CDs, or certificates of deposit, offer investors a safe way to preserve their wealth. And with CD interest rates above 5%, they’re worth considering as a savings vehicle. This is especially true after a historically fast decline in short-term treasury rates, which fell from above 5% to near 4%. This sharp drop in Treasury yields has increased the appeal of CDs, which are still paying as high 5.35% from well-known institutions. But when most people buy a CD, they go through their local bank. However, going through your broker may be a smarter and safer way.
CDs are FDIC insured
CDs are FDIC insured up to $250,000 per depositor per institution. So if you and your partner own $250,000 worth of CDs, held in two different accounts at the same bank (one in your name, one in theirs), you’ll have $500,000 worth of FDIC insurance. However, if you hold $500,000 worth of CDs in a single joint account, you’d have $250,000 uninsured.
The applicable FDIC insurance limits are very important to understand, especially as most people purchase CDs from their local bank. But what about if you purchased them through your broker? In that case, you could source CDs from banks all over the country, thus increasing your FDIC insurance exponentially.
Why buying CDs is more efficient
When you purchase a CD from your local bank, they are likely to offer you their own CD product. They aren’t likely to shop around and find you the best rate. This has two disadvantages:
- You may not end up with the highest available rate
- You end up with significantly lower FDIC insurance
When you purchase CDs through your broker, you can source CD offerings from banks all over the country. For example, here’s a list of available CDs we can purchase for our clients through Schwab. Notice, there are 15 separate different financial institutions just in this list alone:
This allows us to spread our purchases around to 15 different FDIC insured institutions and hold all of the CDs in a single account. In this case, we could secure a total of $3,750,000 in FDIC insured CDs, all of which are paying 5% or more. Your local bank is unlikely able, or willing, to offer the same type of options.
In addition, if we purchase CDs through Schwab, we can automatically roll the CDs as they mature. We can also implement strategies such as CD ladders to create monthly cash flow.
How to use CDs
CDs are excellent saving tools for people trying to preserve their wealth. They tend to be popular with older clients who have benefitted from a decades long rise in riskier assets like stocks or real estate. But now those types of clients are looking for safe options to preserve their wealth. While interest earned from CDs is taxable, you can hold them inside IRA accounts and better manage your tax liability. If you have a sizable IRA account and are looking to pare back your risk, CDs are an excellent alternative to cash.
While we have been recommending Treasuries since last year, the recent decline in Treasury rates makes them less attractive. As long as CD rates are offering a 1% return above available treasury rates, (i.e. 5% CD rates vs 4% treasury rates), they’ll look like very viable options. You just want to make sure you aren’t going over your FDIC insurance limits when purchasing CDs.
Regardless of how you’re using CDs in your financial planning, consider the benefits of owning them inside a brokerage account as opposed to your local bank.
Reach out to us if you have questions regarding CDs or best planning practices.
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