Should I name beneficiaries for my bank accounts?

When most people think about designating who’ll inherit their financial assets when they die, preparing a will comes immediately to mind. But for deposit accounts, naming a beneficiary can more easily and cost effectively transfer your funds to a new owner.

Most banks and credit unions allow you to name one or more beneficiaries for any checking, savings, money market or certificate of deposit account. The legal term for this is “payable on death”, and you might see it referred to as POD. Beneficiaries can also be designated for U.S. savings bonds.

When you specify a beneficiary, you still retain all ownership and rights associated with that account as long as you live. But when you die, the beneficiary becomes eligible to take possession of those funds as their own.

The advantage is that POD designations prevent those funds from entering the probate process of settling your estate, which can be costly, lengthy and burdened with paperwork. Instead, beneficiary designations override any will and are easily settled, at no cost. The beneficiary simply has to provide the financial institution with proof of identity and a certified copy of your death certificate.

Naming beneficiaries can be done immediately upon opening a bank account, via the signature card. But if you neglect to do this at the outset, you can always add a POD designee later. You’re also free to remove and change beneficiaries any time you like, though a new signature card will be required with each change.

Naming beneficiaries for your deposit accounts is one way to provide a gift to those who inherit your assets, as it significantly reduces the paperwork, time and energy necessary to make the transfers. But be sure to periodically review your various designations to ensure they remain up to date with your current preferences.

What is an add-on CD?

Smart savers shop around for a good deal before locking funds into any certificate of deposit. But the more CD shopping you do, the more you discover that it’s not just “one size fits all” out there.

The vast majority of CDs fit a standard formula: you deposit a lump sum, you agree to keep it there for a set term, and the bank agrees to pay you a fixed interest rate on your funds.

But anyone who shops around will quickly notice some specialty CD types, which tweak the general structure with added flexibility or requirements on one aspect of the certificate.

One of the simplest variations is an add-on CD. With these, you still make an initial deposit, and the bank still requires a set term in exchange for a fixed rate. The difference is that these CDs don’t limit you to the initial deposit. You can add more funds over time, without changing your term or the interest rate.

Many add-on CDs allow you to add as many deposits as you like, although they’ll likely require minimum additional increments and may stipulate a maximum that can ultimately be held in the CD. But some add-on certificates specify you can make just one or two additional investments over the CD’s lifetime.

Add-on certificates are well-suited to anyone saving toward a specific goal, like a down payment for a house or car, because they allow you to incrementally sock money away while earning more than you likely would from a savings account.

Just be sure to choose a term length that aligns with your savings goal, and check that the rate is competitive. If you can earn almost as much with a savings or money market account, you may be better served by the withdrawal flexibility those accounts offer.

How is a CD’s interest paid?

All certificates of deposit earn interest. But not all calculate it the same, or pay it out on the same schedule. Before locking into a new CD, it’s worth checking its interest terms.

First look for how frequently the CD will compound. Compounding monthly means one month’s worth of interest will be added to the balance each month. Then the next month, that new higher balance will be used for calculating interest.

Certificates generally compound daily, monthly, quarterly or even annually. The more frequently, the better, as it allows more chances to earn interest on accrued interest.

To see the impact of different compounding periods, take the example of a five-year CD with a 2.50% APR and an investment of $20,000. If compounding annually, the CD would earn $2,628 over the five years, while the same CD with daily compounding would earn $2,663.

Although the difference might seem small, it can sometimes help you choose between two otherwise equal CDs.

The other aspect of CD interest to consider is the ability to tap interest before maturity. Most CD buyers will keep their interest accumulating within the CD, growing the balance and benefiting from compounding.

But some CDs allow you to siphon the interest into a separate account each time the CD earns an interest payment. Here again, the terms of the CD will stipulate how often that happens. Though a CD might compound daily, most banks will apply interest payments monthly or quarterly.

If your goal is to earn the highest possible return over the life of your CD, you’ll want to choose a certificate that allows interest to accumulate and be compounded. But if instead you’d like to preserve your main investment while collecting interest payouts along the way, check the terms to make sure periodic interest withdrawals are allowed.

Your smartest move when a CD is maturing

When you have a certificate of deposit approaching its maturity date, your bank or credit union can make things very easy on you. Do nothing and they’ll conveniently roll your funds into a new CD. But for the savvy saver, it’s usually a mistake to let them do this.

The CD marketplace is chock full of options from hundreds of institutions, in a wide variety of term lengths, interest rates and special features. And because investing in a new CD requires committing those funds for usually at least a year, and often several years, it’s wise to lock into a good deal.

In contrast, letting a CD mature without any instructions on how to handle the proceeds typically results in the bank rolling the funds into a new CD that’s as similar in length as possible to the maturing CD. So if your original certificate was a 21-month special, they’ll likely move your money into their current 24-month standard CD.

While it’s theoretically possible the standard CD offers a good return, chances are exceptionally high you’ll find a better yield by shopping around. That’s because many top-earning CDs are special odd-month terms or limited-time promotions, not standard issue certificates.

