What to do with maturing CDs?

[Kevin M]

Since I started buying 5-year direct CDs about five years ago, my CDs are starting to mature. Although it's much more fun to write about the complexities of bond/CD ladder returns, whether or not you should value your direct CD at statement value or present value of future cash flows, etc., I've received a few questions about what to do with maturing CDs, so thought I should do a blog post on it.

Here it is: What To Do With Maturing CDs?

If you have questions or additional tips, please ask or share.

Kevin

[Bogle_Feet]

I started buying 5-year direct CDs about five years ago, my CDs are starting to mature.

Why would you get into CD's when stocks had hit rock bottom? 2009 was the buying opportunity of a lifetime. The idea is to buy low and sell high -- not the other way around.

Invest in AGG and VOO. Start enjoying MUCH better returns.

http://www.forbes.com/sites/advisor/201 ... is-so-low/

[small_index]

Bogle_feet
What do your alternatives have to do with Kevin's helpful discussion of CDs? Kevin M is earning 3.0% in a CD he shared with many Bogleheads, while AGG yields roughly 2.35% according to Yahoo Finance. And if rates go up, AGG loses value immediately. Actually, AGG could lose out to a 2.25% CD depending on rates for the next 5 years.

[saltycaper]

^ Go easy on Bogle_Feet, Kevin.

Bogle_Feet: Many of us enjoy using CDs in lieu of a portion of our bond holdings, particularly Treasuries, because the inefficiently priced retail bank market offers one of the few opportunities for the individual investor to get a better deal than institutional players and foreign investors. Kevin does note in his blog entry:

If bond yields were to rise much, decreasing the value of my bond funds accordingly, I'd probably use some of the maturing CD proceeds to buy more shares of them, assuming the best available CD rates didn't also rise proportionally.

CD rates were pretty good during the financial crisis (early on). I remember my local banks giving away flat-screen TVs and other bonuses to entice people to take out longer-term CDs. They were begging for deposits.

I wish I wasn't a CapOne customer already. That's a nice bonus they are offering.

I'll be rolling my upcoming CD renewals to maintain my 5- and 10-year ladders. Fortunately CIT's 5-year rate is still competitive enough for me. And for the 10-year ladder, I use brokered CDs and enjoy not worrying about opening a new account to get the highest rate.

[Kevin M]

I started buying 5-year direct CDs about five years ago, my CDs are starting to mature.

Why would you get into CD's when stocks had hit rock bottom? 2009 was the buying opportunity of a lifetime. The idea is to buy low and sell high -- not the other way around.

This comment is so flippant and off-topic that I probably shouldn't even reply, but I can't resist.

First, you should check your calendar arithmetic, since five years ago was late 2010, not late 2008 or early 2009.

I won't go into all of the background (which I've mentioned in other posts), but suffice it to say that I was in the process of value averaging a significant amount of cash into stocks and investment-grade bonds when the financial crisis struck, so my value averaging was accelerated, and I did indeed buy quite a bit of both at the depressed prices.

The implication of the comment is that I sold stocks to buy CDs, which is not the case. By late 2010, my investment-grade bonds had recovered quite a bit from the low prices of late 2008. For example, in approximately two years between 10/31/2008 and 10/15/2010, VG int-term investment-grade bond fund increased by more than 28%, and that's when I started learning about the benefits of direct CDs. So I started shifting from bond funds (with nice capital gains) to CDs.

On September 15, 2010, when I bought my first direct 5-year CD with an APY of 2.74%, the 5-year Treasury yield was 1.46%, so the CD offered a premium of 128 basis points over the other 5-year US fixed-income security with no credit risk, which translates into a cumulative 5-year premium of about 7%, so about $7,000 more on a $100K investment. And the term risk of the CD was much lower, having an early withdrawal penalty of only two months of interest, limiting downside risk to less than 0.5%, compared to the much higher term risk of the Treasury.

Prices of some of my bond funds, like LQD (a corporate bond ETF), continued to rise, with a gain of about 40% by October 2012, so I continued shifting from bond funds like this to CDs. When bond fund prices started falling in 2013, I stopped shifting from bond funds to CDs. Like you said, buy low, sell high.

Since then I have bought more CDs from time to time, especially when a great deal came along, like the PenFed 5-year CD at 3% in late 2013, and yes, some of that has been funded by rebalancing out of stocks after their phenomenal recovery since March of 2009. Recently a couple of other great CD deals have come along, like the NWFCU 3-year 3% CD on October 1 of this year, so bye-bye to some more bond fund shares to buy this CD. Now, direct CDs comprise about 75% of my fixed income (I continue to hold about 25% in a variety of bond funds with higher yields than 5-year CDs).

Invest in AGG and VOO. Start enjoying MUCH better returns.

First, the Vanguard mutual fund version of AGG, Total Bond Market Index Fund (VBTLX, Admiral Shares) had a 5-year return of 2.98% as of 9/30/2015, so a bit higher than the 2.74% returned by my 5-year CD that matured on 9/15/2015. But this fund has credit risk and more term risk than the CD, and these risks happened to have paid off over that period relative to the 5-year Treasury return of about 1.5% with no credit risk and less term risk than the bond fund.

Similarly, term risk and credit risk paid off for funds that I continued (and continue) to hold, like the Vanguard Intermediate-Term Investment-Grade bond fund (VFIDX, Admiral Shares), which had a 5-year annual return of 4.25% (note that credit-risk-free VG Int-Term Treasury fund (VFIUX, Admiral Shares) had a 5-year return of 2.73%, so about the same as my credit-risk-free CD, but with significantly more term risk).

So by replacing the lower-yielding Treasuries in VBTLX/AGG with the higher-yield, lower-risk CDs, and replacing the higher-risk, higher-yield bonds in VBTLX with funds like VFIDX, I earned a higher return at lower risk. So much for your "MUCH better returns".

Of course mentioning a stock fund like VOO (VG 500 Index fund ETF) in the context of this post is completely irrelevant. I'll just mention that although I don't own this fund, I do own VG Total Stock, Total International, and a variety of other stock funds, with tilts to small-cap, value, emerging markets, and REITs. One's policy allocations to stocks vs. fixed income is so far off topic that I'll just stop here.

http://www.forbes.com/sites/advisor/201 ... is-so-low/

This article has absolutely nothing to do with my blog post or the topic of this post.

