Ever since I bought the 3-year 3% add-on CD from Northwest Federal Credit Union in October 2015, I was hoping a similar deal would pop up. But no, there hasn’t been any.
After the Fed raised the rate once from 0% to 0.25% in December 2015, they kept finding excuses to delay further increases. Longer term interest rates not only didn’t go up but they actually went down substantially so far in 2016. From the highest point in early November 2015 to the lowest point in early July 2016, the 10-year Treasury yield dropped almost one full percentage point.
Fortunately CD rates didn’t drop that much. The best rates for a 5-year CD stayed around 2.25% during this time. However, if Treasury yields stay this low for an extended period, CD rates are at risk of going lower.
Andrews Federal Credit Union, near Washington DC, offers a 7-year IRA CD at 3% APY. This rate hasn’t changed since early 2015. To hedge the risk of CD rates going lower and staying lower, I decided to lock in the 3% rate at this time. Although the 7-year term feels quite long, the early withdrawal penalty on this CD is only 180 days of interest. If rates elsewhere go above 3% substantially, I potentially can pay the early withdrawal penalty and reinvest at a higher rate. If they don’t allow me to withdraw early, no big deal, I will honor my commitment.
I must use an IRA for this CD because the 3% rate from Andrews is only offered in an IRA. I’m documenting here all the steps I took to move a part of my IRA from Vanguard to Andrews Federal Credit Union in order to buy this CD. Even if you are not transferring an IRA to buy this same CD now, you can see the general process. In case you contemplate making a similar move in the future, you can decide for yourself whether it’s worth the work.
American Consumer Council
I don’t live near Washington, DC but I can join Andrews Federal Credit Union by joining a non-profit organization American Consumer Council (ACC). I just went to ACC’s website and paid the $5 membership fee by a credit card. Besides Andrews, ACC membership also makes you eligible to join many other credit unions.
I got an email from ACC in a few hours with my membership number.
Online Application
I then went to Andrews’ website and applied for joining the credit union. I entered my ACC membership number in the eligibility part. The IRA certificates weren’t in the list of other accounts I could open in the online application. I just applied for the base share savings account.
The minimum deposit was $5 by ACH debit. I gave the routing number and account number of a checking account.
After finishing the online application, I received an email asking me to upload a signed membership application and a copy of my driver’s license. I went back to the online application, downloaded the membership application in the documents section, signed it, scanned it, and uploaded it back. I also uploaded a copy of my driver’s license there.
IRA Application and Transfer Forms
You open the IRA at Andrews by paper forms. The IRA Application and the IRA Transfer forms are on Andrews’ website under Personal -> IRA/Retirement Center -> Forms. Forms 98 and 302 are for a Traditional IRA; Forms 6098 and 6302 are for a Roth IRA.
In the IRA Application form, I marked the contribution type as Transfer, and I put down “84-month IRA fixed rate certificate” under Investment Description. I put the amount I wanted to transfer under Quantity or Amount.
In the IRA Transfer form, I put my Vanguard fund account number (xxxx-xxxxxxxxxxx) in the Current Owner section. I marked One-Time Transfer, with a transfer amount, and I left empty the two boxes Entire IRA Balance and This Transfer Will Close the Current IRA. I only wanted to transfer part of my IRA at Vanguard, not the whole thing.
Andrews Federal Credit Union is federally insured by the NCUA. All IRAs of the same individual at the same institution are aggregated with an insurance limit of $250,000. When you want to leave room for reinvested interest, the maximum principal you can open and still stay under the insurance limit at all times is about $200,000.
I printed the two forms, signed them, and sent them to Andrews by First Class Mail. If you are not sure how to fill out any part of the forms, you can just call Andrews and ask.
Online Banking
The next day after I uploaded the scanned documents to the online application, Andrews sent me a welcome email with my credit union member number. With the member number, I was able to enroll in online banking. I saw my base share savings account there, with a $5 balance.
Three days after I mailed the IRA forms, I saw another account in Andrews online banking. It said 84 Month Nest Egg Fixed with a zero balance. Andrews received my IRA application and transfer forms but obviously they hadn’t received the money from Vanguard yet.
Mutual Fund Shares Sold
Six days later, I received an email from Vanguard notifying me that a transaction was submitted in my account. Another five days later the transferred amount showed up in Andrews online banking.
That was it. Starting from the day I applied online to join the credit union, it took a total of 15 days, including weekends, to get part of an IRA transferred from a mutual fund company to a credit union. Besides mailing two forms, I did everything online. I didn’t have to show up anywhere or call anyone. I could’ve had it done faster by sending the forms with overnight delivery, obtaining wire instructions from the credit union, and requesting Vanguard to send the money by wire. I didn’t bother; I’m OK with completing in 15 days.
