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Here's What to Do as CD Rates Rise

NEW YORK (TheStreet) -- Hey, have I got a deal for you! A CD that pays five times the average! That's especially appealing in today's tricky savings environment, with rates still pretty low but likely to rise.

Actually, outsized yields are not as rare as you might think. There are often a few banks hungry enough for deposits to pay premium rates, so shopping around pays.  Today, a few moments spent on Bankingmyway.com's search tool will unearth a number of 12-month CDs yielding around 1%, versus a national average of  0.198%.

So what's the best CD strategy when rates are expected to rise?

The first impulse -- to avoid tying your money up for too long -- probably makes sense. The average five-year CD pays a measly 0.746%. You'd kick yourself for locking your money up at that rate if newer CDs were more generous in a year or two.

On the other hand, it doesn't seem likely that yields will rise substantially in the next year or so. The Federal Reserve, which has a lot of influence over short-term rates, has said it probably won't start the rate-raising process until 2015. So it might be worth it to commit to a 12-month CD rather than keep spare cash in a checking, savings or money-market account paying just about nothing.

But it's also important to avoid fixating on rates and to look at actual dollars. On a $10,000 deposit, a 1% yield on a 12-month CD will pay $100 a year. The most generous three-month CDs pay only 0.35% to 0.5%. Yes, that's substantially less on a percentage basis, but is an extra $50 earnings on a $10,000 deposit really enough for tying your money up for an extra six months?

Another factor to consider: what's the penalty for taking your money out of the CD early? On a 12-month deposit, you'd typically lose three months interest for an early withdrawal, and you'd probably give up six months interest on a five-year CD. With yields as low as they are, the penalty would not cost much, but it's nonetheless best to avoid penalties by matching your CD term to your likely cash needs.

Finally, take a look at "rising-rate" CDs that give savers a second chance. The two-year Raise Your Rate CD from Ally Bank, for instance, starts at 1.1% and allows you to pick a time to move to a higher rate, a valuable option if rates rise. On a four-year Ally CD you can raise the rate twice.

Today's CDs don't do much for long-term investors, but they're a decent option for cash you're not likely to need soon but must keep safe  for a rainy-day fund, for instance.

A final caution: many CDs automatically renew, or roll over, into a new CD after the term expires. Since there's no guarantee the new CD will be the best deal around, mark your calendar with the deadline for canceling the rollover, leaving plenty of time to shop around.

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