Thanks for the presenting the opportunity for me to explain the benefits of direct CDs once again, even though it's not the main topic of this thread.

Kevin

[IPer]

OP. Thanks for the great blog post...couldn't have been any clearer! As for the flippant AGG / VOO comment, you covered that in the blog post when you made reference to re balancing...some folk are here to learn and share...

[Abe]

Thanks Kevin, good post. I might add, in my experience, when CD's mature and roll over, I can sometimes call and get a little higher rate than the rate they give with the automatic roll over. I know this is the case with local and smaller banks. I just had a 1 year CD roll over and it automatically renewed at .75%. I called and they gave me 1%. I have found that I can always get a little bit higher rate when I do this.

[Kevin M]

Thanks Kevin, good post. I might add, in my experience, when CD's mature and roll over, I can sometimes call and get a little higher rate than the rate they give with the automatic roll over. I know this is the case with local and smaller banks. I just had a 1 year CD roll over and it automatically renewed at .75%. I called and they gave me 1%. I have found that I can always get a little bit higher rate when I do this.

Thanks for the tip, Abe!

As I mentioned in the blog post, Ally Bank currently adds an extra 0.05% as a loyalty reward upon renewal--at least they did a few weeks ago when I let my small IRA CD there roll over. But a 25 basis point bump is much nicer--if Ally Bank offered that, I'd be keeping more of my CDs there when they renew (unless of course there is a significantly better competitive rate at the time). I wonder if big banks like Ally Bank would do that--they certainly didn't offer when I've told them that I'm closing the CD because of better rates elsewhere (2 or 3 times now).

From now on, I'll definitely ask! Maybe some of the smaller credit unions at which I have CDs will do it. I've found large variation in the flexibility of credit unions when it comes to things like locking the rate during an IRA transfer, honoring a special rate when you make a mistake in the application or transfer, etc. It will be an interesting experiment to see which ones will offer a premium rate upon renewal, and if so, how much.

One question though: why are you buying a 1-year CD (time deposit account) at 1% when you can earn 1% in a savings (demand deposit) account? Are you hedging against falling rates? I have observed that 3-month rates are in the 0.5% ballpark, with 6-month rates back up to the 1% ballpark, and competitive 1-year rates in the 1.3% ballpark, so inverted "yield curve" from 0 months to 6 months, but upward sloping beyond that to five years (and flat to 10 years for direct CDs). So even more puzzling to me why anyone would buy a 3-month CD unless they expect savings account rates to be cut in half in the next three months.

Thanks again for the tip!

Kevin

[Abe]

One question though: why are you buying a 1-year CD (time deposit account) at 1% when you can earn 1% in a savings (demand deposit) account? Are you hedging against falling rates? I have observed that 3-month rates are in the 0.5% ballpark, with 6-month rates back up to the 1% ballpark, and competitive 1-year rates in the 1.3% ballpark, so inverted "yield curve" from 0 months to 6 months, but upward sloping beyond that to five years (and flat to 10 years for direct CDs). So even more puzzling to me why anyone would buy a 3-month CD unless they expect savings account rates to be cut in half in the next three months.

Thanks again for the tip!

Kevin

That's a good question. When I started with my local bank, they were paying a little higher rates with CD's, now they are not. I can't say why I'm staying with them. I do like being able to walk in and talk to someone I know. I have a couple more CD's with them maturing soon. I may very well move them to an online savings account at around the same rate. I also have a substantial amount sitting in Vanguard Money Market Account paying only .01% which doesn't make much sense. It does help qualify me for Flagship service, but other than that there is little reason to leave it there. I never dreamed rates would stay this low this long. I guess I'm not the only one.

[Tamales]

Thanks for the blog post Kevin. I take it you can't close the CD at maturity via your online account (or set it up to close and deposit to your account at the same bank beforehand)? Is this true for all bank CDs that you are aware of?

Not a big deal; just seems a bit primitive in this day and age. Before my recent CD purchases, the last time I had a CD, a physical visit to your brick-and-mortar bank or S&L was the only way to do anything (and I vaguely recall the interest rate was around 12%!).

[patrick013]

Very practical article.

The only thing I don't like about bank bought CD's is how they
handle the interest income.

Some will ACH the amount to an external checking account.
Some will transfer it to an internal savings account.
Others will do nothing, let it accrue till the end of the CD like
a zero coupon bond. Have to be careful not to overinvest
if everything is held and compounded till the end.

[john94549]

Ahem, clearing my throat, as it were. The issue is what to do with maturing CDs. For those of us two years from oblivion, when those 3.5%+ CDs go poof*, it's a real issue. As I keep telling my wife, that direct deposit from that USAA CD will basically disappear in a couple of years.

The concept of switching from a 3.8% CD to a 2.2% CD does tighten your jaws. That said, in a CD ladder, one takes what the market gives. The irony is, at about the same time the USAA CD matures, my wife will stop her spousal and collect her own S/S at 70 (with all those delayed retirement credits).

*I actually have one 10-year CD from 2008 at 5.75%.

[mur44]

Kevin,

I learned a lot from your blog on CD's.
Thanks for the same.

The E-loan 5-year CD rate looks interesting to me
at this point in time. I still want to wait for any
holiday specials that might come along before the
year end.

Are there usually year-end CD specials?

[stlutz]

Thanks as always for the helpful post, Kevin.

Has anyone here run into any problems with this scenario, particularly in a retirement account? How those got resolved could be helpful for others.

[Kevin M]

I also have a substantial amount sitting in Vanguard Money Market Account paying only .01% which doesn't make much sense.

Yikes! Double yikes! I see absolutely no good reason to keep anything in a taxable money market fund at Vanguard. You can link your external checking or savings account, do same day purchases from it, and have distributions and sales proceeds directed to it (typically available in 2 business days), and in the meantime earn 1% or so on it.

