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investing in CDs online
Old 10-20-2016, 12:40 PM   #1
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investing in CDs online

Have some portion of my IRA tied up in a money market account gaining basically no interest...about $150k. I probably won't need to tap into any of this for at least 3 years, but in the meantime, was considering putting that money into 1 or 2 year CDs.
How safe are online CDs purchased through Fidelity...and do they basically work the same as the ones you purchase at a bank (once they reach maturity, the total value including interest would dump back into your IRA money market account).

Any recommendations ? I see a lot of different banks that I'm not familiar with.
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Old 10-20-2016, 12:56 PM   #2
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When buying a CD through a broker, there is no fixed early withdrawal penalty. Probably not as big a deal for the term you are looking at. If you have to have your funds, your CD has to be sold and that cost could be greater than an average EWP or in some circumstances if you purchased your CD when rates were higher, you could make a small profit.

FDIC insurance still works basically the same. If for some reason the bank does go under, your broker makes the claim for you and the funds are returned to your broker. 99% of the time, this is a fast and painless process. You should only see FDIC insured banks through your broker.

You may be able to find better rates outside of your broker, but then you have to deal with transferring the funds and managing a second IRA account. Some people don't mind the extra work, some do. Keep in mind if you opt for the transfer, you shouldn't take possession of the funds, but allow for a Trustee-to-Trustee transfer. This takes longer, but you generally don't have to worry about a potential taxable event being created. Personally, for the amount you have, I would just stick with what my broker was offering.

Since the $150K is under the $250K limit, I would just go with the highest rate on the term you want.

cd :O)
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Old 10-20-2016, 01:54 PM   #3
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If you do go with a bank, sometimes it is better to take the longer term/higher rate CD and then just accept the early withdrawal penalty. For example, say the 2 year CD rate is 1.25% and the 5 year CD rate is 1.75% with a 6 month penalty... if you buy the 2 year CD you get 2.5% (2*1.25%) but if you buy the 5 year CD and break it after 2 years you get 2.625% (2*1.75%, -1.75%*.5). Not a huge difference in that example but in 2 years you may find you don't need the money so you make out even more.

Also, if you go long you can buy 5 $30k CDs so if you need to break one or two you can still get the long rate on the others that you keep, rather than having to break a $150k CD.
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Old 10-20-2016, 07:08 PM   #4
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FYI interest on CD's bought thru a broker like Fidelity does NOT compound. The interest simply appears in the cash area of your broker account - typically every 6 months.
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Old 10-20-2016, 07:17 PM   #5
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Note that your State Farm insurance agent offers CDs thru State Farm Bank, which effectively then has branches in each town. They do pay slightly better rates than local banks.
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Old 10-20-2016, 07:57 PM   #6
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Note that your State Farm insurance agent offers CDs thru State Farm Bank, which effectively then has branches in each town. They do pay slightly better rates than local banks.

Good point. Other insurers have in house banking with decent rates like Nationwide. I don't know if their customer service is any good, though. I would stick with the credit union or places like Ally and Sychrony.
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Old 10-20-2016, 08:15 PM   #7
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Good point. Other insurers have in house banking with decent rates like Nationwide. I don't know if their customer service is any good, though. I would stick with the credit union or places like Ally and Sychrony.
For an insurance company captive bank, typically the service will be thru a local agent, so you could measure if you use the agent for insurance what the service will be like.
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Old 10-21-2016, 12:02 AM   #8
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I just purchased five IRA CDs from Andrews Federal Credit Union online. Easy membership by paying $5 to join a consumer group. 84 month CD with reasonable EWP and 3% interest. Best deal around in IRA CDs. Call and ask for someone to walk you through process. So far so good for me.

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Old 10-21-2016, 01:13 PM   #9
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I just purchased five IRA CDs from Andrews Federal Credit Union online. Easy membership by paying $5 to join a consumer group. 84 month CD with reasonable EWP and 3% interest. Best deal around in IRA CDs. Call and ask for someone to walk you through process. So far so good for me.

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I also opened an account there based on your prior tip (THANKS). Very easy to open. In addition to low EWP they do permit partial withdrawals so I didn't need to split my purchase into smaller CDs which I usually do in case of an emergency. In fact I can use this one CD as an 84 month ladder
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Old 10-21-2016, 02:36 PM   #10
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I also had some $$$ in a Fidelity account about a month ago and decided to try their "ladder" feature where you give it a time frame (in my case it was just 1 year) and a total amount and you then pick four CD's that mature at even times (quarterly in my case) throughout the period. I liked that approach and their selection was good. The rates in the CD's I chose varied from 0.5% for the 3 month CD to 0.85% for the 12 month CD. They give you a selection from which to choose for each period - though I'm not sure why you wouldn't just pick the highest rate as long as the bank issuing the CD was reputable - which is what I did.

The process was pretty quick and I thought the web site did a very good job explaining how to set it up. Assuming that 12 months from now when everything comes due I might do it again.
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