Having done the paperwork just this once, I’m now set for 7 years. I set a calendar reminder at a week before the maturity date. Buying a CD at a credit union takes more time and effort than buying a bond fund but it’s not that bad.
After pocketing the price gains from the drop in bond yields, I find the ability to buy at last year’s rate very appealing. It’s like having a time machine. In the previous 7-year CD vs bond fund case study, the CD won. Let’s see if the CD will win again in this new round.
If you also bought the 3-year 3% add-on CD from Northwest Federal Credit Union in 2015 but you didn’t put in the maximum $100k, you can still add more money to it. The advantage of buying at last year’s rate is only reserved for retail investors. A bond fund can’t join a credit union.
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Sam Seattle says
I like the thorough step-by-step guide, including the note on the amount to stay under the insurance limit at all times, and the reminder to set a calendar reminder. Thank you.
anonymous says
I have a roth ira with vanguard with 100k in it. Can I transfer to the Andrews FCU ira and keep it as a roth ira?
Harry Sit says
Of course. Use the Roth IRA forms 6098 and 6302 from Andrews’ website.
John says
Wish it was not restricted to IRA. I would like to store my emergency cash fund and the IRA rules for withdrawal make it an issue
Dave says
I did a similar transaction in July. In talking with a CSR in the IRA dept. I was instructed to scan and email my forms for opening the IRA to Andrews, thereby not having to do the mailing part.
My opening a Roth IRA and transfering from my existing Roth IRA at local credit union went fine.
TaxMule says
I’ve been reading this blog for a few months. There really is some great discussion. This article shed some light on risk tolerance of Harry versus what I do. I feel like I’m a fairly conservative investor at age 49, with a huge portfolio of directly owned bonds. I have some in tax sheltered account and some in taxed accounts. I guess I’m far more aggressive than Harry. I am terrible at timing.
Over the summer I have been selling some appreciated bonds and redeploying. One piece I sold that compared with this 3% CD is Best Buy. That has a 5.5% coupon and matures in March of 2021. So roughly 4.5 years left. I sold that one for roughly 109, so 9% above par. I paid a bit below par in February of 2012. So a bit over 10% capital gain. So I earned roughly 7.72% for 4.5 years. My target for a retirement account is 7%, so this one outperformed.
My reason for selling is that if I held it to 2021, I loose the 9% because the bond will ultimately pay out even par. So there is basically 3.25% left. So whoever bought it from me has a yield to Maturity of roughly 3.25%. Aside from a default, that is worst case. More than likely, unless interest rates go up a lot, the price will appreciate even more as the maturity gets closer. So whoever bought it will likely reasonably be able to sell prior to maturity for over 109. I’m guessing you could get 4%+ for a few years, and still have a 3.25% as a fallback.
This is not a junk bond, it is in the investment grade class.
So I guess I’m pondering – is this really a lot more risky that a 7 year CD at 3.00%?
There was a bank a few years back offering over market rates on CDs. They did go bankrupt and forced investors to rely on the insurance. I know someone who invested over the protected amounts. He thought by titling some account in his name, and some jointly in combinations with his kids would allow separate protections for each account. The FDIC “aggregated” all the accounts and paid him less than his investment. Scary stuff!
Harry Sit says
You got me curious so I looked it up. This bond must have been a junk bond when you bought it. It was upgraded to BBB- (the lowest investment grade) by S&P only a few weeks ago. It’s more risky than the 3% CD for sure. Bond managers and analysts have much more sophisticated tools and models to analyze these versus buying Treasuries. If they see this bond as not so much riskier than Treasuries they wouldn’t leave the yield on this Best Buy bond at 2.9% versus 1.1% on a 5-year Treasury.
gmshedd says
“unless interest rates go up a lot, the price will appreciate even more as the maturity gets closer. ”
I’m not clear how (absent a fall in interest rates) a bond purchased currently at above par ($109) would be expected to appreciate as maturity gets closer. I would think the price would converge to par as maturity approaches.
Harry Sit says
gmshedd – Because short-term yield is lower (“steep yield curve”), it’s possible the price will go higher as the bond gets closer to maturity, but not too close. Imagine with 3 years to go, the 5.5%-coupon bond still has $16.50 worth of interest per $100. The market might price it at $112 if the 3-year yield is sufficiently low. When it gets to 1 year from maturity, however, the price will have to come down, barring negative interest rates.