I actually have three MM funds in my Vanguard taxable account (Prime, Tax-exempt, CA Tax-exempt), left over from the days when rates were reasonable and I was arbitraging the after-tax rates (yes, I've always been kind of a crazy optimizer). Now that they're all earning about 0%, they just sit empty or with a few dollars in them. No maintenance hassle, since I don't include them in my portfolio spreadsheet--I basically just ignore them, but perhaps will use them again some day. Actually, one of the MM accounts is my sweep account, so it gets some action from VG brokerage activity (dividends, sales proceeds), but anything there is quickly transferred to my external bank account.

I've kept somewhat embarrassing amounts in MM funds in IRAs in the past, since I wanted liquidity with no term risk, and unlike taxable accounts, it's not so easy to move the money in and out of the brokerage accounts. But then these were offset by holding only higher risk/yield bond funds, since my low-risk/high-yield fixed income is mostly in direct CDs now. My goal is always to minimize these amounts (in MM funds or anything earning 0%), so generally they have eventually been included in an IRA transfer to a bank or credit union offering a good IRA CD deal, and now I have almost nothing in them.

I even used the last of a couple of small brokerage cash accounts in two IRAs to buy some emerging markets ETF (IEMG) back when they were down about 30% from 52-week highs a few weeks ago. They are up about 10% and 15% since then, so this little play activity has earned enough to equal 10-15 years in a savings account at 1%, more than wiping out any "losses" from earning 0% for awhile. It's nice to see the balances in the cash accounts at $0.

It does help qualify me for Flagship service, but other than that there is little reason to leave it there.

Exactly, and I don't think Flagship is worth it. About all I get is 25 free trades/year for stocks or non-Vanguard ETFs (of which I only use a few), and free or cheap TurboTax. Maybe there's something else that I don't notice. I would quantify the benefits, and compare that to how much you're losing annually by keeping money in the MM funds.

I never dreamed rates would stay this low this long. I guess I'm not the only one.

You and me both, brother, and we're not the only ones. Even folks like Ben Bernanke have expressed puzzlement over this. The best thing I can figure to do is to take advantage of deals offered to retail investors, like direct CDs and other FDIC/NCUA insured deposit accounts, reward checking accounts, stable value funds, I Bonds, etc., and goose the yields a bit more by taking more term risk and/or some credit risk with a limited amount in higher-yield/higher-risk bond funds. And of course hold an appropriate allocation to stocks based on ability, willingness and need to take risk.

Kevin

[Kevin M]

Thanks for the blog post Kevin. I take it you can't close the CD at maturity via your online account (or set it up to close and deposit to your account at the same bank beforehand)? Is this true for all bank CDs that you are aware of?

You're welcome!

When I asked Ally Bank about this, they said I had to do it by chat or phone--not even by secure message--on or after the day it matured, within the 10-day grace period. I guess it's easier for them just to do the transaction when I request it, rather than setting up a future transaction, but since you can schedule transfers between other accounts, this really doesn't seem like a good reason. Perhaps if you pushed it, you could get them to do it differently. Perhaps someone who has tried this will let us know.

Some banks and CUs allow the option of having the CD not roll over at maturity, but instead have the proceeds deposited into a demand deposit account (savings or checking). I even saw this option on the certificate receipt for the NWFCU and/or the USAlliance Financial CDs that I recently purchased, but "renew" was checked, and I don't recall being offered a choice at any point.

I assume you could have this changed by requesting it, but I haven't bothered. I'm not going to want the proceeds sitting in a low-yield savings account or checking account for long anyway, so I figure I might as well handle it on the day the CD matures, or soon thereafter (within the grace period), and it's easy enough to take the 30 seconds to add an entry in my calendar.

Kevin

[Kevin M]

Very practical article.

The only thing I don't like about bank bought CD's is how they
handle the interest income.

Some will ACH the amount to an external checking account.
Some will transfer it to an internal savings account.
Others will do nothing, let it accrue till the end of the CD like
a zero coupon bond. Have to be careful not to overinvest
if everything is held and compounded till the end.

Thanks for the comment.

Interesting that you find the way interest is handled a disadvantage; I see it as an advantage.

The default for every direct CD I've purchased is to reinvest interest. I like this, since it eliminates reinvestment risk, as you say, like a zero-coupon bond. And over the last five years, the CD rate generally has been better than any other rate with comparable risk, and since rates have been declining, the elimination of reinvestment risk has paid off nicely.

Yet most terms and conditions I've read allow you to withdraw interest penalty free, so even if it is reinvested, you can pretty easily withdraw it. And some CDs allow the option of having it directed to another account. I think this flexibility is great.

Contrast all of this to a brokered CD, for which you have no choice; the interest is deposited to your brokerage cash account, and then you have to manually do something with it if you don't want it to earn 0% (in current environment). This is to your detriment, especially with declining rates and/or low short-term rates, unless of course you spend the interest.

Regarding the issue about exceeding FDIC/NCUA deposit insurance limits, it's true that this is an issue, but more so with an IRA, since it's easy to increase the deposit insurance limit by using various ownership categories and/or multiple owners/beneficiaries. In my blog post about doing an IRA transfer from Ally Bank to Synchrony Bank, I actually mentioned this as one of two reasons I would consider doing an IRA transfer, and this reason applies even if you like the new CD terms. This is just one of the various complexities of using direct CDs instead of brokered CDs or bond funds, so we each have to decide if the complexities are worth it.

Kevin

[Kevin M]

Kevin,

I learned a lot from your blog on CD's.
Thanks for the same.

The E-loan 5-year CD rate looks interesting to me
at this point in time. I still want to wait for any
holiday specials that might come along before the
year end.

Are there usually year-end CD specials?

Glad it was useful--you're welcome!

With the steep EWP for the eloan CD, I'd consider brokered CDs as an alternative, or just use a bond fund with more risk and higher yield (which is what I do). On the other hand, you're earning 20 basis points more in return for quadrupling the EWP. Harry Sit published a good blog post about this trade-off, but the examples he used had higher yield spreads: Low Early Withdrawal Penalty On a CD Is Not Worth It.

Maybe someone can run similar probability calculations for this trade-off (2.25% with 180 day EWP vs. 2.45% with 730 day EWP). I may have placed a higher value on the lower EWPs than warranted--certainly in retrospect we would have all been better off extending maturity regardless of EWP, but we can't invest in the past.

