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Liquid CDs Can't Beat Savings or Money Market Accounts

April 30, 2009

By Clark Schultz | Money Rates Columnist

Banks have been forced to creatively market their deposit products with interest rates so low. Imagine, if you will, a room full of marketing representatives gazing at a giant poster of a 1% CD special that the bank president has put them in charge of promoting. Now it's their job to figure how to make the 1% rate exciting. So the creative thoughts start pouring out...

We will see in the future what these marketing people can come up with, but one of the products that they have already designed is what is called a "liquid CD". A liquid CD is nothing more than a FDIC-insured CD that will allow some penalty-free withdrawals from the account. Some banks will limit the withdrawals up to a certain amount. Other banks will limit the withdrawals for a set time period. Generous banks leave it wide open with their liquid CDs and will allow any withdrawal for any amount at any time. Seems like a good deal right? Not so fast, let's take a look.

Bank of America Liquid CD
The largest bank in the country, Bank of America, offers a liquid CD. They call it the Bank of America Risk Free CD and advertise it as one of their banking specials.  The term for the Bank of America Risk Free CD is 9 months and the current annual percentage yield is 1.30%. The minimum deposit is a reasonable $5,000 and Bank of America limits total deposits in Risk Free CDs to $500,000. The calling card of this bank special is the ability to withdraw funds with no penalty. This is, of course, different than normal CDs where an early withdrawal penalty would apply for taking out any funds before the maturity date of the CD. On the surface this seems like a great benefit. But is it really that useful?

Comparing Account Types
If you compare a liquid CD to a savings account or money market account, you realize that there is very little difference between the account types. Liquid CDs, savings accounts, and money market accounts all allow access to your funds without penalty. Money market accounts actually allow the easiest access because a money market account feature check-writing abilities. For a liquid CD to have any advantage over a savings account or money market account it would have to pay a higher rate. Otherwise, why bother with purchasing the CD unless you were convinced rates were going to fall further? But most banking experts have forecast that bank deposit rates have bottomed out. So now it is time to compare the rates to see how the liquid CD stacks up. In the case of the Bank of America Risk Free CD the answer is not very well. The 1.30% APY is well below the 2% and 3% rates that are quite easy to find on a savings account or money market account. There are many other banks offering liquid CD of some variety, but again savers can find a higher yielding money market or savings account. If rates go up, chances are it will be easier and quicker to transfer funds online from a money market or savings account than to have to formally request a withdrawal from your liquid CD. Remember, time means money.

The marketing staff at banks have done a great job spinning the advantages of a liquid CD. They may even make some sense for certain investors. But in general, take a look at the rates and consider if you might be better off in a higher yielding savings or money market account. Higher rates and more liquidity may mean a better deal.

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