Rising-Rate CDs Are a Downer for Investors

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The only thing investors love more than certainty is a guaranteed win, which is why rising-rate certificates of deposit seem like such a great idea. Safely invest your money and even if conditions should suddenly change, you can get some of that upside rather than being locked in with a traditional CD. Such an arrangement may sound enticing at a time when experts caution that interest rates will likely soon be on the rise.

But a new Bankrate.com study of rising-rate CDs at 150 banks and credit unions suggests that you shop carefully. Most of the rising-rate mechanisms make up for that convenience with returns on your investment that might pay you only half of what a top-yield traditional CD of the same maturity term would. Even top-yield online savings accounts are a better bet.

"Appealing concept aside, we found that by and large you're giving up too much return on the front end just for the option of increasing your rate at some point during the term," said Bankrate.com Chief Financial Analyst Greg McBride. Unfortunately, many investors don't shop around for the best deal and so might settle for someone that pays them far less than they otherwise might see.

There are four basic types of rising-rate CDs to compare against traditional two-year CDs (top yield of 1.5 percent) and online savings accounts (top yield of 1.05 percent).

Liquid/No Penalty

The consumer can get access to some or all of their money before the end of the term. In theory, you could pull your money out of a low-performing CD and put it into a higher-return vehicle. Bankrate found that top performers in this category of CD paid only half of what top traditional CDs offered. "If you truly need liquidity, you have the availability of online savings account," McBride said. "Or you could split the money between online savings accounts and a traditional CD."


"It sounds great because it means you have the option of increasing your rate at some point during the term if interest rates increase," McBride said. " The reality we found is the yields offered were not only less than what you would get on a traditional CD on the same term, but often times so much less that you couldn't possibly bump up to a high enough rate to make up the difference."


Step-ups take out the guesswork and specifically note when rates would rise and by how much. Again, the deal isn't good for the person who researches first. "The options we found here started lower and ended lower than what you would get on a top-yielding traditional CD of the same maturity," McBride said.


In a callable, the bank can call the CD if interest rates change and reissue the CD if it wishes. McBride calls this the worse deal of the lot. "It's a heads-I-win-tails-you-lose proposition," he said. "If rates go down, they call in your CD so they can reissue it at lower rates. If rates go up, then they're not going to call your CD."

McBride said that rising-rate CDs will appear like umbrellas on a rainy day. "This is the environment that you're going to start seeing more of these rising rate products," he said. "Investors should be aware of their other options and not just jump at a rising rate product because the concept is appealing."

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Rising-Rate CDs Are a Downer for Investors
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For 2014, you're allowed to contribute up to $17,500 to your 401(k). (If you're 50 and over, that limit increases to $23,000.) This is the maximum you're able to save per year and still defer paying income tax on that money.

Since 401(k) contributions must be made through payroll deductions, talk to your company's payroll department about adjusting your December contribution or adding a lump-sum amount from your holiday bonus when you receive it. Also, chat with your human resource department to see if it will let you retroactively earmark contributions made prior to April 15, 2015 for the 2014 tax year.
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Just be sure to get a signed and dated receipt from the charity, noting the amount of your contribution -- especially if you're donating goods instead of cash. As an added precaution, take photographs of any high-value donations (over $250).
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