I don't think we can count on specials at any particular time of year. PenFed offered really good specials around the holidays for a couple of years, with the 5-year and 7-year 3% CDs in late-2013/early-2014, and many of us were anticipating the next special last year, but it never came! On the other hand, two really good CD specials have popped up in the last few months, both of which I posted about (and one of them had been offered on and off for a few months even before that).

Kevin

[Kevin M]

Thanks as always for the helpful post, Kevin.

Has anyone here run into any problems with this scenario, particularly in a retirement account? How those got resolved could be helpful for others.

You're welcome!

What scenario are you referring to? Just dealing with maturing CDs in general?

Kevin

[patrick013]

Yet most terms and conditions I've read allow you to withdraw interest penalty free, so even if it is reinvested, you can pretty easily withdraw it. And some CDs allow the option of having it directed to another account. I think this flexibility is great.

Every once in awhile you might run into a bank that does not allow it.
So, if absolutely needed for household cash, check and be sure. Could
be an online only account or a small town bank. Right now they are
hitting the checking account just fine.

[Kevin M]

Yet most terms and conditions I've read allow you to withdraw interest penalty free, so even if it is reinvested, you can pretty easily withdraw it. And some CDs allow the option of having it directed to another account. I think this flexibility is great.

Every once in awhile you might run into a bank that does not allow it.
So, if absolutely needed for household cash, check and be sure. Could
be an online only account or a small town bank. Right now they are
hitting the checking account just fine.

Thanks for the tip. I have enough liquidity that I don't expect this ever to be an issue, but if for some reason I wanted to have the interest distributed, I would make sure I could do it before buying the CD.

Kevin

[stlutz]

What scenario are you referring to? Just dealing with maturing CDs in general?

I'm not totally sure--that's why I thought I'd ask.

The obvious concern is IRAs where you have to do a custodian-to-custodian transfer window. Less of a concern when you are going from, say, a brokerage account to a bank CD, but what about from bank to bank and you have to get it done in a 10 day window lest you end up in a new 5 year CD yielding .01% with an early withdrawal penalty of 50% of your principal.

[Kevin M]

The obvious concern is IRAs where you have to do a custodian-to-custodian transfer window. Less of a concern when you are going from, say, a brokerage account to a bank CD, but what about from bank to bank and you have to get it done in a 10 day window lest you end up in a new 5 year CD yielding .01% with an early withdrawal penalty of 50% of your principal.

Gotcha. The fallback, which should be easy and safe, is to instruct the bank or CU to deposit the proceeds from the maturing CD into a savings account in the same IRA. You can then take your time to move it elsewhere.

The other alternative, which I described in a blog post I referenced in the new blog post, is to do a direct transfer from the maturing CD into a new CD at the other bank/CU. Every IRA transfer form I've seen has a choice to transfer the proceeds from a designated account (e.g., CD) at the specified maturity date. This is what I used in the one I did a few weeks ago, and it worked great, as I posted about. You just have to open the new IRA (if not already open), and mail the transfer form about a month before the CD matures.

I already had the IRA open at Synchrony Bank, so it was easy to open the new CD and mail the transfer form to Synchrony Bank, who then mailed it to Ally Bank (standard procedure).

I may do the same for CDs maturing next year, but if I have several maturing within a month or so of each other (which I do), I'll probably just have the proceeds deposited to an IRA savings account, so I can just do one direct transfer for proceeds from multiple CDs. At current low rates, I'm not worried about the money earning 1% instead of 2.25% for a few weeks.

Good question.

Kevin

[Kevin M]

As I mentioned, Ally Bank sends an email about a month before maturity; it just tells you that "You have new Ally correspondence in online banking". Here's an extract from the correspondence for my CD maturing on Nov 1:

You’ve reached an important milestone. Your Ally Bank High Yield CD - 60 Month
will be maturing on November 1, 2015. What’s next? You may choose to:

• Keep your money working in another Certificate of Deposit (CD). Your current CD
will renew automatically unless you have previously requested otherwise.

• Your new maturity date will be November 1, 2020. At this time, your
interest rate and annual percentage yield (APY) have not been set. Beginning
on November 1, 2015 you can call us at 877-247-ALLY(2559) or visit us online
at allybank.com to check the current rate and APY. Remember with Ally’s Ten
Day Best Rate Guarantee, you will receive Ally’s highest interest rate
offered for your CD term during the ten calendar days beginning on November
1, 2015 and ending November 10, 2015 with no action required on your part.
As an additional benefit, we currently offer a loyalty reward of 0.05%,
which will be added to the Ally Ten Day Best Rate Guarantee interest rate
for your CD term and will be reflected in your APY.

• Make changes. Starting on your CD’s maturity date, you will have a grace
period of ten calendar days to add additional funds, make changes or withdraw
funds without an early withdrawal penalty whether you renew or move to another
term. However, you must act no later than November 10, 2015. If you do not,
your CD will renew automatically into the same term.

Please see Additional Information Regarding Your Maturing CD for more
information.

Kevin

[CedarWaxWing]

Very nice blog Kevin, and thanks again for your last NWCU tip. That was my first online/ far away account opening, which was a bit gltchy, but i think overall it was, in the end, a good experience.

thanks again.

M

[William Million]

Short Term Corp Admiral Shares VSCSX has fallen a bit but is still close to 2%. Modest downside risk (avg maturity about 3 years), but honestly, you could do worse. To get 2% on CDs offered now by many banks, you might have to go out to 5 years. VSCSX offers you the option to cash in at any time with no penalty (beyond fluctuations in principal).

[mur44]

Thanks Kevin for your reply regarding E-Loan
5-year CD EWP.

In your opening remark, you mentioned about
Laddered Bonds. I have never bought individual
bonds.

Is it possible to build Laddered Bond Funds,
in particular using Vanguard bond funds?

[jimkinny]

Since I started buying 5-year direct CDs about five years ago, my CDs are starting to mature. Although it's much more fun to write about the complexities of bond/CD ladder returns, whether or not you should value your direct CD at statement value or present value of future cash flows, etc., I've received a few questions about what to do with maturing CDs, so thought I should do a blog post on it.