TaxMule says
I agree that Best Buy is more risky than a treasury. Any corporate bond is rated that way. I’m not suggesting that anyone just go out an buy this one as a one off either. Everyone should do their research. What I am suggesting is that corporate bonds in a retirement account can be pretty valuable. I sold by Best buy to get more yield. More yield is challenging in the current market for sure. But I am able to do it.
In this comparison to the CD, the value of a corporate bond would be that there is a chance to earn more than the current yield. As they get close to the maturity, the value reflects the shorter term. So you might make 4-5% APR if you hold this one 2-3 years. But you will get the 3% if it you hold it. If you are willing to go a longer term, which every newspaper article discussing bonds 101 says NOT to do, you can make a lot more. They have been warning about this for more than 10 years. If you would have bought 7% coupon corporate bonds 5 years ago, you would have 35% paid back, plus a nice appreciation. I can’t see losing that back when/if rates go up. I will say, I have seem stock mutual funds I own do that – twice – in the 2000s alone.
On your research, I see that S&P has them at BBB-. But Moody’s has them at Baa1 – three notches above junk. I’m not sure why there is a difference. I’m not sure why they use different letters either. It makes it all confusing. I have this one in another account (an HSA) and I usually get notifications of upgrades/downgrades. I did not see this one moved to junk. I’m slightly concerned you say that somewhere. I did not get an email on an upgrade recently either. Maybe I’m missing something.
They way I research these is reading the Moody’s reports. My brokerage makes those available. If it makes sense to me, I’ll buy it. I prefer companies I shop with. When I buy bonds like RiteAid, I ‘ll start shopping there instead of their competitors. That is another doble check. So if the stores are falling apart, I’ll sell.
I just re-read the 2012 Moody’s on BB and the most recent from 2015 (a bit old, which is always annoying). In 2012 they were bumped down to Baa2, so one notch lower than now. That was the value time to buy it. In 2012 they had 1.5B in cash reserves. Now they have 3.5B. Their current debt is around half of that. That is a huge improvement. I know from shopping that they price match Amazon. They have better margins than Amazon or any of their competitors according to Moody’s. I recently bought a new TV there. Then I used points from that for my daughter college computer. Then on both items, they gave me money back when the prices dropped within 45 days. They really are better than Amazon. But that only hit me this year. It all fits in.
So yes, a bit more risk. But it doesn’t seem like that much more to me. Even junk bonds only default a very low percent of the time (3-4% I think). So with 3.5B in cash, well above junk status, I’ll be surprised if they don’t call these at the earliest time and not issue any more debt. I can live with that risk all day.
I’m not trying to brag. I just think more people would use corporate bonds if they knew about them. Fixed income is 2x the size of equities. Super rich guys buy them all the time. They are not like a stock that needs good new on a quarterly basis. Just stay in the game and keep paying the interest twice a year. They need less monitoring than stocks too. I found your site when I was looking for info on marginal tax rates. I think anyone concerned with that would be able to figure out corporate bonds.
Harry Sit says
I looked it up at Fidelity. It listed these rating change events:
S&P RATING UPGRADE UPGRADED TO BBB- ON 07/26/16
FITCH RATING UPGRADE UPGRADED TO BBB- ON 08/27/15
MOODYS RATING UPGRADE UPGRADED TO Baa1 ON 08/24/15
S&P RATING UPGRADE UPGRADED TO BB+ ON 08/10/15
FITCH RATING UPGRADE UPGRADED TO BB ON 09/03/14
S&P RATING DOWNGRADE DOWNGRADED TO BB ON 11/21/12
Anyway, everything you mentioned, including the price movements when it gets closer to maturity, cash on hand versus debt, margin, etc. are known to the market participants. It’s very hard to argue they priced it wrong. They don’t leave money on the table like that. The risk is reflected in the price. There has to be something, even if it’s not obvious to you and me.
I remember a few years ago Best Buy was viewed as in trouble. Their CEO resigned due to an affair with an employee. I guess the new CEO turned it around. It wasn’t that clear the turnaround would be successful when S&P downgraded it to BB. Moody’s was more optimistic and proven right. It could’ve gone another way.
TaxMule says
There is more risk. Sure. I think it is a very small amount of extra risk. That extra risk is rewarded. You seem to this there is more. Honestly, I don’t know to measure that in a number. I do know that in 15 years, I’ve done well with bonds. They are 3/4 of my portfolio. Not bond funds, but directly owned bonds. The key advantage I have is the ability to hold them if needed. I sell some if they go over par. That adds to the coupon yield over time. Plus there is no annual expense. There are trading costs though.
I hope that if you think corporate bonds are too risky that you don’t buy stocks directly. Those are lot more risky.
