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Consider risk, reward, goals and more when picking CD
Q. How can I determine which CD rate and term is the best buy? I made a graph of the available rates from two banks: I put the CD maturities horizontally and the interest rates vertically. I then plotted each available rate and drew a line along the slope. With one bank, the yield increase was steep as you moved from three months to one year and then essentially leveled off. It appeared the best investment was a one-year CD because all other rates fell below the line. With the other bank, it appeared a two- or three-year CD gave the best rate.
A. You are on the right track. A graph like the one you drew can be helpful in making your decision, but should not be your only consideration.
What you have drawn is the relationship between risk and reward. You can see how much each bank is willing to reward you for taking the extra risk of a longer-maturity investment. At the first bank, the extra reward drops off sharply after one year. You definitely would not want to get a long-maturity CD at that bank. At the second, the risk-reward relationship is best at two- and three-year maturities but is pretty decent all the way out to six years.
What else matters? Your investment goals and your outlook for interest rates.
A five-year CD obviously is not the best option for somebody investing money that will be needed a year from now. On the other hand, a one-year CD is not a great choice for someone with a long-term horizon trying to generate income.
You also need to consider whether interest rates are likely to continue declining over the next few years or reverse course. If you think rates are headed down, you want some of your money locked up long term. If you think they are headed up, you want to stay toward the short side. Many people prefer to hedge their bets by putting their money into CDs with varying maturities. That way they regularly have some money coming due to be invested at current market rates.
By the way, if you connect the dots on your graph, you will have what is known as a yield curve. Similar yield curves based on U.S. Treasuries of varying maturities are published daily in the Wall Street Journal and can be found online at Bloomberg.com. (Go to http://www.bloomberg.com and click on "interest rates.") An upward sloping yield curve is considered normal.
Q. I've heard that, tax-wise, a Roth account is the best deal in tax savings you can get. For what age group is this appropriate: young working parents, teenagers or seniors such as myself who want to help grandkids? How can you start such an account?
A. A Roth account is a type of individual retirement account. To make a contribution to one, you must have earned income. That means if you are retired, you cannot contribute to a Roth for yourself. But you can contribute to accounts on behalf of your grandchildren who have jobs. Technically, you would make a gift to the child, who would turn around and make the contribution.
A Roth is appropriate for any qualifying worker, but the younger you are, the more you get out of it because you have more years of tax-free compounding of investment returns. All withdrawals are tax-free if you comply with the rules.
A Roth IRA can be opened with most any bank, brokerage firm or mutual fund company. It's just a matter of filling out the paperwork.
Q. I am to receive a pension from a company that is going through tough times. What happens to a person's pension if the company goes out of business or is bought by another company?
A. Pension benefits are insured within limits by the Pension Benefit Guaranty Corp. In general, basic benefits are covered, but not health care, vacation pay or severance pay. Also, benefits that recently were added or increased may be only partly covered.
Check out the Web site http://www.pbgc.gov for more detailed information about what is covered and what is not. Good luck.
Online money map
Can't wait to find out more about the tax bill Congress passed last month? Check out the Joint Committee on Taxation Web site (http://www.house.gov/jct) and click on the summary of provisions for HR 1836.
- Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731, or to firstname.lastname@example.org by e-mail.
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