Here it is: What To Do With Maturing CDs?

If you have questions or additional tips, please ask or share.

Kevin

Kevin, thanks for your post and link to your blog. Nice job and as mentioned by others, in this thread, thanks for sharing your information re your experiences and the nice CD offered by the CU.

I still have a few CDs left at banks/CU and will take advantage of the TIRA to TIRA direct rollover per IRS regulations, limitations. This is just too convenient to pass up.

I am also going to do a TIRA to Roth conversion, using a CD. In the past I have used just one institution but this year I am going to do a distribution from a TIRA CD, have the funds mailed to me and then pull the funds into a Roth IRA per IRS rules. Of course taxes are involved but I was going to do a conversion anyway, this just makes it easier for me to get around the need for a Medallion signature guarantee. I suspect Medallion signatures guarantee may become the norm, if not already.

Twice, in the last 2 years I have had a credit union move, at maturity, the funds in a TIRA CD to a savings account in the IRA. So far no problems but I can understand how this might lead to a snafu.

Thanks again,

Jim

[nedsaid]

Kevin, this is interesting. The last thing I want to do is move portions of my IRA accounts to different banks to purchase Certificates of Deposit. I would probably instead move funds from my mutual fund IRA to the brokerage IRA at the same firm and purchase brokered CDs.

Do you have thoughts on brokered CDs? I bought one many years ago for my Brokerage IRA account but just let it mature. I never bought another one.

[herpfinance]

Thank you Kevin for yet another great blog post.

As always it was a pleasure to read and very informative.

[bmelikia]

I started buying 5-year direct CDs about five years ago, my CDs are starting to mature.

Why would you get into CD's when stocks had hit rock bottom? 2009 was the buying opportunity of a lifetime. The idea is to buy low and sell high -- not the other way around.

Invest in AGG and VOO. Start enjoying MUCH better returns.

http://www.forbes.com/sites/advisor/201 ... is-so-low/

Bogle_Feet is making a very strong assumption that the OP's only assets were the funds held in these maturing CD's.

Bogle_Feet - a few bones to pick. . .

Why are you making this assumption?

Are you not familiar with diversification (stock,bonds,REITs,Saving Accounts,CDs)?

What if, in addition to having these CDs, the OP had maintained a steady investment approach over the course of the last 5 years?

What would have been the case if the market was NOT at "rock bottom"?

What if the market tanked an additional 20-30%? What if to this day we had still not yet recovered?

[Kevin M]

Short Term Corp Admiral Shares VSCSX has fallen a bit but is still close to 2%. Modest downside risk (avg maturity about 3 years), but honestly, you could do worse. To get 2% on CDs offered now by many banks, you might have to go out to 5 years. VSCSX offers you the option to cash in at any time with no penalty (beyond fluctuations in principal).

You can always choose to take more credit risk and/or term risk in return for higher yield. I always come back to the closest apples to apples comparison, which is to a Treasury of same maturity. Even that is somewhat apples to oranges for direct CDs, because the term risk of the CD is lower, especially in the earlier years.

Five-year Treasury yield now is 1.43%, so a decent 5-year CD at 2.25% earns you a guaranteed premium of 0.82 points per year. To get higher yield on marketable fixed income, you must take more term risk or credit risk, so any bond fund with a higher yield has more risk, pretty much by definition.

I too own some bond funds, but currently prefer ones with higher yields than decent CDs, so short-term corporate at 1.94% SEC yield for Admiral shares doesn't quite make the cut. However, I would be fine with it in a 401k, or in an IRA for liquidity with reasonable risk (2.8 year duration, 38% of bonds rated Baa, 50% A, 11.3% AA).

The CDs I buy all also offer the option to liquidate at any time, and the penalty (about 1.13% for Synchrony Bank 5-year CD with APY 2.25%) is reasonable considering the potential capital loss in the bond fund (about -3% if short-term corporate rates were to increase by 1%). However, the liquidity story is slightly more complicated, but I've discussed this at length elsewhere.

Kevin

[Kevin M]

In your opening remark, you mentioned about
Laddered Bonds. I have never bought individual
bonds.

Is it possible to build Laddered Bond Funds,
in particular using Vanguard bond funds?

A bond fund basically is a (rolling) bond ladder. A bond ladder is just a portfolio of bonds of different maturities, with each maturity being a rung in the ladder. In a rolling ladder, each maturing bond is "rolled" into a new bond at the longest maturity of the ladder, and this is roughly what a bond fund does, except that they may sell the short-term bonds before they reach maturity.

Of course you can build a CD ladder as well, but I tend to stick with CDs of 5-year maturity, unless a great deal pops up for a shorter term, since the early withdrawal option of a good 5-year direct CD keeps the term risk to a minimum, and the main reason to own shorter-term CDs or bonds in a rolling ladder is to keep term risk to acceptable levels.

We often use a rolling bond ladder to explain bond funds, and to construct a simplified model of a bond fund that we can use to more easily analyze the characteristics of the bond fund. This kind of analysis is what I was referring to in the opening remark that you are referring to.

Although a typical bond fund doesn't have a maturity date, and therefore can't be used to construct a ladder directly, there are some bond funds that do have fixed maturity dates, but Vanguard doesn't offer these. So if you want a non-rolling ladder, you can use one of these other bond funds or individual bonds (or of course CDs), but if you want a rolling bond ladder, you might as well just use a bond fund with the desired term risk (duration) and credit risk (average credit quality of bonds in the fund).

The most common example of a non-rolling bond ladder, that some Bogleheads use, is a TIPS ladder, with the intention of using each TIPS to fund future real liabilities (e.g., residual living expenses in retirement) as it matures. If inflation is not a huge concern, especially in the shorter-term, a non-rolling ladder of CDs could work well to fund future nominal liabilities. One recommendation I've seen is to use a CD ladder for say 5-10 years into the future, and then a TIPS ladder for years beyond that, since unexpected inflation is likely to be more of a concern over a longer period, and the real yield on longer-term TIPS is higher.

Kevin

[Kevin M]

Kevin, thanks for your post and link to your blog. Nice job and as mentioned by others, in this thread, thanks for sharing your information re your experiences and the nice CD offered by the CU.