Fortunately, it’s easy to have your CD liquidated instead of auto-renewed. In the weeks before expiration, your financial institution will notify you of the impending maturity date, with instructions for informing them what to do with the funds. Generally, they provide the option to transfer the proceeds to a linked savings account, and from there, you can do what you like with the funds.

The important thing is to submit your liquidation request in time for their deadline, as the grace period is slight. You’ll then have whatever time you need to figure out the next best step for your funds.

Opening a CD? Make it bulletproof.

It’s true: Certificates of deposit are among the safest places to save. But that’s not to say they’re risk-free. A few important precautions will ensure the money you sock away in CDs will be there anytime you need it.

CDs are safe because they’re bank savings accounts, not investments that depend on the stock or bond market. When you open a CD, you enter into a signed agreement that stipulates exactly how much interest you’ll earn and on what schedule. Read the deposit agreement before signing and you’ll be safe from surprises.

Choosing the institution for your CD is one area where you should be vigilant, however. Most CDs you encounter will be offered by banks and credit unions that are federally insured: by the FDIC for banks and the NCUA for credit unions.

This is important because even if the bank or credit union fails, your deposits are protected. FDIC or NCUA insurance guarantees your balances up to $250,000 will suffer no loss as a result of the institution’s failure.

But be careful. There are banks and credit unions that hold private rather than federal insurance. Although they provide some protection against failure, the coverage and reliability won’t match the security provided by the U.S. government. So for complete peace of mind, do business with institutions that carry the FDIC or NCUA seal.

For some savers, the $250,000 limit can also come into play. Federal insurance covers that amount per person, per institution, with all deposits held at a bank counting toward the threshold. With amounts above $250,000 unprotected, you’re smart to spread balances among multiple institutions if you’re holding that much in bank accounts.

Sticking to federally insured institutions and staying below the maximum insurance ceiling are easy steps to ensure your CD savings will be positively bulletproof.

How will my CD earnings be taxed?

With the year winding down, the start of tax preparation season is just weeks away. That means employers, banks and investment firms will soon be sending you (and the IRS) forms indicating what you earned with them during the year.

If you owned any certificates of deposit in 2017, you’ll be included in these January mailings. That’s because CD earnings are considered “interest income”, making them taxable in the same way as interest earned from savings or money market accounts.

But some savers wonder when CD earnings become a taxable event. Does it matter if the interest compounds within the certificate versus being paid to a linked account? Does it depend on when you cash out the CD or when it matures?

The answer is generally no, none of those things will have an impact on your tax liability. Simply put, CD earnings become taxable when the bank or credit union applies the interest. Typically, that will mean four quarterly or twelve monthly interest payments throughout the year.

Each institution will then combine all of the interest payments into a lump sum for the calendar year, and will report this to you on a 1099-INT form. Whether the CD is still open or has matured will have no bearing on the tax obligations for that year.

One exception is CDs opened within an IRA account. Because the same rules apply to all IRA investments, interest earned on retirement CDs is not taxable until the funds are dispersed post-retirement.

Whether you own one certificate or a portfolio of dozens, the tax implications of CDs are straightforward, and unfazed by any attempt to strategize your timing. So invest your CD funds whenever it makes good sense for you, and let your bank help you do the simple tax math in January.

How much do I need to open a CD?

If you’ve never opened a certificate of deposit before, you might think CDs are a complex option for investing a large sum of money. While they certainly can be good investments for those with ample cash, you might be surprised how accessible they are to savers with any modest amount to sock away.

The minimum requirement to open a CD varies by individual bank or credit union – there is no set standard. And in addition to each institution choosing its own minimum, many offer multiple rate tiers for different investment amounts. Generally, the more you can deposit, the higher the rate you’ll earn.

But putting away more isn’t always necessary to earn the highest rate. Some banks have one across-the-board minimum, and saving more with them won’t change your rate. It might be $5,000 or $2,500, or even just $500 or $1,000.

That’s right. Even if you’re shopping around for a top rate (which you should always do), you can find plenty of CDs requiring just $500 to open. In fact, there are even a good handful of banks – including some large nationals – that require no minimum at all.

But small minimums can help robust savers as well. Have $10,000 available to deposit? You may be able to earn the same return on two CDs of $5,000 or four of $2,500 as you can by lumping it into a single $10,000 certificate. This gives you flexibility to cash out a portion of your CD savings should you unexpectedly need some, but not all, of the funds for an emergency.

One search of the nation’s top rates on any given day will quickly reveal there’s no rule of thumb for CD minimums. The only thing you can count on is that good options exist for savers at every level.

APR vs. APY… What’s the difference?

Anyone who has shopped rates – whether for putting money in a CD or savings account, or for borrowing with a mortgage or credit card – has noticed banks and lenders using two acronyms that are almost, but not quite, the same. Sometimes they quote APR, other times APY. What gives?

APR stands for Annual Percentage Rate, and is the basic rate a bank either pays for deposits or charges for a loan. It’s the fixed percentage applied to your balance over the course of the year.

But as many savers and borrowers know, interest grows when it compounds. And that’s where APY comes in. APY stands for Annual Percentage Yield, and it’s the rate you’ll actually yield as a result of compounding.