On the junk/non-junk, I need to see why I didn’t see that on Ameritrade. That does explain why the value went up so much recently. What happens is that High Yield funds can’t hold investment grade bonds and vice versa. So there are forced sales when they transition. Those can be good times to buy. I sort of remember the split rating in hindsight. I don’t think the value ever went below the .90 range though.
I do see why some of your other posts mentioned that you have no exposure to corporate bonds. If I go by the book, I should have more stocks and stock funds. If I had only taken the money I had lost in stock funds when I was 32 and invested in it safe munis and corporate bonds, I’d have a lot more money right now.
Harry Sit says
No doubt the risk is rewarded. Risk is simply bad things can happen. If bad things don’t happen, you get paid for your bravery. The reward is embedded in the price. The market determines how much you should be rewarded for taking what level of risk. The reward you received is proper. It’s not like you identified a secret sweet spot the market consistently misprices, giving you a large extra reward for only a little bit of risk. On the other hand, I’m also not saying that the market is always too optimistic, and therefore you should never buy corporate bonds. The risk and reward balance out.
Contrast that with buying CDs at select credit unions. The FDIC/NCUA insurance removes the credit risk. The early withdrawal option reduces the term risk. You get a higher yield than Treasuries. That’s an advantage we should take.
Sidras says
How should I complete the Roth IRA paperwork if I wanted to transfer the whole account from Dodge&Cox to Andrews? Should I skip the field ‘what amount to transfer’ by marking ‘close the account’ at the mutual fund? The value is less than $40K, so no problems with FDIC limits.
Your article got me pondering whether it would be best for me to eliminate my Int’l fund at Dodge by totally closing the account there and at the same time move to ‘bond’ side a bit as I need more fixed income to balance our retirement portfolio’s AA a bit. Int’l funds haven’t done well for a good while plus we have Int’l exposure in the 401k plan as well.
If I’m not mistaken, I should not have any issues with the IRS and I’m not obligated to tell it that I moved my Roth IRA account from Dodge and Andrews, right? I’m guessing Dodge and Andrews will take care of that part.
Another question… Say the current $40K balance of this RIRA consists of $30K contributions, $5k dividend & gain reinvestments, and another $5k market gain. After I transfer to Andrews and suddenly I need money. I’m guessing I must possess good records to prove that I’m OK to withdraw $30K or otherwise I’ll be in trouble with the IRS. Andrews will not receive such break-down from Dodge, right?
Finally, I use Vanguard where I enter balances of our outside investments in order to obtain our retirement portfolio’s rough AA, so what would you use for a CD? Perhaps VPMXX ticker would be the most conservative as far as FDIC insured fixed income investment goes. Agree?
Thanks, Sidras
Harry Sit says
If you want to transfer the entire account, just check those two boxes: entire balance and close account. When you get a 1099-R next year about the transfer it will have the correct code indicating it’s a transfer and thus no taxes are due. Just enter it into your tax software. You should keep track of your contributions whether you transfer or not. See Maintain A Roth IRA Contributions and Withdrawals Spreadsheet. I don’t use Vanguard to track outside investments but I agree any money market fund symbol will do.
Sam S says
Thank you for the link to the spreadsheet. Now I got some homework to do, too.
Sidras says
Thanks for a quick response. What/where do I check if I use paper tax returns (or FREE Tax Fillable Forms via the IRS site)? My taxes might get complicated as I approach my retirement, but now it’s still too easy to bother with TT or other software.
“When you get a 1099-R next year about the transfer it will have the correct code indicating it’s a transfer and thus no taxes are due. Just enter it into your tax software. ”
Thanks
Harry Sit says
I just looked it up. Transferring from one IRA to another IRA of the same type actually does not trigger a 1099-R. So nothing to report. From 1099-R instructions:
“Transfers
Generally, do not report a transfer between trustees or issuers that involves no payment or distribution of funds to the participant, including a trustee-to-trustee transfer from one IRA to another IRA … …”
TaxMule says
I can’t seem to comment directly on this, so I added it to the end.
As these bonds get close to maturity, the yield will go down even more. Yes, eventually the price will converge on zero. Right now this one is still trending up. There are a lot of factors all at work.
Everything Harry said is correct. I think there is even more to discuss somewhere. I did some clean up of my records on the bonds I have sold in the last year or so. Most corporate bonds I have held for 3-5 years ended up yielding 6.5-20+ percent APR, depending on coupon, risk and duration. But those were the winners. Some I just hold.
I did get a report from my broker after mentioning this blog. I was caught off guard by a bunch of short calls. I just sold one that had a 08-2015 call for a large premium. It only had less than 2% left, so I sold and redeployed. I had one that went to High Yield, then back to investment grade. That pulled 15.8% for 2.8 years after a sell.
