I also opened up a couple of Ally Bank 5-year CDs earlier this week as one of the places for my emergency fund, following my previous positive analysis. It went pretty smoothly, here are the steps of the application:

Step 1 select accounts – Choose the account type and term, as well as opening deposit amount. You really can open with as little as $1.

Step 2 personal information – Enter and verify your personal information and identity based on information from your credit report.

Step 3 opening deposit – Either mail in a check or provide account information (routing and account numbers) for electronic funding.

Step 4 account options – Choose how you would like your interest payments deposited (monthly, quarterly, annually) for your CD. Also choose the location (mailed check, back into CD, another Ally account, or external bank account).

Step 5 congratulations – You will have to verify two small test deposits to set up a new bank account. A welcome kit with signature cards will be mailed to you. These must be mailed back in order to avoid backup withholding of interest to the IRS. However, it does not appear to affect the actual funding of the CD.

Previously, I wrote about Ally Bank CDs and how they offer flexibility in the case of rising interest rates. I finally found the time to do the analysis of the 5-year CD that I wanted to do. In particular, I felt that the current yield curve and short 60-day early withdrawal penalty make this certificate of deposit very attractive.

The current Ally Bank 5-year CD yields 2.00% APY (as of 1/05/15). Rates change constantly, but let’s assume you have a certificate of deposit from any bank paying 3.09% APY with an early withdrawal penalty of the last 60 days of interest. (3.09% APY = 3.04% rate compounded daily.) Here’s how your actual annualized interest rate would fluctuate given your holding period.

Some very interesting realizations come out of this:

• After only 4 months, your annualized rate is 1.52%. (Essentially you 2 months out of 4, which is half of 3.04%). This isn’t bad at all, considering their liquid online savings account is currently paying 0.99% APY (as of 1/05/15).
• After 1 year, your annualized rate is 2.57%. The current 1-year CD is currently paying 1.05% APY(as of 1/05/15). I can’t find any bank with a 1-year CD paying anywhere close to 2.57% APY. Try to find one!

• After 2 years, your annualized rate is 2.83%. Ally’s current 2-year CD is currently paying 1.29% APY(as of 1/05/15), although it does have a Raise Your Rate feature.
• After 3 years, your annualized rate is 2.91%. The current 3-year CD is currently paying 1.40% APY(as of 1/05/15). At this point, a few banks offer a similar rate, but this is still amongst the top. The only better one I could find was PenFed which was slightly better at 3.00% APY.

Final benefit: No minimum opening balance!
As icing on the cake, you can buy these CDs in increments of as little as $1. Now, I wouldn’t abuse their policy, if only to avoid the trouble of keeping track of them all. But let’s say you have $50,000 to put aside. You could buy five $10,000 CDs, and so if you must make a withdrawal of $10,000 you’ll just “break” one CD and have the other four intact. For more modest total amounts, you could go into smaller increments, for example at $1,000 a piece.

Ally Bank has been making several customer-friendly tweaks to their product line which are worthy of note. First up are two that give you a way to lock in a higher rate, but with a handy exit plan in case rates start rising due to inflation or other governmental intervention.

60-day Early Withdrawal Penalties
The usual deal for a certificate of deposit (CD) is that you agree to keep your money at a bank for a fixed length of time, and the bank agrees to give you a higher interest rate in return since it allows them to lend more easily. Of course, the purchaser is hoping that rates don’t rise a lot after already being locked in.

If you break that agreement, you get hit with a hefty penalty. It is not uncommon for some banks to take half of all your interest accrued if you “break” the CD. On a 2-year CD you’d lose a year’s worth of interest. On a 4-year CD, 2 years of lost interest. But Ally CDs now have only a 60-day interest penalty for breaking their CDs, from 6 months all the way up to 5 years! (See the Fees tab.)

Since the early withdrawal penalty is so short, you can run some scenarios where you earn the 5-year CD unless rates rise significantly and you can then simply break the CD, pay the penalty, and yet still come out ahead versus going with a shorter CD. The actual break-even requirements depend on how long you’ve held the CD and how high rates go. The longer that rates stay relatively low, the more “ahead” you’ll be since you’ve been earning that higher interest for a while.

2-Year CD with One-Time Rate Bump Another new product is their Raise Your Rate CD. If rates rise, you can have your rate bumped up to whatever the current 2-year CD rate is, any time during your 2-year term. This is nice because you are essentially paying no early closure penalty at all, and you don’t have to re-commit to another 2-year term.

Finally, a few extra small-but-handy details. All Ally CDs can be opened with $5 or $50,000 as they have no minimums. They also offer a 10-day guarantee that you won’t fund your CD only to miss out on a rate hike, or to have your rate drop if your paperwork takes too long to process:

With our Ally Ten Day Best Rate Guarantee, when you fund your CD within ten days of opening or when your Ally CD renews, you automatically get the best rate we offer during those ten days. Most banks offer only one rate—the one you get the day you fund.

Just got this e-mail from regarding my ETrade Bank online savings account:

We are writing to let you know that your E*TRADE Bank account referenced above will soon be transferred to Discover Bank, and become a Discover Online Savings Account. This follows our plan to focus more exclusively on providing optimal investing solutions to our customers. We expect the transfer to occur on or about March 7, 2010.