Thanks for the kind words, and you're welcome!

I still have a few CDs left at banks/CU and will take advantage of the TIRA to TIRA direct rollover per IRS regulations, limitations. This is just too convenient to pass up.

I've been hesitant to do this because of the possibility for mistakes, and now we have the limitation of only one per year across all IRAs, so it is of limited use if one has a number of IRA CDs maturing in a given year, which is the case for me this year and next. However, I have thought that this could be a valuable ace up my sleeve to take advantage of the deal PenFed offers for owners of IRA CDs who area age 59 1/2 or older (penalty-free early withdrawals).

But my PenFed IRA CDs still are earning higher than market rates, and with the lousy rates now offered by PenFed (1.5% on 5-year CD), coupled with the new higher early withdrawal penalties, I'm now more concerned about what I'll do with my PenFed CDs when they mature; I certainly won't be rolling to new PenFed CDs, unless they happen to offer a really good CD special when my CDs there mature.

<snip> ... this just makes it easier for me to get around the need for a Medallion signature guarantee. I suspect Medallion signatures guarantee may become the norm, if not already.

Ally Bank requires them, Synchrony Bank told me that they do not. I'm lucky to be able to get a signature guarantee at the local Fidelity office, which happens to be downtown where I often walk to, so no big deal to stop in on one of my walks to get the signature guarantee.

Twice, in the last 2 years I have had a credit union move, at maturity, the funds in a TIRA CD to a savings account in the IRA. So far no problems but I can understand how this might lead to a snafu.

Thanks for sharing. I'm not too worried about snafus here, but I haven't had much experience with this yet.

Kevin

[Kevin M]

Kevin, this is interesting. The last thing I want to do is move portions of my IRA accounts to different banks to purchase Certificates of Deposit. I would probably instead move funds from my mutual fund IRA to the brokerage IRA at the same firm and purchase brokered CDs.

Clearly you are not among the target audience for this blog post!

Do you have thoughts on brokered CDs? I bought one many years ago for my Brokerage IRA account but just let it mature. I never bought another one.

I used to buy brokered CDs, and still have one with a 5% coupon, but for the last five years, I've preferred direct CDs because of the reduced term risk provided by the early withdrawal option.

Good brokered CDs are a good deal for the retail investor compared to Treasuries. You get a yield premium comparable to direct CDs, currently about 80 basis points for 5-year maturity. Sometimes the yield premium is not quite as good as a direct CD, but currently it's about the same for new issue 5-year CDs, and you might even find something a bit higher with a secondary market 5-year CD. One advantage of brokered CDs is that you can get even higher yield, up to about 3%, by extending maturity to 10 years in the secondary market.

Credit risk is about the same for all FDIC-insured CDs, direct and brokered, and for Treasuries--basically none.

Term risk is about the same for brokered CDs and Treasuries, but is much lower with direct CDs with good early withdrawal terms, which is the main reason I've been using them instead of brokered CDs over the last five years.

Brokered CDs are less liquid than Treasuries, so there will be a much larger discount if you sell before maturity. I would assume a 1% to 2% discount, but it's hard to say, since you won't see many bid quotes.

If held to maturity, brokered CDs are better than Treasuries--by the amount of the yield premium. However, there is a risk that a bank will fail, and the takeover bank will call the CD if its yield is above market (or the FDIC will just liquidate the CD and return your money to you). This is one reason to be careful about paying a premium for CDs in the secondary market--only the face amount plus accrued interest at time of failure is insured.

I've thought about buying some brokered CDs with terms longer than five years for the extra yield, but so far am sticking with bond funds with enough term risk and credit risk to earn the higher yields (say 3%). The bond funds provide better liquidity.

However, if I didn't want to take credit risk, I would use brokered CDs in preference to Treasuries for whatever amount of fixed income I was willing to hold to maturity. Maybe even the liquidity issue isn't so bad, since at a premium over 10-year Treasuries of about 90 basis points, and assuming 1%-2% discount upon sale before maturity, you would only lose about 1-2 years of yield premium if you sold before maturity. So as long as you don't sell for at least two years, perhaps still better than Treasuries.

Kevin

[mur44]

Kevin M,

In view of today's FOMC statement that it is
open to rate hike in December 2015
(WSJ: Fed Keeps Rate Hike This Year on Table),
more Credit Unions or Banks might offer
more lucrative rates during the next 2 months
for say 5-year CD's.

A local (NJ) CU (http://www.gardensavingsfcu.org) is now
offering 2.35% (2.38% APY) with good EWP.

Any thoughts on post-FOMC statement?

[john94549]

The irony with any fixed-income product is whether it is worth the effort. Mind you, I have been a major fan of retail IRA CDs for the better part of a decade. One of my purchases is still clicking along at 5.75%. My major gripe is that the paperwork has gotten ridiculous. You find a rate and term you find attractive. Then you call the bank or credit union offering said rate and term, and they send you a transfer (IRA custodian-to-custodian CD transfer).

You fill it out. You send it to wherever your current IRA CD is. Then they send it, along with the funds, via snail mail, to the new custodian. By then, the rate and term you so appreciated might have gone "poof". So, you are left with all those funs in limbo. Accept the horrid "new" rate, send the funds back to me (consult your accountant, since this might be a "rollover"), or try to unwind the whole thing.

Seriously, this is much more complicated than it used to be.

Lesson learned, before transferring any IRA CD funds, get a rate lock on application.

[Kevin M]

Any thoughts on post-FOMC statement?

Absolutely none. I don't pay much attention to macroeconomics, figuring that all know information is priced into rates. If you want to read some commentary from a CD expert, check out Ken Tumin's blog post: Fed Suggests It Will Consider a December Rate Hike. Note that even Ken doesn't speculate on the impact this might or might not have on CD rates.

Mountain America Credit Union has been offering a 5-year 2.30% CD with a one-time rate bump for awhile now. I already have IRA CDs there, and if the deal is still available when some taxable CDs mature in the next few weeks, I may go for it.

Kevin

[Kevin M]

Then you call the bank or credit union offering said rate and term, and they send you a transfer (IRA custodian-to-custodian CD transfer).

