 from your taxes (meaning you will only have to pay tax on $48,000 in income to the IRS). At 59 1/2, you may begin withdrawing funds but will be forced to pay taxes on all of the capital gains, interest, dividends, etc., that were earned over the past years.   The Traditional IRA is therefore tax deferred.

On the other hand, if you put the same $2,000 in a Roth IRA, you would not receive the income tax deduction. If you needed the money in the account, you could withdraw the principal at any time (although you will pay penalties if you withdraw any of the earnings your money has made). When you reached retirement age, you would be able to withdraw all of the money 100% tax free. The Roth IRA is going to make more sense in most situations. Unfortunately, not everyone qualifies for a Roth. A person filing their taxes as single can not make over $132,000. Married couples are better off, with a maximum income of $194,000 yearly.