New bank CDs are paying more than double the interest rate of some older ones | Business

A bank certificate of deposit is traditionally a good way to get a little bit more interest on one’s savings, in exchange for leaving that money tied up for a while.

A CD can typically be redeemed early, with a penalty that amounts to giving up the last few months of interest earned, so putting money in a 2-year CD doesn’t really mean the money is out of reach for two years.

Lately, with interest rates rising, CD and regular savings account rates have nearly doubled since the start of this year. 

No one’s getting rich off these rates — we’re talking between 2 percent and 3 percent interest — and they lag well behind the rate of inflation, but the ongoing changes do raise some issues.

For example, at what point does it make sense to pay a penalty and close a CD early in order to put that same money in a higher-yielding CD?

Consider how rates have changed. Here’s a look at how the rates offered by Ally, one of the large online banks, have changed for 18-month CDs:

• February 2021: 0.6 percent interest.
• April 2022: 1.25 percent
• May 2022: 1.75 percent
• July 2022: 2.25 percent

Today, Ally is paying 1.25 percent on regular savings accounts, so a CD acquired last year would look like a real loser. I’m using Ally as an example because I have an account with them and am familiar with their rates and policies, but always shop around and check local banks, too, for the best rates.

Regular readers might recall that in February 2021 I wrote about rising-rate CDs, which allow account holders to switch to presumably higher rates offered at any time during the term of their CD, usually one time or two depending on the term.

In retrospect, that was a good idea at the time.

But what if a person put some money in a CD just a few months back when the interest rate was 1.25 percent and now it’s nearly double that much?

The penalty for an early CD withdrawal, at least at Ally, is 60 days of interest, and someone who took out a CD in April would be about three months in. 

Let’s imagine that’s a $10,000 CD. At 2.25 percent versus 1.25 percent, that’s an extra $100 or so in yearly interest. So, yes, it would pay to cash out that CD and put the money in a new one paying nearly twice as much.

And if you think interest rates will keep on rising, then a rising-rate CD could again be a good choice. With one of those, you can switch to a higher rate when one is offered without the early-withdrawal penalty.

Now, none of these CD rates is going to make anyone wealthy. Heck, they won’t even keep up with rising prices, especially in today’s high-inflation environment. But people ideally have some emergency savings tucked away, and it’s good to earn as much interest as possible.

In April I wrote about federal inflation-indexed i-bonds, the U.S. government bonds that are currently offering a 6-month guaranteed interest rate of 9.62 percent at treasurydirect.gov. Those are a great, safe way to save, but there’s an annual limit ($10,000) on how much one person can buy, and you can’t withdraw the money until a year has passed.

For emergency savings you don’t expect to need for at least a year, i-bonds are still my top recommendation. After that, check out current CD rates, and consider a rising-rate CD. With emergency funds in a CD, you can always withdraw them if needed and forfeit just a little interest.

Reach David Slade at 843-937-5552. Follow him on Twitter @DSladeNews.