Best CD - High Rates and Little Risk

Last Updated Aug 6, 2011 5:15 PM EDT

With interest rates plunging to record lows, it's getting harder to make cash work. But thanks to Ken Tumin, founder of DepositAccounts.com, I have a very good product to tell you about. Here's the scoop on a great place for cash you won't need for about 16 months. You'll earn long-term bond rates with only very short-term interest rate risk. First, some background and then the specifics.

Dismal rates today

With rates continuing to fall, I've been wondering how low rates can go? The AA+ rated 5-Year Treasury bond is yielding only 1.25 percent. Vanguard's Total Bond Fund (BND) is yielding 2.52 percent. That fund could decrease by about five percent for every one percent increase in intermediate-term rates. And though I'm not predicting a bond bubble, it does still concern me.

The iGoBanking CD

I'm recommending the iGoBanking FDIC insured 10 year CD, understanding that you may not leave the funds for the full 10 years. This 10-year CD with a minimum $1,000 deposit, yields 3.25 percent APY and has only a six month early withdrawal penalty.

I've developed estimates of the yields of iGoBanking after paying the penalty and compared it to the Ally Bank 5-year CD, with a 2.30 percent APY yield. You can see, for example, that breaking the CD after two years yields 2.46 percent APY, compared to Ally Bank yield of 2.11 percent APY. The breakeven works out that iGoBanking yields more than Ally Bank after 16 months.

Buying this CD is the equivalent of buying a bond with a put option giving the right to sell it back to iGoBanking at a 1.625% discount, which is one half of the 3.25 percent yield. Thus, there would be two reasons you would close the account early.

1. You need the money.

2. Interest rates have increased and you can earn more elsewhere.

More on iGoBanking and this CD

iGoBanking is a division of Flushing Savings Bank, FSB, which has a three star Safe and Sound rating. It is very consumer friendly in that, after completing the application, they will hold the rate as long as the funds are received within 15 days, according to marketing director, Patricia Tiffany. Funding the CD quickly is recommended.

They do not allow partial early withdrawals so I recommend opening up multiple CDs in case you need some of the cash. For example, rather than opening up one $20,000 CD, you could open four $5,000 CDs. This CD is not available for IRA accounts. For more specifics, check out the iGoBanking wrrite-up on DepositAccounts.com.

My advice

Don't panic and get out of stocks, just make sure your fixed income is working hard and is safe. With rates so low, it's tempting to leave cash earning nothing. Frame your decision differently. Opening up a $20,000 CD yields about $600 more per year than cash earning only 0.25%. If it takes an hour of your time, you've earned $600 per hour. Not bad pay in my book. Be sure to never ever go above FDIC limits, but remember you can get millions of dollars of FDIC insurance at each institution if you do it right.

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    Allan S. Roth is the founder of Wealth Logic, an hourly based financial planning and investment advisory firm that advises clients with portfolios ranging from $10,000 to over $50 million. The author of How a Second Grader Beats Wall Street, Roth teaches investments and behavioral finance at the University of Denver and is a frequent speaker. He is required by law to note that his columns are not meant as specific investment advice, since any advice of that sort would need to take into account such things as each reader's willingness and need to take risk. His columns will specifically avoid the foolishness of predicting the next hot stock or what the stock market will do next month.

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