When CD rates starting rising in 2023, I had the chance to help a lot of people open CDs at my branch that I never would have seen otherwise. One common scenario I witnessed was when an elderly couple would go back and forth about buying one CD or splitting the money into multiple CDs. After a few moments of pondering, they would turn to me and ask, “Does it make any sense to split them?”
I am going to answer that question here.
Let’s say you have $100,000 to put into a CD that’s paying 5% APY for 12 months. That amounts to an interest payment of $5,000 after a year. If you split the CDs into $50,000 chunks, what happens with the interest? Each CD would make $2,500 in interest, so you would add both together to arrive at $5,000 interest. Either way, you make the same interest.
If the interest payment doesn’t change, why would you want to split CDs?
I have only seen 2 scenarios that make sense for splitting CDs. I’ll explain them below:
1) Different beneficiaries for each CD. If you have 5 grandchildren that you want to name as beneficiaries on your CD money, then it makes sense to split them up. Instead of naming 5 beneficiaries on one account, go ahead and set up a separate CD for each grandchild. Record-keeping is easier, and there’s less room for a court challenge. Also, if the 5 grandchildren don’t live in the same city, you can disburse the funds as each one is available(assuming they are all of legal age, which is a different topic altogether). If all 5 were on one CD, you’d have to wait for all 5 to be present before funds could be distributed in most cases. If they all live in a different state, that would create a logistical nightmare. More than likely, they would all come to town for the funeral, but the death certificate wouldn’t be ready by then, so they’d all go back home and have to make a return trip just to sort out the money situation. With 5 separate accounts, you could take each account one at a time as each grandchild becomes available to meet at the bank. Typically, CD early withdrawal penalties don’t apply in the event of death. I am lumping any kind of Trust or Estate situation into this category as well.
2) There’s a chance some of the money may be needed prior to maturity. Let’s say you’re thinking of buying a property in the next 6 months and you set the funds for that purchase into a CD to earn interest along the way. Suddenly, 2 months later, the price drops and it becomes a competitive situation and you need the funds asap. You break the CD, pay the penalty, and purchase the land. However, you’re a bit miffed that you had to pay a CD penalty. Usually, in this type of situation, the bank charges the CD penalty based on the entire amount of the CD. If you know ahead of time that some of the money might be needed, you could set aside whatever that amount is into its own CD and put the rest into a separate CD. Then, if you need to break the first CD, your overall penalty is less than it would have been if you had one larger CD. This strategy depends on the bank and what the CD penalty is, so it may not apply in your situation. Check with your bank. If you end up NOT needing any funds early, then the worst that happened to you is one extra set of paperwork to keep up with. You don’t actually lose anything going this route if you end up not needing the funds ahead of time.
