Stash Your Cash in Long-Term CDs

Higher interest rates on your investment may offset any early withdrawal penalty

Allan Roth,

AARP

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En español

Published February 02, 2015

Look into longer-term certificates of deposit with easy early-withdrawal penalties. Higher interest rates on your investment can offset taking a penalty punch.

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Got a chunk of your nest egg sitting around in your bank or brokerage account? These days too many money market and bank savings accounts are yielding just 0.01 percent annually. At that rate, even with the power of compounding, it will take 6,932 years to double your money. Can't wait that long? Here are some ways to make your cash work harder and perhaps earn hundreds or thousands of dollars more a year.

Move it

Look for money market accounts paying as high as 1 percent, as shown on such websites as Bankrate.com and DepositAccounts.com. One percent may not seem like much until you frame it in terms of annual dollar return. The extra 0.99 percent (1 percent versus the 0.01 percent savings banks are paying) gets you $99 a year for a $10,000 account, or $990 for a $100,000 one — more than you'd earn with a short-term U.S. Treasury bond; at the time of this writing, a two-year Treasury note yielded 0.73 percent.

Go long

Want an even higher return? Buy certain types of long-term certificates of deposit — specifically, longer-term CDs with easy early-withdrawal penalties. If you find you need the money, or if rates increase (possibly due to the Federal Reserve no longer buying back bonds), you can earn more by paying the penalty and buying a new CD.

Look at longer-term CDs by using DepositAccounts.com. Its early-withdrawal penalty calculator turns up the following:

Buying a 2 percent five-year CD at Ally Bank and cashing it out in one year still earns as much as 1.17 percent after the penalty. At Synchrony Bank, cashing out a 2.25 percent five-year CD in two years earns as much as 1.69 percent annually. Both happen to be higher than many one- and two-year CD rates at Bankrate.com. So think of these as short-term CDs with an option to leave your money in longer and earn the higher rate.

Earn even more

Not touching your money for the whole term can yield even more. For example, the five-year CD at Synchrony Bank will earn 2.25 percent annually. That's an extra 2.24 percent over a 0.01 percent savings account, which amounts to an extra $224 a year on a $10,000 deposit, or $2,240 a year on a $100,000 deposit. (By comparison, the five-year U.S. Treasury bond yields only 1.76 percent.)

See the future

In case this still hasn't persuaded you to make your cash work harder, here are a couple of other ways to think about it. For a $10,000 deposit, it's the equivalent of getting a free $56 dinner every three months, yet not having to sit through a salesperson's pitch. For the $100,000 deposit, it's like getting free gasoline for the year. (That's based on someone driving 15,000 miles a year and getting 20 miles per gallon at $3 per gallon, which amounts to $2,250 a year in gasoline costs.)

How much cash or near cash (long-term CDs with easy early-withdrawal penalties) you need depends on your situation, although generally I recommend keeping at least a year's cash on hand. That is, have enough so you don't have to sell any of your investments for a year. If you are fortunate to have a pension or secure job, you may not need as much.

And while you'll likely owe taxes on these additional earnings, depending on your other income, it's still not a bad reward if you have some larger amounts of cash that are hanging around underinvested. So fight inertia and stash your cash in a higher-paying Federal Deposit Insurance Corp.-insured account (or credit union account insured by the National Credit Union Administration). Remember not to exceed insurance limits, which are currently $250,000 a year per depositor at each bank. Then treat yourself to a reward with the extra earnings.

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Allan Roth is a practicing financial planner who has taught finance and behavioral finance at three universities and has written for national publications including The Wall Street Journal.