Best Interest Rates for Cash Reserves – Updated April 2015

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percentage2Our family keeps a year’s worth of expenses (not income) put aside in cash reserves; it provides financial insurance with the side benefits of lower stress and less concern about stock market gyrations. In my opinion, emergency funds can actually have a better return on investment than what you see on your bank statement.

I don’t rate-chase nearly as much as I used to, but it still pays to shop around. Too many places are basically paying ZERO – the Megabanks, short-term US Treasuries, and money market sweep funds. Do you know what Chase offers on a 1-year CD? 0.02% APY. Bank of America on their 5-year CD? 0.15% APY. The highest money market mutual fund in the country yields 0.06%. My Vanguard Prime is at 0.01%.

Best Currently Available Interest Rates
Here is a brief summary of the best interest rates available on deposits backed by the full faith and credit of the US government. I will try to sort them from the shortest to longest maturities.

  • High-yield savings accounts. There are a variety of online savings accounts out there nowadays, with the highest ones earning around 1% APY. GE Capital Bank has an FDIC-insured Online Savings account paying 1.05% APY with no maintenance fees, no minimum balance, and no minimum to open.
  • Short-term guaranteed rates. Everbank Yield Pledge Money Market and Interest Checking account both offer 1.40% APY guaranteed (up to $50k each) for the first 6 months for new accounts. Since it is fixed, this is essentially a 6-month CD with a higher rate than any other 6-month CD rate out there and with no early withdrawal penalty to worry about. Salem Five Direct has an eSavings account that pays 1.10% guaranteed until 1/1/16 (~8.5 months left) but the rate is only available to new customers.
  • “Series I” US Savings Bonds offer rates that are linked to inflation. “I Bonds” bought right now will earn 1.48% total for the first six months, and then a variable rate based on ongoing inflation after that. You must hold them for a year, and if you redeem them within 5 years you lose the last 3 months of interest. While future rates are unknown, the net rate after a year is likely to be competitive with top 1-year CD rates at a minimum, while offering upside if inflation spikes. More info here.
  • Rewards checking accounts pay above-average interest rates, but with some risk. You have to jump through certain hoops, and if you make a mistake you won’t earn any interest all that month. Rates can also drop quickly, leaving a “bait-and-switch” feeling. But the rates can be high while they last. Consumers Credit Union offers up to 5.09% APY on up to a $20k balance, although 3.09% APY is easier to achieve unless you satisfy a long list of requirements. I list this one because the rate is guaranteed until December 31, 2015.
  • Certificates of deposit. If you have a large cushion, it’s quite likely to just sit there for years. Why not put some money in longer-term investments where you can still take it out in a true emergency and pay an early withdrawal penalty. Synchrony Bank (formerly GE Capital Retail Bank) is offering a 5-year CD paying 2.25% APY for $25k+ balances (2.20% APY for $2k+) with an early withdrawal penalty of 180 days interest. For example, if you withdraw from this CD after 2 years and pay the penalty, your effective rate earned will still be 1.69%.
  • Willing to lock up your money for 10+ years? Did you know that you can buy certificates of deposit via Vanguard’s bond desk? These “brokered CDs” offer the same FDIC-insurance and are often through commercial banks like Goldman Sachs. As of this writing, you can get a 10-year CD maturing 4/22/2025 that pays 2.95% APY. Prices will vary regularly.
  • How about two decades!? “Series EE” US Savings Bonds are not indexed to inflation, but they have a guarantee that the value will double in value in 20 years, which equals a guaranteed return of 3.5% a year. However, if you don’t hold for that long, you’ll be stuck with the normal rate which is quite low (currently a sad 0.50% APY). Think of it as a huge early withdrawal penalty. You really want to be sure you’ll keep it for 20 years.
  • Finally, how about something out-of-the-box? You can earn up to 2.25% APY within a 529 college savings plan (which can be opened with you as the beneficiary for now). FDIC-insured, and the rate is still pretty good even after a 10% penalty for non-qualified withdrawals.

How about my money? In terms of the opportunities above, I have opened an account at Everbank in the past for the promo rate and I have usually try to buy the max in US Savings I Bonds each year (no EE bonds, too long of a commitment). I don’t currently juggle any rewards checking accounts nor do I have any deposits with any other banks mentioned above. It’s just not worth it me to switch right now.

Besides some older CDs at higher rates, I keep a good chunk of my money at Ally Bank because right now they are the all-around “good enough” bank for me. Sure I could eek out 1.05% in a savings account somewhere, but Ally Online Savings is paying a 0.99% APY (as of 4/12/15) which serves as a no-fee overdraft companion to my Ally Interest Checking with unlimited ATM fee rebates. Along the same lines, I could get 2.25% in an outside bank’s 5-year CD, but Ally has 2.00% APY on their 5-year CDs and a relatively short 150-day early withdrawal penalty. A rate difference of 0.25% on $10,000 over a year is $25, and I’m not sure that’s enough to open a CD at another bank when my current Ally CDs mature.

All rates were checked as of 4/12/15.

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Comments

  1. Jonathan, I was intrigued about your “529 plan savings account” concept (in which the 10% hit is factored into the total return) and commented on it when you first raised it, seeking some confirmation. I wonder if this is an original idea of yours (only asking because I am still looking for that confirmation) and if you (or any of your readers) can shoot any holes through the idea (e.g. could it arguably be perceived as some sort of manipulation, might there be some overlooked catch, etc.). Any further insight would be much appreciated. I am a former arbitrageur who has seen what regulators can do and it ain’t always pretty (fortunately I have always been ultra-conservative to the brink of paranoia). But if there is nothing wrong with it, this seems like this is a great move, particularly in this interest-rate environment.

