3% cd

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musbane
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3% cd

Post by musbane »

Since I was at risk of hijacking another thread, I've started a new one.

I heard (through the other thread) that a company called Andrews Federal Credit Union is offering IRA(only) CDs at a 3% APY.

Like many others, I have been having difficulty in finding good rates for the fixed portion of my AA.

I checked them out as best I could and found:

Assets slightly over one billion dollars
Listed by NCUA as covered up to $250k
Reviews are easy to come by. Mostly complaining about poor customer service which I did NOT experience.

The credit union was set up for members of the Andrews Airforce Base. They provided me with a work around to this that is similar to that used by Penfed.

Oh yes. The penalty for early withdrawal is 6 months interest.

I hope this is of use to other Bogleheads.
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whodidntante
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Re: 3% cd

Post by whodidntante »

3% is well above market and I think the cost to move the IRA to another custodian once the CD matures needs to be factored in. Do you happen to know what they will charge for that?
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Rob5TCP
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Re: 3% cd

Post by Rob5TCP »

I currently have 2 CD's with Andrews.
Valor Credit Union did offer a 3% with the ability to add to it; but they unilaterally discontinued that earlier this year (to much controversy to current CD holders).
3% is very hard to find right now.
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musbane
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Re: 3% cd

Post by musbane »

Whodidn'tante

The only fee I see on their web site is $25 for a wire transfer out.
I'v never experienced a fee for moving an Ira.
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whodidntante
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Re: 3% cd

Post by whodidntante »

musbane wrote:Whodidn'tante

The only fee I see on their web site is $25 for a wire transfer out.
I'v never experienced a fee for moving an Ira.
Thanks. Such fees are common and are sometimes substantial. I've paid for rollovers in the past.
patrick
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Re: 3% cd

Post by patrick »

Series EE US savings bonds are very similar 3.5% 20-year CDs.

Seen this way, EE bonds are probably the best "CD" around if you just look at interest rates. They do have the equivalent of a very draconian "early withdrawal penalty" if you redeem in less than 20 years -- you get almost no interest then. On the bright side, you buy them outside the IRA yet get full state tax exemption and defer federal tax too.
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Re: 3% cd

Post by tbradnc »

patrick wrote:Series EE US savings bonds are very similar 3.5% 20-year CDs.

Seen this way, EE bonds are probably the best "CD" around if you just look at interest rates. They do have the equivalent of a very draconian "early withdrawal penalty" if you redeem in less than 20 years -- you get almost no interest then. On the bright side, you buy them outside the IRA yet get full state tax exemption and defer federal tax too.
The low annual purchase limit puts a damper on things....
fanmail
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Re: 3% cd

Post by fanmail »

This is a 7 year cd, right? You forgot to mention that.
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amphora
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Re: 3% cd

Post by amphora »

patrick wrote:Series EE US savings bonds are very similar 3.5% 20-year CDs.

Seen this way, EE bonds are probably the best "CD" around if you just look at interest rates. They do have the equivalent of a very draconian "early withdrawal penalty" if you redeem in less than 20 years -- you get almost no interest then. On the bright side, you buy them outside the IRA yet get full state tax exemption and defer federal tax too.
+1
tbradnc wrote:
The low annual purchase limit puts a damper on things....
It's true you can only buy $10k in EE bonds per year, but I think they're the best deal in bonds right now and worth it for a portion of fixed income allocation.
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musbane
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Re: 3% cd

Post by musbane »

Fan mail.

I can't believe I forgot that. Yes, it is seven years. Thanks.
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SeeMoe
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Re: 3% cd

Post by SeeMoe »

musbane wrote:Fan mail.

I can't believe I forgot that. Yes, it is seven years. Thanks.
7 Years is a long time to have your money locked away with big penalties if its withdrawn early! something a lot of us prefer not to happen with our investments that can be used elsewhere when opportunity presents itself, or an emergency arises...Just my opinion...

SeeMoe.. :confused
"By gnawing through a dike, even a Rat can destroy a nation ." {Edmund Burke}
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Re: 3% cd

Post by Waba »

SeeMoe wrote:
musbane wrote:Fan mail.

