TOP DRAWER ARTICLE

 

Bank CDs
by
HL Carpenter

 

Have you noticed that Treasury bills, notes and bonds are paying next to nothing in terms of interest? If so, you may be shopping for better rates. One place to look: Certificates of deposit (CDs) at your local bank.

Like Treasuries, bank CDs are generally considered safe investments. You probably know they’re insured by the federal government (up to $250,000 through December 31, 2009).

Other features include:

Penalties. Bank CDs are known as time deposits because you agree to invest your money for a fixed amount of time. That means cashing in your CD before the maturity date costs you money, in the form of an early withdrawal penalty.

According to the Comptroller of the Treasury, which is the government entity that administrates national banks, under Federal law all CDs that are cashed out early are subject to a minimum penalty. How much? For first six days after deposit, the penalty can be at least seven days' simple interest. There is no maximum penalty set by law.

Ask your bank or read your certificate or account agreement to find out how much the penalty will be.

Note: The early withdrawal penalty is deductible on your federal income tax return, even if you don’t itemize.

Reinvesting. Your bank will send you a notice just before your CD matures that shows the date the principal and interest become fully payable to you. Once the CD matures, you have a ten day window to decide what to do. Your options include withdrawing your money, reinvesting it by letting the original amount and term roll over, or reinvesting by adding additional money or changing the term.

Check current rates so you can choose the best course of action. For example, say your currently-maturing CD has a seven month term, but your bank (or a different bank) is offering a nine month CD with a higher interest rate. If you let your seven month CD roll over, you’ll miss out.

Rate adjustment. Some banks offer a one-time interest rate “bump-up” feature. This means if rates rise during the term of the CD, you can request the higher rate.

Terms of the ‘bump-up’ may require you to accept a new maturity date equal to the original term of the CD. You’ll have to decide whether the increased rate is worth the lengthened term, based on your outlook for future increases in interest rates.

 

Originally published April 2009.

 

This information should not be considered legal, investment or tax advice. Top Drawer Ink Corp. does not provide legal, investment or tax advice. Always consult your legal, investment and/or tax advisor regarding your personal situation.

 

 

Last update: January 8, 2011