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The recent rise in interest rates has greatly increased the attention that savers are giving to CDs, or certificates of deposit.
For many years, CDs offered very low rates and were not very attractive places to save. That is changing today, but before you buy, you should know about a few options that may be more beneficial than CDs depending on your finances.
First, know that there may be a tax benefit to using alternatives. This is because the interest from CDs will be taxed at income tax rates at the federal level, and by your state.
There are many other safe investments that are taxed in more favorable ways. For example, U.S. savings bonds and Treasury bills are not taxed at the state level.
For those in high-tax states, this means your after-tax return may be significantly better with Treasury bills than CDs. Switching to investments that are exempt from state income taxes can be one of the best ways to reduce state income tax burden in retirement.
Liquidity may also be a concern. CDs typically have penalties for early withdrawals. Investments such as money market funds can be sold at any time without penalties.
For those with cash savings above the FDIC limit, purchasing Treasury bills also provides you with a nearly limitless federal government protection on your savings, which would not exist if that money remained within a single bank.
Lastly, it can be time-consuming to ensure you are getting the best rate with CDs. It may mean having multiple CDs at multiple banks around town and moving money around each time a CD matures to a new bank.
Banks typically offer special interest rates for new money but will renew you into lower-yielding CDs at maturity. Ensuring you are getting the best return using CDs can be very time-consuming.
Money within a brokerage account, instead of a CD at a bank, gives you the flexibility to move between a wide variety of investments very quickly and easily. As interest rates or your personal tax situation change, investments within a brokerage account can quickly be adjusted to fit your circumstances.
Some alternatives we advise our clients on besides bank CDs:
Additionally, utilizing a brokerage account helps keep your money consolidated into one easy-to-manage location. You don’t have to spread your savings across numerous banks around town!
Cash management is just one of the topics we cover with our clients on a fiduciary, flat-fee basis. Our clients don’t pay any more to have us manage their cash balances in CDs, Treasury bills, or other alternatives. We do not charge a percentage of assets fee!
If we can help you determine the best options for getting returns on your cash, please reach out.