Discover Bank sounds okay from what I’ve read, and the APY on my whopping 3 cent balance will go up from 0.50% to 1.35% APY, but the only reason I kept the E*Trade account around was for its speedy funds transfers. I don’t use any ETrade brokerage services since they are too expensive and the phone hold times are too long. (I do enjoy the commercials, though.) Time to close the account?

Interest rates are still pretty low as we enter 2010, but I remind people that high nominal rates aren’t always better. Would you rather earn 3% with no inflation or 7% with 5% inflation? In any case, most of us have a chunk of cash and we should still try to earn the most no matter what the rate environment is like right now.

High-Yield Reward Checking Accounts
These are checking accounts that are still fully insured and pay a very high interest rate, as long as you jump through certain hoops each month. This also means that if you make a mistake you’ll forfeit virtually all your interest for that month, so it can be tricky. But for the very diligent, their rates are still averaging around 3-4% APY up to a certain balance limit. Here are a couple of the highest current account available nationwide:

• Royal Bank of Missouri has their Majestic Checking paying 4.30% APY on up to $25k, which requires 10 check card purchases each month, a direct deposit or ACH transaction per month, and online statements only.
• Sierra Reward Checking at 4.09% APY on up to $25k, which requires 12 check card purchases each month, a direct deposit/auto-withdrawal, one BillPay per month, and online statements only.

Online Savings Accounts
These accounts pay a yield that at least a full percentage point (1%) higher than any current money market fund, while still providing easy access and safety with minimal hassles. The primary drawback here is that you are limited to a maximum of 6 withdrawals per month, as it is a savings account. Here are account that represent the range of the best current rates.

• EverBank is offering 1.10% APY for the first 6 months for new accounts. This rate is higher than any 6-month certificates of deposit currently available, which being available for withdrawals at any time. The rate is guaranteed stay in the top 5% of competitive accounts.
• Alliant Credit Union has a non-promo savings account rate of 2.00% APY. Membership is restricted to people with affiliation to a qualifying organization, but the cheapest way around this is to become a member of a PTA or PTO.
• Ally Bank Online Savings offers their “no fine print” savings account rate to 0.85% APY as of 11/12/13. No minimum balances, no monthly fees.
• Veteran online bank Capital One 360 holds up the lower end at 0.75% APY.

Certificates of Deposit
If you are willing to restrict access to your money for a while, your yield can go a bit higher, but not that much. On the other hand, if you think rates will stay low, it may be worthwhile to lock some rates in. Keep an eye on the early-withdrawal penalties if you do think you’ll need to withdraw.

• 3-Year CD at Pentagon Federal Credit Union will get you 3.0% APY. (6-mo. early withdrawal penalty.)
• 5-Year CD at Pentagon Federal Credit Union will get you 3.5% APY. (6-mo. early withdrawal penalty.)

You may have gotten a notice from your bank recently stating something like “Effective January 1, 2010 Your Bank will no longer be participating in the FDIC Transaction Account Guarantee Program.” Citibank is opting out, along with over 1,000 other banks (complete list).

What is the Transaction Account Guarantee (TAG) Program? In response to the financial crisis, the program basically allowed participating banks with all noninterest-bearing transaction accounts – like many checking accounts that earned no interest – to have unlimited coverage by the FDIC. It was part of the Temporary Liquidity Guarantee Program, and was designed to help calm the fears of depositors with lots of money in possibly shaky banks.

Now that some banks are feeling better about themselves, they decided that they’d rather save the money and not participate in the extension through June 30, 2010. According to Bloomberg, the cost of participation will increase to a range of 15 cents to 25 cents annually for every $100 of covered deposits, up from 10 cents currently.

But for most people this shouldn’t be a concern, as you’ll just revert back to the standard $250,000 per depositor covered by FDIC, currently set to last until December 31, 2013. I would hope if you had over $250,000 in cash, it wouldn’t be sitting in a non-interest bearing account!

I haven’t done an interest rate update in a while, as sadly there just hasn’t been that much to write about.

Reward Checking Accounts
These are checking accounts, usually through local credit unions, that pay a very high interest rate if you jump through some hoops each month. However, if you make a mistake you’ll forfeit virtually all your interest for that month, so it can be tricky. But for the very diligent, their rates are still averaging around 4-5% APY on balances up to $50,000. Here’s a recent example at 4.01% APY on up to $25k, which requires 10 check card purchases each month, a direct deposit/auto-withdrawal, and online statements.

For more, see my review of rewards checking accounts and also this list of accounts by state. I’d stick with small local credit unions with limited membership eligibility if possible, as the rates tend to be more stable. I myself got burned with nationally-advertised Evantage Bank that dropped its rates shortly after opening.

Online Savings Accounts Rate Updates

• EverBank is offering 1.10% APY for the first 6 months for new accounts. This rate is higher than any 6-month certificates of deposit currently available.
• Discover Bank is offering 0.85% APY on its new online savings account.
• Ally Savings is offering 0.85% APY as of 11/12/13.

Certificates of Deposit
As stated above, for 6-months or less go with EverBank. In general, CD rates have been very low, and given how fast rates can rise as compared to how much further they might fall, I don’t see the benefit in locking up for money for a long period of time. Even a top 3-Year CD might get you 2.76% APY, according to MoneyAisle.

Remember, the new $250,000 FDIC & NCUA insurance limits per titled accounts are currently extended through 2013.