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Rates Creep Up on Five-Year CDs

Before you lock in, make sure the early-withdrawal penalty isn’t onerous.

Rates on certificates of deposit are finally starting to tick up. Internet banks have recently been offering five-year CDs yielding 2%, compared with an average of 0.69% for all five-year certificates. The average was about 3% in 2008.

Even marginally higher rates are tempting for yield-starved savers. But if rates are headed higher still, shouldn’t you wait to lock in? “It’s too early to say whether we’ve turned a corner,” says Ken Tumin, of DepositAccounts.com. To take advantage of today’s higher rates without getting stuck, go for the highest-rate CD with the lowest early-withdrawal penalty.

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For example, iGObanking.com is offering a five-year CD yielding 2.05% with an early-withdrawal penalty equal to 180 days’ interest. Say you invest a chunk of savings, and after a year you find that market rates are more competitive. Even after the penalty, your yield would be 1.03%. The highest rates for one-year CDs and online savings accounts are currently about 1%, so you have nothing to lose. If rates stay where they are or drop, you’re ahead of the game; if they rise, you can pull the money out and reinvest.

You could make out even better with a reduced penalty, even if the rate is lower. Ally Bank’s five-year CD yields 1.5% with a 60-day early-withdrawal penalty. Pull out the money after a year and your yield would be 1.25%. See more CDs with high-yield rates.

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