I can't believe I forgot that. Yes, it is seven years. Thanks.
7 Years is a long time to have your money locked away with big penalties if its withdrawn early!
EWP is 6mo interest, I dont think that's a "big penalty". If you withdraw after 2 years, you would still have gotten about 75% of 3% = 2.25% over the period. Good luck finding a 2 year CD with 2.25%
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Re: 3% cd

Post by nalor511 »

Wish someone would offer this outside an IRA
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Rob5TCP
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Re: 3% cd

Post by Rob5TCP »

Waba wrote:
SeeMoe wrote:
musbane wrote:Fan mail.

I can't believe I forgot that. Yes, it is seven years. Thanks.
7 Years is a long time to have your money locked away with big penalties if its withdrawn early!
EWP is 6mo interest, I dont think that's a "big penalty". If you withdraw after 2 years, you would still have gotten about 75% of 3% = 2.25% over the period. Good luck finding a 2 year CD with 2.25%
While it is RARE; C.U.'s and banks have changed the EWP retroactively (as well as changed some of the provisions of the CD).
Usually, they allowed you to w/d your entire CD at that point without charge.
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Kevin M
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Re: 3% cd

Post by Kevin M »

Just saw that the purchase of my second of these CDs today occurred today. This was from the proceeds of a matured Ally IRA CD; I initiated the IRA transfer a couple of weeks ago, about a week before the CD matured. I have a couple more IRA CDs maturing at Ally next month, so if the AFCU rate holds I will hit my NCUA deposit insurance maximum when I transfer some of the proceeds from those CDs to Andrews FCU when they mature.

I have posted a bunch about this CD already. I bought my first one on Feb 19 of this year.

The best apples to apples comparison is to a 7-year Treasury purchased on the same day, since neither has credit risk, and they have the same term to maturity. Yield on the 7-year Treasury is 1.38% today (Daily Treasury Yield Curve Rates), so the CD I bought today has a yield premium of about 160 basis points. To put it another way, the yield on the CD is more than double the yield on the Treasury. Yield on the 7-year Treasury when I bought my first of these CDs on 2/19/2016 was 1.53%, so it's a slightly better deal now, but was a great deal then too.

Add to that the early withdrawal option, which limits downside to about 1.5% if rates were to increase enough to justify doing an early withdrawal and reinvest at the higher rate, and the CD is the clear winner over any bond or bond fund on a risk-adjusted basis (the early withdrawal penalty, or EWP, is only 180 days of interest, which is fantastic for a 7-year CD; even most competitive 5-year CDs now have an EWP of 360/365 days of interest). Compare this to the much larger downside of any bond or bond fund of comparable maturity/duration--a loss of almost 7% on a 7-year Treasury if rates were to increase by one percentage point.

So anyone who considers the early withdrawal penalty a negative just doesn't understand the risk/return tradeoff of bonds and CDs, or is thinking in all-or-nothing terms. I just manage my fixed income so I have liquidity elsewhere--cash, bond funds, and proceeds from maturing CDs. I don't expect to tap this 7-year CD unless yields were to increase enough that paying a 1.5% penalty would be well worth it.

The EE bond is a poor comparison, since the term to maturity is so much longer, and the effective EWP is so much worse. After only a year the EWP on the EE bond is essentially almost 3% compared to the CD, and almost 3.5% compared to the phantom rate of 3.5%. It gets worse every year, since you give up almost all of your phantom 3.5% interest if you redeem before maturity. After 19 years your EWP is about 17 years of interest; yikes!

Of course if you are willing to have no liquidity with this chunk of fixed income for 20 years, then the EE bond is a good investment compared to a 20-year Treasury with a yield of only 1.9% as of today. If you adjust for term risk, the CD is a hugely superior investment--there's just too much risk of unexpected inflation over a 20-year period for me to be comfortable with 3.5% nominal and no liquidity. And this doesn't even get into the low annual purchase limits--I'm hoping to end up with more than $200K in this CD, all invested this year (you can invest a little over $203K to stay just under the $250K limit at maturity in 7 years).

