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Certificates of Deposits, Your Questions Answered
First and foremost, what is a Certificate of Deposit (CD)?
A CD is called a time deposit. You are telling the bank that you will leave your money on deposit with them for a predetermined period of time. When you open a Certificate of Deposit with a bank they provide you a safekeeping receipt. In the Good ole days they actually gave you an original certificate. The documents prove that you deposited the set of amount of money, at agreed upon rate, for the agreed upon time. Since you have promised to leave your funds at the bank and they can count on those funds, they usually pay a higher rate than they would for a money-market or savings account. The highest interest rates are usually given for long-term CDs. A Certificate of Deposit may be closed early (early withdrawal penalty), but the cost my be considerable. FDIC (banks) and NCUA (credit unions) insured institutions offer federal protection in case the institution fails.
Is my money insured?
Deposits are insured up to $250,000.00 (through 12/31/13) of insurance per bank. Personal funds can have up to $1,000,000.00 if they open individual personal CDs for $250,000.00 and a joint CD for $500,000.00. [Through 12/31/13] There are additional account types that can receive additional insurance. This article goes into great detail, Calculating FDIC and NCUA Insurance. The insurance limits for IRAs were changed to $250,000.00 on 4/1/2006. The FDIC (Federal Deposit Insurance Corporation) and NCUA (National Credit Union Administration) insure your money in the case of a bank (FDIC) or credit union (NCUA) failure. You can verify federal insurance by going to the NCUA or FDIC websites. Please note that quite a few banks have opened up internet operations under a different name. The internet "bank" does not have separate insurance coverage.
The NCUA follows the same insurance guidelines as the FDIC. People aren't as familiar with credit unions because they have membership restrictions which usually limit their deposit based to a local area. However, some credit unions do have nationwide membership mechanisms.
Why use a CD Placement Firm?
First, compared to local CD rates, placement firms often find higher rates. They have dedicated staff that looks under every nook and cranny. Second, is the cost saving feature of your time. You can spend time searching for rates, calling to see if they are still good, acquiring wire instructions, sending applications, etc. -- or call a placement firm. Calls have already been made. they know the process for opening a CD and occasionally can open the CD for you. Placement firms usually track the CD through maturity and provide a second pair of eyes to make sure it doesn't auto-roll at some horrendous rate. If any problems occur during the term such as missing interest payments, the firm can often help correct the problem or put you in contact with someone at the bank who can.
What is needed to open a CD?
This depends on the bank or credit union and the type of account you are opening. In general, if you are opening a personal account be prepared with a copy of your driver's license, your social security number, and often a second form of ID such as a utility bill, credit card, passport, etc. The US Patriot Act made it law that the bank has to verify your identity and ensure that you aren't a terrorist. The Bank will also often ask for your Date-of-Birth, Maiden Name, and Place of Birth. If you are opening an account for a living trust, be prepared to provide the trust documents. Usually, just the first and last page are required.
If you are opening an account for a corporation, association, LLC, LP, etc. you need all of the above for each signer plus some additional documents. In general that includes a board resolutions showing who is authorized to handle the accounts, articles of incorporation or other founding documents, and a W9 for EIN verification.
Banks, Credit Union, Public Funds, and Publicly traded companies have an exemption in the Patriot Act and don't have to provide personal information on the signers. The reasoning was that these entities are already overseen by the government in some fashion and aren't a terrorist organization and wouldn't have terrorists working for them. However, regardless of the exemption, many banks that are accepting deposits still require it. So if you don't want to provide the information, you may have to leave some good rates on the table.
How much money can I deposit into a CD?
You can deposit as much as the bank will take, but you should stay under the insurance limits which is generally $250,000.00. Some banks and credit unions have very low minimums for those just starting out, $25 to $500, where as others want larger deposits $25,000 to $250,000.00. Sometimes, they will even pay higher rates for it.
Are Certificates of Deposit a safe investment?
CDs that are federally insured by the FDIC or NCUA are safe investments. They offer a reliable return. Of course because of their insurance and safety, rates are lower than what you can receive with other riskier investments. You always need to weigh the risks versus the returns of an investment. CDs offered by offshore or non-insured banks may not be safe [Note: A "bank" called Millennium Bank was shut down last year after being accused of being a Ponzi scheme]. They usually tempt you with rates ranging from 7% - 9%. Treat offshore CDs like you would an investment in the stock market. Don't invest more than you are willing to lose and realize that it can be list. However, with federally insured CDs, as long as the combination of your principal and interest remain below the insurance limits, there is no risk of losing your investment. Federally insured CDs are probably the safest investment with the highest return.
Are there fees to open a CD?
In general, the banks and credit unions don't charge fees to open a CD. You may incur fees for a notary, mailing, or wires. Especially if you are dealing with an out-of-state bank. CD Placement firms usually have a fee. Their fees compensate them for all of the time they spend finding the rates and figuring out each bank's process.
What is the difference between an APR and APY?
The APR is the Annual Percentage Rate or simple interest rate. It assumes the interest will be paid out on a monthly basis. The APY is the Annual Percentage Yield or compounded yield. It assumes the interest is invested back into the CD and then also earns interest. Not all banks will allow the interest to compound. Banks that do, will either compound daily, monthly, quarterly, or semi-annually. There is some risk if you open a CD at the insurance limit and allow interest to be compounded. If for some reason the bank does close, then any amount over the limit would be uninsured, thus causing some or all of the interest to be lost.
What is a laddered CD portfolio?
A laddered CD portfolio is an investment strategy that allows you to keep your funds in the safety of FDIC insured CDs, yet, weather some of the ups and downs of the fixed income investment market. If you invest all of your funds in 6-month CDs than you will basically be affected by every up and down of rate changes. If you ladder your CDs across multiple terms than you always have funds coming due to take advantage of potentially higher rates, but also have some protection against decreasing rates. In addition, in general you receive a higher rate for longer-term CDs. So when your CDs come due, you are now able to always invest in a longer term CD and thus earn more interest. Over time 5-year CD portfolios average about 1.00% higher than 6-month portfolios.
Where are the highest Certificate of Deposit rates?
The Highest CD rates are usually found with banks that have a large loan pipeline, but don't have strong local deposits. The bank needs funds from out of their area and usually have to pay more for that. The highest rates may be in California one week and in Illinois the next. Believe it or not, your local bank may have the highest national CD rate, but they may not offer it to their local customers. A bank may have a short-term need and they don't want to have the rates on their core deposits go up or give the expectation that they should be higher.
How do I send the funds?
The best way to send your funds is by secure Fed wire. The funds will be credited to your account the same day you wire and you will begin to earn interest. Some banks will accept checks if you prefer, but you will lose a day of interest for every day the check is in the mail. Furthermore, unless the rate is guaranteed until receipt, the interest rate could decrease. Using the Fed wire system is very secure and safe.
Please leave a comment if you have any other questions. Would love to answer them.
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