How CDs can work for savers

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Kiplinger’s Personal Finance

For money you can tie up for a few months or more — say, a portion of your emergency fund that you wouldn’t need for at least three months, or money earmarked for tuition or retirement income — consider certificates of deposit. CDs come with maturities that typically range from three months to five years, with longer maturities offering higher yields.

You can invest in a long-term CD even if you think you may cash out early or if you want to take advantage of rising rates — just be sure to check the interest penalty.

For example, a five-year CD from Ally Bank (www.ally.com), which recently yielded 1.82 percent, charges a penalty of only 60 days’ yield if you withdraw the money early.

In contrast, a five-year CD from Intervest National Bank, which offered a slightly higher rate of 1.96 percent, takes back half your interest with its early-withdrawal interest penalty of 30 months.

Constructing a CD ladder — putting chunks of cash in CDs of varying maturities — allows you to benefit from the best current yields and stay flexible enough to snag top rates down the road. When interest rates rise, you reinvest cash from shorter-term CDs to take advantage of higher yields. Your longer-term CDs will continue to earn interest at today’s highest rates.

If you’d like to put more than $250,000 (the maximum that the FDIC will insure in a single account) in CDs, the Certificate of Deposit Account Registry Service (CDARS) offers a convenient way to invest your funds. You deal with one participating bank, which sets the rate and parcels out $250,000 chunks to some of the more than 3,000 participating institutions.

U.S. savings bonds are another safe way to invest money you can tie up for a year. EE bonds pay low rates (0.6 percent), but I-bonds, which pay based in part on the inflation rate, are currently paying an attractive 3.06 percent.

You can cash in savings bonds after 12 months, but if you redeem them before five years have passed, you forfeit the last three months’ worth of interest.

The I-bond’s rate is composed of a fixed rate, currently 0 percent, that lasts for the life of the bond, plus a semiannual inflation rate that changes every six months. If you bought a $1,000 I-bond and redeemed it after a year, you’d still earn about 3 percent interest after the penalty at present inflation rates.

You must purchase savings bonds in an online Treasury Direct account, which you can set up at www.treasurydirect.gov.