Top 19 strategies for CD savers

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Opening a certificate of deposit  takes a little more planning than opening other types of bank accounts, because CDs are locked in for a set time — months or years — and generally impose penalties for early withdrawals. But CDs can be a useful tool to help maximize your CD investments and grow your savings.

Here are 19 top strategies for utilizing CDs in your savings portfolio.

1. Determine what the money is being saved for

What are you saving for? If the funds are likely to be used within the next few months, a savings account or money market account is probably a better option than a CD.

“The first thing that we do is think about when money might be used, or if it’s earmarked for a specific goal,” says Lauren Zangardi Haynes, certified financial planner at Spark Financial Advisors.

One smart reason to save in a fixed-rate CD is knowing exactly how much money you’ll earn during the term. But if you’re trying to grow your money more aggressively and/or over a longer period, other types of investment products may be a better fit. Stocks, mutual funds, exchange-traded funds (ETFs) or index funds may offer higher gains, though they also have the potential to lose principal.

2. Decide how much needs to be liquid

Consider a CD for funds that don’t need to be accessible in the short term. Money meant for a near-term purchase or emergency savings should be in a liquid account, such as a savings or money market account.

Longer-term CDs generally pay higher rates. In the current interest rate environment, however, most CDs with terms more than two years aren’t offering much higher yields than shorter-term CDs.

3. Shop around

Getting a good deal requires research. See what your existing bank is offering, then compare to what the average CD pays. Look for a bank that offers rates significantly higher than the national average.

Next, compare the best rates online for the terms you’re considering. Online banks may pay higher rates than others. Those banks don’t have the expenses related to a branch network, so they can generally pay you more. They also need a way to attract your deposits, which they do through higher yields. Similarly, credit unions are able to pay higher rates because they are not-for-profit organizations.

4. Be sure it’s insured

CDs are smart investments if you don’t want to risk your principal. A CD opened at a Federal Deposit Insurance Corp. bank provides safety to consumers. Each depositor at an FDIC bank is insured to at least $250,000 per insured bank, according to the FDIC.

Credit unions often call CDs share certificates. The National Credit Union Administration operates and manages the National Credit Union Share Insurance Fund. The standard share insurance amount is $250,000 per share owner, per insured credit union, for each account ownership category, according to the NCUA.

5. Ensure the CD term makes sense for you

A CD isn’t the best place for funds that you need before the term is up. Money taken out of a CD prematurely may result in an early withdrawal penalty, which may result in the loss of earned interest and possibly principal.

If you may need your funds before a CD’s term is up, a savings or money market account may be a better option.

6. Consider promotions or bonus rates

Local banks and credit unions may offer bonuses and special rates typically reserved for larger deposits. Community banks may offer CDs with attractive rates to consumers in specific cities or counties.

Take a look at the institution’s standard rates, which will give you some idea of whether CD rates will be competitive when they are up for renewal.

7. Avoid automatic rollovers

Reevaluate your CD as it’s set to mature — especially if you had a promotional rate — or it may renew at an unfavorable APY. A CD that boasted a competitive rate when first opened might be less so at renewal time.

8. Know when you’ll need your money

Determining when you’ll need your money can help you avoid early withdrawal fees. CD terms typically range from three months to five years.

A one-year CD may be a good investment if you’re planning to buy a house sooner rather than later. You’ll be protecting principal and also earning a competitive yield.

“We don’t necessarily want to take on a lot of risk by investing it, but we’d like to earn a little more interest,” says Spark Financial Advisors’ Haynes.

Money meant for an emergency fund can be divided between a savings deposit account or a CD, which can help ensure you have funds in place for any immediate needs.

Money that you won’t need for at least five years could earn a higher return in other investments, such as stocks, mutual funds or ETFs, but those strategies offer no guaranteed return.

9. Choose an online bank

Online banks, also known as direct banks, are good places to find the highest APYs. And while a traditional brick-and-mortar bank may suit you better if you’d prefer to meet with a banker, the APY will likely be lower.

Online banks tend to offer higher yields and lower fees, generally because they have less overhead, compared with brick-and-mortar banks, and can pass on that savings to customers.

Compare CD rates on Bankrate to find the best rate for you.

10. Look at minimum deposit requirements

Some banks require a minimum deposit of $1,000 to open a CD, while others may offer competitive rates with a lower minimum amount, so it pays to shop around. If you don’t have the minimum required to open an account, look elsewhere.

11. Be aware of (and avoid) fees

Fees can result in considerable loss of your earnings on a CD, so it pays to know what the rules are for early withdrawals. You could end up walking away with less money than you started with if you have to end the agreement early.