Regarding fees, I have done many IRA transfers and have never been charged a fee, with the possible exception of an account closing fee at Schwab ($50 as I recall); I think Fidelity also charges an account closing fee, but I have done a number of partial IRA transfers out of Fidelity with no fees. I have done IRA transfers out of Vanguard, Ally Bank and PenFed with no fees. However, I wouldn't be surprised nor would I mind being charged a nominal fee for closing an account at a credit union after making so much more interest over five or seven years compared to a Treasury.

Kevin
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musbane
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Re: 3% cd

Post by musbane »

Kevin, I'm not sure, but I think I heard of this CD from you. If so, thanks.

One thing. You can set up your CD for the full $250k and have the quarterly interest sent to your other bank. I am doing this as a withdrawal from the IRA (I'm retired and have to withdraw some anyway) but there is likely a way to keep it in another IRA.
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Rob5TCP
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Re: 3% cd

Post by Rob5TCP »

Kevin - your risk/reward calculator (I believe it was yours) was quite the eye opener.
Most of my IRA bond funds are sold and are now at Andrews. There was just no comparison.
I am calculating converting some of my other CD (and EWP) into 7 year Andrews.
By using different POD, I should be able to easily get past the 250K max.
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Kevin M
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Re: 3% cd

Post by Kevin M »

musbane wrote:Kevin, I'm not sure, but I think I heard of this CD from you. If so, thanks.

One thing. You can set up your CD for the full $250k and have the quarterly interest sent to your other bank. I am doing this as a withdrawal from the IRA (I'm retired and have to withdraw some anyway) but there is likely a way to keep it in another IRA.
I was thinking along these lines too, but my issue is that I'm not yet taking IRA distributions--will start when I must in about six years--so the only thing that would make sense for me would be quarterly IRA transfers to another custodian, and I think that might be too much hassle. I guess another option would be to do annual IRA transfers, risking at most about $7,500 ($250K * 3%).

As is typical of direct CDs, AFCU allows penalty-free distributions of interest ("dividends"). From its Truth in Savings disclosure:
Transaction limitations: After the share certificate is opened, you may not make deposits to it until the maturity date stated above. Dividends credited during the term may be withdrawn at any time during the term; withdrawing dividends can reduce future earnings. Dividends not withdrawn become part of the principal of the share certificate when the share certificate is renewed for another term. Withdrawals of principal during the term are subject to early withdrawal penalties. If you close your share certificate prior to maturity, you will receive the dividends that you earned through the closing date but that have not been previously credited.

Early withdrawal penalties (a penalty may be imposed for principal withdrawals before maturity):
• If your account has an original maturity of less than 24 months, we will charge a penalty equal to 90 days of dividends.
• If your account has an original maturity date of 24 months or greater, we will charge a penalty equal to 180 days of dividends.
So apparently I could do periodic IRA transfers of "dividends" directly from the CD to another custodian to minimize the risk of having uninsured deposits much in excess of $250K. This eliminates the need for using an IRA savings account at AFCU to collect the dividends.

Will think more about this, but the first hurdle is that the rate must hold for another month or two.

On another topic, note that the disclosures imply that partial withdrawals of principle are allowed, as long as a minimum balance of $1,000 is maintained (which explains why our available balance shows as $1,000 less than the actual balance). This is the same as PenFed.

Kevin
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Kevin M
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Re: 3% cd

Post by Kevin M »

Rob5TCP wrote:Kevin - your risk/reward calculator (I believe it was yours) was quite the eye opener.
Most of my IRA bond funds are sold and are now at Andrews. There was just no comparison.
I am calculating converting some of my other CD (and EWP) into 7 year Andrews.
By using different POD, I should be able to easily get past the 250K max.
Cool, but a couple of observations.