    • @Gerry B: My one piece of knowledge to chip in on this topic is that while tax-free earnings in 529 accounts are very similar to Roth IRA accounts, withdrawals are very different. With a Roth IRA older than 5 years, you can remove only principal and keep the earnings in the account without any penalty. With a 529 account, all withdrawals are prorated to include earnings with principal, so you are always taking the 10% penalty, i.e. the only way to get all of your principal out is to take all of your earnings out as well.

    • Well, the idea of using a 529 for purposes other than college has been discussed for a long time, for example you could use it to hold REITs and defer taxation on the income for decades and come out ahead of a taxable account even after 10% penalty. Of course the gov’t could always change the rules on withdrawals but even the recent (quickly nixed) proposal grandfathered in existing contributions.

      I have personally funded a 529 for my own use as an adult to take college and grad courses, and the withdrawal process was pretty informal. You ask for the money, they give it to you, they send you a tax form at the end of the year. I kept all my tuition bills but they never asked to verify anything. If it wasn’t for school, I imagine you’d pay taxes and penalties when you file your tax return.

      Interesting note by Scott above about pro-ration. That would actually seem to help if you wanted to take a little out early and then save the rest for actual qualified expenses eventually (with no taxes or penalty).

  2. …as to the EE bonds, I thought I’d add a couple of “pros” there: (1) this investment in US government securities is generally subject to federal, but *not state*, taxes; (2) if you are on a “cash” basis for tax purposes, you can defer the federal taxes; (3) even if you are on an “accrual” basis the really big tax bill isn’t likely to come until year 20; (4) there is some probability–small as it may be–that we have seen the end of the era where government securities yield over 2%. No, I don’t believe that is true, but I *do* believe that it has a non-negligible probability of being true, and this is a darn good hedge for that scenario, particularly because you *can* escape with an “early withdrawal penalty” which is actually a good deal less steep than it appears if rates start to increase.

    • (I meant to say “the era where *short term* US government securities yield over 2%–sorry!)

    • So I’ve been thinking about this more as we approach the end of April. The EE alternative seems better and better as each day goes by. It seems particularly attractive to those of us who hold I-bonds issued within recent years with a 0% real interest rate.

      If you hold the aforementioned I-bonds, you are guaranteed six consecutive months of 0%. The last three month of this six month dry spell appear like a great time to escape this long-term-questionable investment with no less-than-5-year penalty (I.e. losing three months’ interest at 0%). The only scenario which would appear counter-indicative is if U.S. Interest rates turn negative (unlikely, but that’s probably what they thought in Geneva until recently).

      Now you either believe that U.S. interest rates will revert to historical, higher levels or you do not. If you believe this, you should not be in 0% real interest I Bonds anyway, because historical real interest rates are nearly 3%. So you’d certainly want out of those recently-issued I Bonds unless you believe we’re in a “new normal.” And getting out with a real penalty is worse than getting out with no penalty.

      But if we’re in a “new normal,” the EE is a screaming deal. You are getting more than a full percentage point better than the “big boys” buying a 20-year Treasury. Plus, you are getting a free “put,” because after 11 months of illiquidity you can put this EE Bond back to the Treasury at any time for *more* than you paid for it. So what if it’s just a little bit more. Buyers of Treasury Bonds would kill for free puts like that.

      By the way, I believe the current “interest rate” on EE Bonds is 0.1%, not 0.5%, although that hardly matters. More importantly, there’s a very good chance that the doubling provision I’m relying on will be modified soon–this having been done twice already.

  3. Big changes coming soon for GE Capital Bank as announced last week (GE is selling them off). So that interest rate may or may not stay.

  4. Jonathan this is great info, this and the national deals you post are the reason I subscribe.

    I called the Consumers Credit Union to get more details, you where not joking about the hoops. You have to open a Credit card and spend $1000 a month to get the 5% apr for only ~7 months guaranteed .

    -Jacob

    • Yes, I’m no longer active with rewards checking accounts; I think I’ve had 5 or so but the last two the interest rates dropped very quickly after setting it all up. For Consumers CU, I would really just consider it a 3.09% APY account myself. The rate might last longer; it was only guaranteed until August 2015 before but the guarantee was extended. It will probably end at some time of course.

      For the time and effort, these days I’d much rather apply for a credit card and get a $500 value bonus that is non-taxable within months. At a 25% tax bracket, I’d have to get $667 in equivalent bank interest which at such low interest rates would take many times longer even with a rewards checking account at 3%. I’m sticking with the low-hanging fruit for now.

  5. Also I was thinking I have a 2 year old, do I really need a College saving plan, since assuming hes not making much off the couple of thousand I set assigned hes not going to pay taxes on that anyway.

    • I believe that by opening a 529 plan for the benefit of your child you keep the account technically in your name, so when it comes time to calculate how much financial aid your child qualifies for the assets in accounts in your name (including said 529) are weighted less than assets in an account in your child’s name (like a savings account that belongs to them). So the 529 allows you to get the preferential tax treatment without stashing the assets in your child’s name without decreasing your “need” from a financial aid perspective.

      • Thats very interesting, it would be good to know how financial need is calculated. Do you have any info on this books or sites that you recommend?

        The problem is that need may be calculated differently in 16 years vs. now 🙁

        But even if that was the case, cant you just throw the entire fund into the account right before college? It looks like there is no limit but it seem like it could get complicated if its over $14k.

        I am just thinking that it would be better to keep investing options completely open vs. tied down to a plan, and there is a penalty if your kid doesn’t goto college

  6. I just opened a checking and savings account with Ally, I want to keep everything in savings and have checking overdraft from savings, what If I were to overdraft 6 times a month, every month? Always having the money to cover transactions from savings, would they have a problem with this? I would not be borrowing money from them, I would not be going over the 6 transaction limit for the savings account, I should be fine, right?

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