A penalty of 90 days’ worth of simple interest is a common early withdrawal fee for a one-year CD, though some banks have penalties of six months’ worth of simple interest or more. Other banks may have even steeper penalties or may penalize based on a percentage of the withdrawal. Some banks, for example, impose a penalty of 540 days of interest on funds withdrawn prematurely from five-year CDs.

12. Go short term when it makes sense

Yields on long-term CDs usually are higher than shorter-term CDs — but not always. Still, an APY that’s a few basis points higher may not be worth it if the term is longer than you’re willing to consider. If your time horizon is on the shorter end, a savings account that pays a comparable APY to short-term CDs could be an alternative. Keep in mind, however, that rates on savings accounts are variable while those for CDs are fixed for their terms.

13. Ladder your CDs

A CD ladder is a strategy using multiple CDs maturing at different intervals to take advantage of higher interest rates. It’s best used when interest rates are rising or when there is little difference between short- and long-term rates. A CD ladder can help you lock in high APYs if rates continue to decrease. In a decreasing rate environment, longer-term CDs might earn an APY that is no longer offered.

Opening a one-year, two-year and three-year CD at the same time is an example of laddering, allowing you to more easily avoid early withdrawal penalties and diversify your portfolio.

14. Consider the indexed (structured) CD

An indexed CD, also known as a structured CD, is a nontraditional certificate of deposit that is linked to other investments, such as stocks, bonds, currencies or commodities. Though indexed CDs likely won’t lose money as long as they are held to maturity, returns are typically capped at a percentage of the total return of the underlying index or basket of securities.

For example, if it’s linked to the S&P 500 and that index gains 10 percent over the year, a structured CD may yield three-quarters of that return. Structured CDs vary and can be more complex compared with a conventional CD. But the potential for greater returns appeals to some savers with intermediate time horizons, typically 2-4 years.

15. Look at bump-up CDs

Bump-up CDs can be a better choice when interest rates are on the rise, because they allow you to earn a higher yield on an existing investment should rates increase.

Investors generally have to request a bump up in the rate should yields rise during the CD term. Bump-up CDs typically permit one request for a rate increase, but some (especially those for longer terms) permit multiple bump ups.

Bump-up CDs typically pay lower rates than regular CDs, so compare rates.

16. Consider a barbell strategy

A barbell strategy is similar to a ladder, but with the middle rungs missing. Short maturities make up one end of the barbell, or investors may even put money in a high-yield savings account to keep part of the principal more liquid. Long-term maturities make up the other end of the barbell.

If you’re looking at a longer-term CD, weigh the potential increase in APY with the potential early withdrawal penalty, says Amy Hubble, certified financial planner at Radix Financial.

“You can usually get the most value by going ahead and do the longest-term CD that they offer, which is usually five years,” Hubble says. But you’ll also need to consider whether longer-term CDs are a good value if shorter-term CDs have similar yields.

17. Evaluate step-up CDs

A step-up CD is another investment option that allows for rate increases during a CD’s term. Step-up CDs differ from bump-up CDs, which only permit an increase in the yield when rates actually increase.

But step-up CDs generally have a predetermined APY in future years. To get the best rate, compare the blended APY to see what it averages out to during the term.

Also, some banks use the terms step-up CD and bump-up CD interchangeably, which can cause confusion.

18. Look into brokered CDs

Brokered CDs are purchased through a brokerage firm and are an option for those looking for higher rates than offered at banks on regular CDs. Brokered CDs also allow investors with more than $250,000 to still insure their funds with the FDIC by offering CDs issued by multiple banks.Just make sure you know what bank this brokered CD is at so you don’t exceed FDIC limits with other accounts at the bank.

Tim Kenney, certified financial planner at Seawise Financial in Cardiff-by-the-Sea, California, says brokered CDs benefited the investor because you could instantly get more FDIC coverage — especially when the FDIC limit used to be $100,000 — through brokered CDs.

“It was pretty easy to get over that FDIC coverage really quick,” Kenney says.

Terminating a brokered CD early is more complicated than with a traditional CD because  you may have to sell your ownership interest, via your broker, at the current market value. Depending on the rate environment, terminating your investment early could cause you to lose some of your principal.

Brokered CDs are a riskier option than bank CDs, according to the Securities and Exchange Commission, because you may lose some principal or have to sell for a loss if rates increase after you open a brokered CD.

The Financial Industry Regulatory Authority recommends confirming you’re listed as the owner of the CD at the bank or that the CD is held in your name by a trustee or custodian.

19. Check out no-penalty CDs

With a regular CD, you’ll usually incur a penalty for making an early withdrawal before its term is up. But a no-penalty CD allows you to make a penalty-free withdrawal, generally after the first week of opening or funding the CD. The trade-off is you could earn a higher yield with a regular CD.

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