First, I'm reluctant to do any early withdrawals to fund this CD because of the risk of having the rate drop before the transfer is complete, in which case the EWP would be wasted. However, I have seen two reports from forum members that an AFCU CSR said they would lock the rate when they received the IRA transfer form, which is the exact opposite of what I was told. If you can get the rate lock in writing, then I guess you could submit the IRA transfer form before doing the early withdrawal, and then call them daily to see if they've received the form yet and locked the rate, then do the early withdrawal. If the rate drops before they lock the rate, then you could request that they cancel the IRA transfer request.

Other than the rate-lock issue, it is a no-brainer to do an early withdrawal from a 2% CD with an EWP of 180 days of interest and more than a year left to maturity, since you will earn back the EWP in one year at the 3% rate. With an EWP of one year of interest, you'd want more than 16 months remaining to maturity, since that's about how long it would take to break even at 3% after the EWP of 2% (4%/3% * 12). I think I'd add a few months to these numbers to make it worth the hassle of doing the transfer. Also this assumes that you have no other IRA assets to transfer (as is my case, with proceeds from maturing CDs).

Second, POD does not apply to IRA accounts. Retirement accounts is its own ownership category, and the FDIC/NCUA limit for this ownership category is $250K, regardless of number of beneficiaries. POD falls under the trust account ownership category. An account cannot be in two ownership categories--it's either trust/POD or retirement. Since this CD is available only in IRAs, I see no way to exceed the basic insurance amount of $250K.

Kevin
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Re: 3% cd

Post by Rob5TCP »

Kevin M wrote:
Rob5TCP wrote:
First, I'm reluctant to do any early withdrawals to fund this CD because of the risk of having the rate drop before the transfer is complete, in which case the EWP would be wasted. However, I have seen two reports from forum members that an AFCU CSR said they would lock the rate when they received the IRA transfer form, which is the exact opposite of what I was told. If you can get the rate lock in writing, then I guess you could submit the IRA transfer form before doing the early withdrawal, and then call them daily to see if they've received the form yet and locked the rate, then do the early withdrawal. If the rate drops before they lock the rate, then you could request that they cancel the IRA transfer request.

Other than the rate-lock issue, it is a no-brainer to do an early withdrawal from a 2% CD with an EWP of 180 days of interest and more than a year left to maturity, since you will earn back the EWP in one year at the 3% rate. With an EWP of one year of interest, you'd want more than 16 months remaining to maturity, since that's about how long it would take to break even at 3% after the EWP of 2% (4%/3% * 12). I think I'd add a few months to these numbers to make it worth the hassle of doing the transfer. Also this assumes that you have no other IRA assets to transfer (as is my case, with proceeds from maturing CDs).

Second, POD does not apply to IRA accounts. Retirement accounts is its own ownership category, and the FDIC/NCUA limit for this ownership category is $250K, regardless of number of beneficiaries. POD falls under the trust account ownership category. An account cannot be in two ownership categories--it's either trust/POD or retirement. Since this CD is available only in IRAs, I see no way to exceed the basic insurance amount of $250K.

Kevin
Thank you Kevin - the limit now does affect one CD I was going to transfer.
I will call on Monday to ensure I can transfer the other in time to make the 3% offer. The payback period is very short.
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Kevin M
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Re: 3% cd

Post by Kevin M »

Rob5TCP wrote: Thank you Kevin - the limit now does affect one CD I was going to transfer.
I will call on Monday to ensure I can transfer the other in time to make the 3% offer. The payback period is very short.
Sounds like a plan. Glad we got the IRA vs. POD NCUA insurance thing cleared up. Would be interested in hearing how your request for a rate lock goes--maybe share the CSR's name if you get one that agrees to do this for you.

For my second transfer I never even contacted AFCU, other than mailing the IRA transfer form. I wanted to see how it would work with as little effort as possible.

I did contact Ally by online chat because my IRA savings account got closed the day of the transfer. I had indicated to close the account on the transfer form, without thinking it through. This was a mistake, since I had already requested that all of my IRA CDs at Ally be set up to have proceeds deposited into the IRA savings account at maturity. So I had to open another IRA savings account (during an online chat session), and make the same request again. Next time I will only specify a dollar amount, leaving a little bit in the IRA savings account to keep it open.

