CD ladder offers best of two worlds

• Don Taylor, Ph.D., CFA, CFP
• On 6:00 am EST, Thursday November 5, 2009

Dear Dr. Don,
I have a $30,000 IRA CD coming due with Bank of America. Can you steer me to a good rate? The best I have found for a one-year IRA is 2.25 annual percentage yield, or APY.
-- Dolores Depositor

Dear Dolores,
You can shop nationwide for IRA CDs using Bankrate's "Compare CD Rates" feature. I did so when writing this reply and could only marginally improve on the 2.25 APY, with a 2.35 APY on a one-year IRA CD.

If you're willing to extend the maturity, you can find an 18-month CD with an APY of 2.7 percent, or a two-year CD with a 2.75 APY. Extend out to a five-year maturity and you can earn 3.7 APY. That's the longest maturity that Bankrate tracks using the Compare CD Rates feature.

You always have to choose between locking in a longer rate or staying short so you can reinvest, ideally at higher rates, in the future. One way to get past this dilemma is to build a CD ladder where you invest in multiple maturities and reinvest in the longest maturity when a CD matures.

The Bankrate feature, "Laddering: How to build a CD ladder," explains this approach in greater depth.

You also should consider when you'll have to start taking required minimum distributions, or RMDs, out of the account or when you may need the money. The Bankrate feature, "Know your required minimum distribution," will help you understand RMDs, which were suspended for the 2009 tax year. Talk to your tax professional if you're uncertain about how RMDs apply to your retirement accounts.

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