I usually download the form, which saves a few days.

You fill it out. You send it to wherever your current IRA CD is. Then they send it, along with the funds, via snail mail, to the new custodian. By then, the rate and term you so appreciated might have gone "poof". So, you are left with all those funs in limbo. Accept the horrid "new" rate, send the funds back to me (consult your accountant, since this might be a "rollover"), or try to unwind the whole thing.

Agreed that there is a 2-3 week period where you are at risk, unless you get a rate lock. I don't think I'd do anymore of these unless I got a rate lock.

Synchrony Bank locks the rate for 60 days. I've had credit unions guarantee the rate in writing (I would insist on getting it in writing) once they receive the IRA transfer form. We did one recently with a credit union who guaranteed the rate in writing, the rate dropped before the transfer was complete, and although the CD initially showed the lower rate, they fixed it after I sent them a short email.

I think if I gambled and the rate dropped to something really crappy, I would just instruct them to put the money in an IRA savings account instead of the CD, and then find somewhere else to transfer it (rather than messing with a rollover). I did have a rate drop on me once during an IRA transfer, but the lower rate wasn't bad enough to hassle doing something else--it still was pretty competitive.

Kevin

[john94549]

Synchrony Bank locks the rate for 60 days.

Good to know. I'll add one more, StateFarmBank. The way it works, you walk into your local State Farm office, they enter your IRA CD transfer into their computer system, and the rate locks immediately. The rates aren't stellar, but, still, are competitive. The major plus for me is the agent does all the work. Just bring in the current statement on your maturing CD a month or so before maturity, and a driver's license, and that's that. You walk out with an IRA CD confirmation, rate and term locked.

I'd love to see a compilation of banks/credit unions with reasonably competitive IRA CD rates which lock rates. They would definitely be on my permanent "short list" going forward.

Financial institutions should understand, if they don't already, that we geezers don't like (a) uncertainty, or (b) paperwork. I'd happily surrender 20 bps or so on a 5-yr IRA CD transfer for an elimination of both (a) and (b).

[Kevin M]

Fiancee got a taxable CD from State Farm a few years ago. I see now that their 5-year APY is 2.05%, so not great, but not horrible. Unfortunately, the EWP now is 545 days (1.5 years) of interest, so about 3.1% which is pretty bad, but not the worst. Was 180 days of interest for CDs opened or renewed before 4/30/2015: 5 Year CD Rates. I'd take a closer look at brokered CDs before accepting an EWP this high, and with brokered CDs the FDIC insurance limit is more manageable for IRAs.

Kevin

[john94549]

Kevin, unless they've changed their terms lately, we geezers (59 1/2 and over) can make partial withdrawals with no EWP on StateFarmBank IRA CDs. The irony is, I first plunked money into SFB and PenFed IRA CDs quite some time ago since I thought I might need those partial withdrawals. Turns out, I didn't.

Isn't it amazing that we now view any CD at or above 2% as "not too bad"? Move up another 20 basis points, it's "honorable mention". Above that, it's "leader board". My, oh my, it's a slog in fixed-income. I guess the good news is that the banks and credit unions have yet to embrace negative interest rates. If that happens, I will cash out my after-tax CDs and rent a very large safety-deposit box.

I have never been able to wrap my arms (or my mind) around negative interest rates.

[Kevin M]

Kevin, unless they've changed their terms lately, we geezers (59 1/2 and over) can make partial withdrawals with no EWP on StateFarmBank IRA CDs.

State Farm Truth in Savings Disclosures – State Farm®:

Normal distributions will be allowed on IRAs without incurring an early withdrawal penalty for customers who have reached age 59½. Transfers or rollovers to another IRA are not considered normal distributions.

This sounds like you must take a distribution, in which case you would have to use the once-per-year rollover option to move it elsewhere. Withdrawing from the CD to an IRA savings account at SF is not a distribution, so doesn't sound like this would be a workaround to the no transfers clause.

Isn't it amazing that we now view any CD at or above 2% as "not too bad"?

Yep, but it's even sadder that the 5-year Treasury rate is only 1.53%, was as low as 1.29% earlier in month, and was hugging 0.6% during 2012. I guess the silver lining is that inflation has been hugging 0% this year, so a real return of about 2% isn't so bad compared to the 5-year TIPS that has been ranging mostly between about 0% and about 0.5% this year.

I will cash out my after-tax CDs and rent a very large safety-deposit box.

I'm exchanging some of mine for a Tesla!

I have never been able to wrap my arms (or my mind) around negative interest rates.

Yeah, and I don't think my bank allows me to keep more than $10K in my safe deposit box.

Kevin

[john94549]

Kevin, I think the portion of the SFB disclosure you noted (relative to the partial withdrawal) implies merely that you must accept a check. Which I have done, on two occasions. What you do with that check, well, it's up to you.

[OAG]

Been buying CD's for about 40 years (IRA, Regular and relatively ROTH CD's) primary at NFCU & PenFed (a few from Capital One too). Last GOOD CD was 5% APY at PenFed on 1/1/11 for a 10 year CD. Used a then unused HELOC (2.75%) to purchase that CD for $100K (best recent move on CD's) and paid off the HELOC with maturing lower rate CD's).

One point about moving IRA's (either Traditional or ROTH) is to have the NEW Custodian move the money from the OLD Custodian. Will generally go faster and save a lot of time.

After 59.5 years of age (I am 75 today) taking money from Traditional or ROTH IRA CD's is totally EWP (from either PenFed or NFCU they are) and or course IRS Penalty free.

Back to the OP's question about what to do with maturing CD's. Personally I forward loaded a 7 year ladder so that only about 12% of the ladder will be maturing in the next 4 years so I think I may just "sit" on the cash in a Capital One 360 Savings Account (current paying .75%). I am now single and getting to the point (in age) that chasing interest rates has little to no interest (pun intended) to me.

[Kevin M]

I just used online chat to request that all of my Ally Bank CDs maturing in November not be renewed, but that proceeds be deposited into my checking account. This was the first time I requested this in advance, as I had been told previously to do it within the 10-day grace period after maturity. It was very easy to do it in advance (for about 10 CDs).