Maybe Harry would consider a topic on overall risk? I’m still concerned why I’m selling at 3% when others are buying.
“unless interest rates go up a lot, the price will appreciate even more as the maturity gets closer. ”
I’m not clear how (absent a fall in interest rates) a bond purchased currently at above par ($109) would be expected to appreciate as maturity gets closer. I would think the price would converge to par as maturity approaches.
Harry Sit says
Good job in getting the good returns. Now the question is when you consider both the winners and the ones you hold whether you would’ve done just as well or even better if you used a corporate bond fund. You are basically running your own bond fund. They have the scale, knowledge and skills, but they charge you a fee. Where does your home-made bond fund land in Morningstar when you compare it with professional bond funds?
TaxMule says
Thanks Harry. I’ve been doing this more and more each year. The overall return this year started to get too high. I know that’s a good thing, but it raised a lot of red flags for me. The year-to-date for my retirement account is 18+% right now. But that includes about 10% or so in high quality dividend paying stocks. Blue-chip issues like GE, Amgen, DTE, stuff like that. A chunk is High Yield too. We are in a huge bond rally though. Maybe it will keep going, but it sure seems like it will end. So when I look at my portfolio and see that a bond is trading at 1.18, I look to see if it makes sense to sell it now, and take that money off the table. If I hold it, it just continues to go down to the zero mark, eventually.
Even though I have issues from a few years back, I still have been managing to buy some good stuff this year, last year and 2014. If you want investment-grade, one I bought in June was Kohls. Brick and mortar stores have a cloud over them. But they’re going to use those buildings for something. In this sideways economy, Kohls is doing okay. The big ding on their report is that they did not manage to capture a larger share of the JCPenney market that was given up. I can live with that. Also, it is super long-term – 2044. But it pays 5.75% . I bought it at .90 cents on the dollar in June. It’s trading at .99 right now. A bond like that will get beat up if rates go up significantly. But all signs point to them being edged up over time. It might still be worth buying. One bond is a bad idea. But 5-10 positions adds diversification.
I don’t just randomly pick these things. I have two brokers that I deal with. They give recommendations. They read the S&P’s. If they find a decent one, I’ll review the S&P, and decide whether it makes sense or not. Kohl’s made sense, so I pulled the trigger. In a way, I swapped Best Buy for Kohls.
One advantage a small investor has over an institutional investor is size. We don’t need to manage m(b)illions of dollars of assets. Just enough for our own portfolios. An interesting thing would be if you look at the top 10 holdings of a successful mutual fund, and only held those 10 positions, what would your return be? I suspect it will be higher than the fund’s actual return.
gmshedd says
Thank you, Harry, for pointing out this 3%er. I had the same experience as Dave (above), scanning and emailing the IRA application form to IRA@andrewsfcu (+.org). This allowed me to be certain that the 3% rate would apply. I once lost a 3% rate over a weekend!
As for the bond discussion, it seems to me that defined-maturity bond etf’s (e.g., Bulletshares 2020 Corporate Bond Fund) offer a middle road that reduces the risk (relative to a fixed duration fund) of price depreciation due to interest rate increases through the ability to retrieve par by waiting until maturity, and reduces credit risk (through diversification) relative to purchasing individual bonds. I’ve purchased some high yield exposure through these ETF’s, but the investment grade corporate funds sell at a premium to par and the yields are barely better than a comparable maturity CD, so why bother?
Harry Sit says
gmshedd – The reduced risk of course comes at a cost. As you see in my previous comment, holding to maturity means you have to endure the low yield in the last part of the bond’s life. The fixed duration bond funds normally sell their bonds when most of the juice is already squeezed out and there isn’t much left.
Dan says
Can I rollover my 401k directly into Andrews FCU? I don’t see this option in their literature.
Dave says
Send an email to ira at andrewsfcu dot org and ask how to do it.
I’m sure they would help.It “might” take 24 hours for the answer .
jim says
Do you know for next if it is possible to open up a nondeductible ira with them and then convert it to a roth ira the next day because I make too much just to open a roth ira?
Harry Sit says
I don’t know. You can ask them by phone or email. The easiest would be transferring an existing IRA to Andrews and continue contributing and converting elsewhere.
jim says
Thank you for the idea. They email me back but didn’t seem like a straight answer so I’ll just open up next year with Vanguard, convert to roth ira and then transfer to them.
The small penalty makes this a great deal for ira’s. I transferred 200k of roth ira to them so it will be interesting to see how this fares compared to the market over the next 7 years.