Mortgages typically compound monthly and credit cards daily. For bank deposits, compounding may occur this often, or may just happen quarterly or semi-annually. The more compounding periods in a year, the bigger the gap between APR and APY.

That’s because interest is charged on previous interest each period. Do it just twice a year and the compounding effect is slight. But if it’s done 12 or even 365 times in a year, compounding will inflate the APY to a noticeably higher number than the original APR.

From there it’s easy to see why mortgage and credit card lenders typically quote the lower APR, while banks soliciting your deposits tend to quote the higher APY.

How much of a difference can it make? Take a mortgage quoted at 4.5 percent APR. After compounding monthly, the rate you’ll actually pay by the end of the year, or the APY, will be 4.59 percent.

Understanding this allows you to ensure you’re comparing apples to apples – APR to APR, or APY to APY, but never mixed – whenever you shop rates.

My bank says I can only make six withdrawals from my savings account each month. Why?

If you frequently transfer money out of savings, or cover checking overdrafts with a linked savings account, you’ve likely discovered there’s a limit to how often you can do this in a month. Exceed six withdrawals per statement cycle and your bank will warn you at best, or close your account at worst.

But before unloading your anger at your bank, or moving your savings to a seemingly friendlier institution, know that banks have no say in this. The mandate comes down from the Federal Reserve in a rule called Regulation D.

The six-withdrawal limit applies to all liquid savings instruments, so that includes savings and money market accounts. It also applies equally to banks and credit unions. And while the Fed doesn’t dictate fees, most institutions will ding you with a charge – often $10 – to teach you that your savings account can’t be used like a checking account.

If you’re a first-time offender, you may escape with a warning, or may be able to score a one-time courtesy waiver. But even if you pay the fee, repeatedly exceeding the limit will eventually lead the bank to close your account, as they simply can’t abide by their own Fed requirements if you keep breaking the rules.

Fortunately, only withdrawals authorized online, by phone, via bill payment or as auto-transfers count toward the six. So if you’ve hit your monthly limit but still need to take out funds, you can avoid the penalty by withdrawing at a branch or ATM, or by requesting a mailed check.

With an understanding of the rule, and the ability at many institutions to see how many withdrawals remain for the month, most consumers can plan accordingly to use their account as the Fed requires, and avoid their savings being diminished by fees.

“Are No-Penalty CDs a good choice?”

When putting your cash into a bank or credit union, there are more choices than plain vanilla savings accounts and conventional certificates of deposit. One hybrid product to consider is a no-penalty CD as it balances the quest for maximum returns with the desire for easy access to your funds should you need them.

No-penalty CDs, sometimes called no-risk or risk-free CDs, are exactly what they sound like. Instead of the early withdrawal fees that traditional certificates charge if you cash in before maturity, you can take all or some of your funds out of a no-penalty CD at any time with no loss of interest or principal.

The one exception is that most no-penalty CDs will require you to lock your funds in for about a week. Then the no-penalty period will kick in.

The trade-off, as you might predict, is you’ll typically earn a lower interest rate for no-penalty certificates than you could earn by fully committing your funds to a traditional term. The difference varies widely by institution, but can be significant.

On the flip side, you can usually earn more with a no-penalty CD than with a simple savings account. That’s what makes the risk-free CDs a hybrid: they typically sit between the earnings potential of savings accounts and standard certificates, while also offering a withdrawal flexibility that lies between the two.

Since most no-penalty certificates have terms around 12 months, they make good sense for savers who want to sock some money away but aren’t certain they can leave it untouched for a year. If instead you want frequent withdrawals of your funds, a high-yield savings account will suit you better, while those with high confidence they can hold their funds in place for a year or longer will earn more with a conventional CD.

How do high-interest checking accounts work?

Imagine a checking account with all the standard transactions you’d expect from a checking account, but paying 2, 3 or even 5 percent interest on your balance. Since most checking accounts pay no interest at all, and even the top-paying savings accounts in the country offer less than 1.5 percent, you’d be smart to ask, “What’s the catch?”

These accounts are typically called “high-interest checking accounts”, and though they have a number of strings attached, they aren’t a scam. They’re legitimate accounts, usually offered by smaller banks and credit unions, that simply have very specific requirements for earning the off-the-charts interest rate they advertise.

The most common hoop you’re required to jump through is using your debit card a minimum number of times each month, and we’re not talking about three or four transactions. A typical requirement is 12 debit transactions per statement cycle, and I’ve even seen an account requiring 20. The purchases will also have to be signature, not PIN-based, transactions.

Other typical stipulations include paying at least some number of bills online each statement cycle, setting up direct deposit, and at some banks, opening a credit card with that institution. Signing up for electronic statements is almost always required.

One caution is to check the account’s balance cap. Most high-interest checking accounts specify a maximum balance that can earn the high rate, with anything above that threshold earning zero or near-zero interest. Sometimes the balance cap is an accommodating $10,000 or $20,000. But accounts with caps of just $1,000 or $2,000 won’t be worth your trouble.

If frequently using your debit card is easy for you, a high-interest checking account could significantly boost the interest you earn from your regular banking. Just be warned that the bank will only pay that chart-topping rate in months where you meet every requirement.