Since I wanted to open a Synchrony Bank savings account before Oct 31 for the $50 bonus (already have opened CapOne360 and Discover accounts for the bonuses), and this will push my Ally cash to a much lower number than I'm used to, I wanted to get the proceeds from the CD maturing on Nov 1 into checking ASAP, so I thought I'd give a shot to requesting it a couple of days early. It was no problem, so then I asked if I could do it for more CDs maturing soon, and chat rep said fine.

So I just copied/pasted the last four numbers of each maturing CD into the chat window. Chat rep came back with a standard confirmation listing last four digits of all CDs. Took about 10 minutes, and as usual, I was multitasking in other windows while waiting for replies from rep.

These are all taxable CDs, so easy to spend or move elsewhere for slightly better rate.

By the way, here's something fun to do with proceeds of a maturing CD: buy a Tesla! Less money to worry about earning low interest rates, and much more fun than earning $2K/year in interest.

Kevin

[Kevin M]

Kevin, I think the portion of the SFB disclosure you noted (relative to the partial withdrawal) implies merely that you must accept a check. Which I have done, on two occasions. What you do with that check, well, it's up to you.

Makes sense. Great for someone who wants/needs to take IRA distributions, but no so much for those who don't.

Kevin

[Abe]

Since I wanted to open a Synchrony Bank savings account before Oct 31 for the $50 bonus
Kevin

Thanks for posting this. I just opened 2 savings accounts with Synchrony a couple of days ago, but I didn't know about the $50 bonus. I just called them and they said they will give me the bonus for one account. I have 2 accounts, but they said it's only good for one bonus per person. Thanks again.

[Kevin M]

Been buying CD's for about 40 years (IRA, Regular and relatively ROTH CD's) primary at NFCU & PenFed (a few from Capital One too). Last GOOD CD was 5% APY at PenFed on 1/1/11 for a 10 year CD. Used a then unused HELOC (2.75%) to purchase that CD for $100K (best recent move on CD's) and paid off the HELOC with maturing lower rate CD's).

Nice! I remember using 1-year no-interest credit card deals for this kind of thing back when rates were more "normal".

But of course one must define "good". Someone anchored on 10% or 15% nominal rates from the late 70s and early 80s might think 5% sucks, but I too am kind of anchored on 5% rates (even for money market accounts!). At any rate, "good" is relative, and with 5-year Treasury rate at 1.5%, a CD at 2.25% is pretty darn good. Also, with inflation running at 0% this year, that's a real rate as well--at least this year.

One point about moving IRA's (either Traditional or ROTH) is to have the NEW Custodian move the money from the OLD Custodian. Will generally go faster and save a lot of time.

Yes, that's the way I've always done it, and I've done quite a few. Published a blog post on doing an IRA transfer from Ally Bank to Synchrony Bank in late July: First bank-to-bank IRA transfer from a maturing IRA CD, but other than that one, all have been from brokerages (Vanguard, Fidelity, Schwab). They all work pretty much the same.

One forum member mentioned a case in which it actually was easier (if not necessary) to do it from the other direction, but I've never personally run into that.

After 59.5 years of age (I am 75 today) taking money from Traditional or ROTH IRA CD's is totally EWP (from either PenFed or NFCU they are) and or course IRS Penalty free.

Yes, and this is what John was saying about State Farm Bank. Only very useful if taking IRA distributions, unless you want to mess with a rollover (not direct transfer), or unless they will let you do the withdrawal into an IRA savings account (State Farm won't, and I've heard mixed reviews on PenFed), from which you could then do the IRA transfer.

Unfortunately, PenFed 5-year rates suck now, and the EWP is pretty steep. They've gone downhill, but maybe they'll come out with a nice special again some day.

Back to the OP's question about what to do with maturing CD's.

It was really a rhetorical question. The actual purpose of the OP, and the linked blog post, was to provide some answers to the question. So thanks for contributing!

Personally I forward loaded a 7 year ladder so that only about 12% of the ladder will be maturing in the next 4 years so I think I may just "sit" on the cash in a Capital One 360 Savings Account (current paying .75%). I am now single and getting to the point (in age) that chasing interest rates has little to no interest (pun intended) to me.

Gotcha.

I tend to prefer sticking with the longer maturities (5-7 years), rather than ladder with shorter maturities, since it's often the case that you earn more by breaking a longer-term CD early than by holding shorter-term CDs. But I probably would ladder if I knew I absolutely would need the funds before the longer maturity. So far, not the case for me.

I prefer not to sit on too much cash at 1% or less (Synchrony Bank 1.05%, Ally Bank 1.00%), since breaking a 2.25% CD after one year will earn a bit more, and after one year you start pulling further ahead. And we've seen a couple of really nice CD deals pop up in the last few months (3-year at 3%, 2-year at 2.25%).

I hear you though about chasing rates. I've still got it in me to try and optimize my fixed-income yield/risk trade-off, and with 70% in fixed income, it makes a real difference in terms of dollars. I can see kicking back about it more as I get older though; maybe use brokered CDs a bit more, and maybe even some TIPS--hopefully real rates will tick up some more, and we'll be able to earn at least 1% real for five years, and maybe 2% real for 10 years. Hope I'm not dreaming too big; haven't seen 1% on a 5-year TIPS since late 2009, and we just hit 0.5% late last year (now back to the 0.3% ballpark).

Kevin

[Kevin M]

Since I wanted to open a Synchrony Bank savings account before Oct 31 for the $50 bonus
Kevin

Thanks for posting this. I just opened 2 savings accounts with Synchrony a couple of days ago, but I didn't know about the $50 bonus. I just called them and they said they will give me the bonus for one account. I have 2 accounts, but they said it's only good for one bonus per person. Thanks again.

Great! Discover Bank's $100 bonus comes out to an even higher APY, but I probably won't use the account after the bonus period, since the rate is a bit low (0.75%). CapitalOne360 deal is best if you want to earn more $$, since you can earn up to $500 on a $50K deposit. I'm doing all three.

Only concern is that I waited until last minute to open SB account (today), so it probably actually won't be funded until after Oct 31. I assume/hope that initiating the external transfer as part of opening the account meets the deadline criterion.

Kevin