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Putting tax refund in a CD? Get the best rate!

Certificates of deposit are a convenient way of investing a tax windfall. Jean Chatzky has tips on getting the best return.

Q: I am due for a couple of thousand dollars in my tax refund, which I am considering putting into a CD. How do you find the best interest rates?

A: By shopping around. CDs (Certificates of Deposit) are like deposit accounts with strings attached. Essentially, you agree to put your money away for a set period of time. In exchange for that loss of liquidity, you can typically earn a rate of return that's higher than the one you'd get from most money market accounts. It's not complicated in any way to open an account. Here are ways to hunt the best rates down:

Hunting grounds. Bankrate.com (www.bankrate.com) keeps an up-to-date tally of the best rates in the country on its Web site, and many magazines (like Money) and local newspapers print a similar list once or twice a month. You'll also want to check with your bank or broker to see what deals he or she is offering.

Hunting tips. You may find that the larger the deposit you're able to make to a CD, the higher the rate of return. If that's the case at your bank, try to time your rollovers so that you can eventually consolidate several smaller CDs into a larger one to capture the higher rate. If you're trying to choose between CDs or T-bills (T-bills are Treasury securities or bonds that mature in three to 12 months), you'll need a special calculator to put them on a level field. You can find them on the Web.

Jean Chatzky’s Bottom Line
This week: How to avoid fees
When you combine broker's commission, mutual fund management fees, the money you pay to your accountant and taxes, the average investor loses 5 percent to 10 percent of the total value of their investments year in and year out, according to my colleague Jason Zweig at Money magazine.

One great way to trim those expenses: Buy an index fund. These typically have lower expense ratios than actively managed mutual funds, because they're not compensating a manager to make choices trying to outperform the market. And since they buy and sell shares less frequently, there's less of a tax impact on you.

Of course, be sure to pick an index fund that's appropriate for your risk tolerance and your portfolio. Long-term investors in their twenties or thirties may prefer a index fund that tracks the U.S. equity markets, while those who are closer to retirement should probably opt for bond index funds. Below are four of the most commonly tracked indexes:

  • Standard & Poor's 500 Stock Index, which covers the largest companies in the United States.
  • Russell 2000 Stock Index, which tracks small-sized U.S. companies
  • Wilshire 5000 Stock Index, the broadest index covering large, medium and small U.S. companies
  • Lehman Brothers Aggregate Bond Index, the most widely known bond index covering the total U.S. taxable bond market

Jean Chatzky is the financial editor for “Today,” editor-at-large at Money magazine and the author of “Talking Money: Everything You Need to Know About Your Finances and Your Future.” Her latest book, "Pay It Down: From Debt to Wealth on $10 a Day," is now in bookstores. Copyright ©2005. For more information, go to her Web site, .