Also, with the account closed I could not view the transaction history for the account, so contacted Ally to be sure that it was closed due to the transfer to AFCU. Although this was pretty obvious, I wasn't comfortable without getting some sort of confirmation that this was the case.

Kevin
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Rob5TCP
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Re: 3% cd

Post by Rob5TCP »

Kevin M wrote:
Rob5TCP wrote: Thank you Kevin - the limit now does affect one CD I was going to transfer.
I will call on Monday to ensure I can transfer the other in time to make the 3% offer. The payback period is very short.
Sounds like a plan. Glad we got the IRA vs. POD NCUA insurance thing cleared up. Would be interested in hearing how your request for a rate lock goes--maybe share the CSR's name if you get one that agrees to do this for you.

Kevin
Things are not always as clear cut as they seemed. I went to Synchrony Bank's website and looked up EWP. On June 13, 2016 they changed the penalty on all CD's over 4 years to 365 days interest. I will be doing some calculations to see if the difference is still worth the effort.
I looked up my original terms and they were 6 months EWP.
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Kevin M
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Re: 3% cd

Post by Kevin M »

Rob5TCP wrote: Things are not always as clear cut as they seemed. I went to Synchrony Bank's website and looked up EWP. On June 13, 2016 they changed the penalty on all CD's over 4 years to 365 days interest. I will be doing some calculations to see if the difference is still worth the effort.
I looked up my original terms and they were 6 months EWP.
The new EWP only applies to CDs purchased since the policy change. EWPs have increased at most banks and credit unions from which I've bought CDs, but in no case have they applied to existing CDs (my personal experience--we know of two cased in which changes in early withdrawal terms were applied to existing CDs). So if you're talking about CDs you bought before June 13, 2016, your EWP still is six months of interest for terms of over four years.

We've seen a general trend of decreasing rates and increasing EWPs. I discuss this in my most recent blog post, explicitly mentioning the EWP increase at Synchrony Bank: CD Rates Falling, But Yield Premiums Still Attractive.

As mentioned previously, your payback period on a 2% CD with an EWP of six months of interest is about one year, and if the EWP is one year of interest it's about 16 months. So if you have two years or more until maturity, it's a win either way. Obviously the payback is a little longer if your SB CD has a higher rate, like the 2.3% they offered not too long ago on a 5-year CD.

For a precise calculation, see this tool: When to Break a CD Calculator - Is the improved interest worth an early withdrawal penalty?.

Kevin
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Rob5TCP
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Re: 3% cd

Post by Rob5TCP »

Kevin M wrote:
Rob5TCP wrote: Things are not always as clear cut as they seemed. I went to Synchrony Bank's website and looked up EWP. On June 13, 2016 they changed the penalty on all CD's over 4 years to 365 days interest. I will be doing some calculations to see if the difference is still worth the effort.
I looked up my original terms and they were 6 months EWP.
The new EWP only applies to CDs purchased since the policy change. EWPs have increased at most banks and credit unions from which I've bought CDs, but in no case have they applied to existing CDs (my personal experience--we know of two cased in which changes in early withdrawal terms were applied to existing CDs). So if you're talking about CDs you bought before June 13, 2016, your EWP still is six months of interest for terms of over four years.

We've seen a general trend of decreasing rates and increasing EWPs. I discuss this in my most recent blog post, explicitly mentioning the EWP increase at Synchrony Bank: CD Rates Falling, But Yield Premiums Still Attractive.

As mentioned previously, your payback period on a 2% CD with an EWP of six months of interest is about one year, and if the EWP is one year of interest it's about 16 months. So if you have two years or more until maturity, it's a win either way. Obviously the payback is a little longer if your SB CD has a higher rate, like the 2.3% they offered not too long ago on a 5-year CD.

For a precise calculation, see this tool: When to Break a CD Calculator - Is the improved interest worth an early withdrawal penalty?.

Kevin
With 3 years to go - it's an easy decision with 6 months penalty. Thanks for the heads up; again !
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