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Are today’s CD rates worth it?

By Sheyna Steiner · Bankrate.com
Friday, February 18, 2011
Posted: 9 am ET

CD rates have gone up over the past 12 weeks in Bankrate's weekly rate surveys.

Don't rush out to the bank just yet; yields have increased by mere fractions of a percent, one basis point at a time. The typical yield on a five-year CD has increased from 1.51 percent to 1.62 percent over three months, hardly warranting a celebration.

But, we may be in the midst of the long-awaited reversal of the downward rate trend CDs have weathered for the past 2½ years.

"I do feel that CD rates have hit bottom and that savers should not be looking at anything beyond a one-year maturity. In fact, I would suggest that CDs are not the place to be, at all," says Drummond Osborn, Certified Financial Planner and president of Osborn Wealth Management in LaPorte, Ind.

Osborn predicts that rates may begin to rise by the year's end. With continued economic growth and inflation increases, higher CD rates may indeed be on the horizon -- however distantly.

"The economy is recovering and the Fed will have no choice but to raise rates at some point to stem the fear of inflation," says Brooks Gregory, a financial adviser with Peachtree Planning in Atlanta, Ga.  

In the meantime, savers should stick to short-term CDs or consider forgoing CDs in favor of more liquid accounts such as savings or money market accounts.

"Individuals need to carefully shop for the best rates, which are typically found at the nontraditional online banks.  More often than not, a fully liquid savings or money market account is offering a higher rate than CDs with maturities of less than 1 year," says Osborn.

"When rates do begin to rise, individuals should slowly begin building a laddered CD portfolio," he says.

On the other hand, it has been suggested that savers could do better buying a long-term CD now and taking the early withdrawal penalty in a year or two when rates start moving up.

It does depend on the penalty, of course. Bankrate's 2010 CD early withdrawal penalty study put the average penalty for CDs with maturities of one year or more equal to 180 days of interest.

With higher penalties, using the early withdrawal strategy may not work out as well as, depending on the timing, you may have to forfeit too much interest -- or even principal.  

This CD calculator can help you determine the price of early withdrawal.  

CD investors: What is your strategy now?

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2 Comments
Longfellow
March 07, 2011 at 9:29 am

Early withdrawal penalties are now tax deductible.

http://taxes.about.com/od/deductionscredits/qt/earlywithdrawal.htm

barefootpoet
February 21, 2011 at 10:27 pm

The turmoil in the Middle East will add even more to the already rising price of crude oil resulting in inflation and the dismal housing market will still keep interest rates historically low. Our hard saved money is shrinking before our eyes.