- Advertisement -
For investors looking for relatively safe returns, hiding in a CD is finally paying off. Bank certificates of deposit are among the fixed income investments that are booming in popularity as the Federal Reserve raises interest rates. Bond yields have risen, and just last week, the 3-month Treasury rate topped 5%, rewarding investors who want to earn interest on short-term holdings of cash. Recently, certificates of deposit of online banks have higher rates for 1-year instruments. This includes Ally Bank, which recently raised its annual CD yield by 25 basis points to 4.5%, and SLM, which raised its rate by 10 basis points to 4.6%, according to Stephens. The inverted yield curve, in which short-term Treasury bills yield higher than long-term bonds, has also proven to be a boon for CD investors. “You don’t get paid much more for locking up your money for five years versus one year,” said Christine Benz, director of personal finance at Morningstar. “This is not very familiar to many people. They assume that the longer your term, the more you should be paid.” Indeed, five-year CDs at Ally Bank and SLM offer an annual percentage yield of 4.25%. Another key benefit of CDs: At a time when the Silicon Valley bank failure highlighted the security of bank deposits, it’s worth noting that CDs are protected by the Federal Deposit Insurance Corporation. They are backed up to $250,000 per account holder at each bank. Shopping at the best conditions Internet banks offer some of the most attractive rates for CDs. Investors noticed that deposit balances at these institutions rose 13% year-on-year in the fourth quarter, Stevens found. See below for the latest 1-year CD rates from online banks as of March 10, according to the firm. Yield is just one factor when looking for a place to leave money. The liquidity trade-off should be paramount for CD-buying investors: you are tied to this investment until expiration unless you are willing to pay for early withdrawals. These penalties can vary from one bank to another, but generally you are sacrificing the interest you would have earned over a given period. The expiration date of the CD is another consideration. While short-term instruments earn high returns at some banks, you face the risk of reinvestment at maturity. “A long-term CD is a bird in the hand, but with a short-term CD, you have to reinvest in six months or a year,” Benz said. There is a chance that the rates may be less attractive at this point. The CD ladder can help eliminate some of these risks. This means you buy CDs with different maturities and then reinvest your earnings as they mature. When rates drop, you can rely on older CDs that have already recorded higher returns. Know the catch It’s worth noting that while you may be on the hunt for good CD income, the amount of income you earn won’t match the rate of inflation in the long run. Separate CDs and ladders may only make sense for part of your portfolio. In addition, you may find yourself on the hook of the tax collector because of the interest you earn on CDs. CDs generate interest income that is taxed as ordinary income and is subject to rates ranging from 10% to 37%, depending on your tax bracket. One option is to defer taxes on the interest by keeping the CD in a tax-advantage account. “Now that the yield is higher, the tax impact is more significant, so it’s worth considering how much tax credit you’ll be paying,” Benz said. — Michael Bloom of CNBC
Credit: www.cnbc.com /
- Advertisement -