Gaming the NC SECU Bridge Account as a Boost for Declining Interest Rates

First let me describe what a bridge account is, and then I’ll go into how I’m gaming it. In mid 2007, my credit union began to offer what they call a bridge account. The account is set up with the intent of convincing the novice or reluctant investor to enter the stock market.

What happens is this. You open an account and deposit a minimum of $25. The interest rate on this account is variable and pays quarterly. It varies with the movement of the S&P 500 fund. If the S&P 500 is up for the quarter you receive that return (up to 3%). This may not seem like much, but it translates to a 12.00%APR/12.55%APY. Not bad given current money market and CD rates.

But Slug, what happens if the S&P 500 has another quarter like this last one where it fell almost 10%? Nothing happens. That’s right, your money just sits there and loses no value. You gain no interest, but in exchange you aren’t exposed to any downside in the market. Again not bad.

So how do I game it? Well, in the case where the market is clearly negative and conditions suggest that there will be no quick turnaround the opportunity exists to simply transfer your money out to a regular money market (currently at 3.4%) then switch it back into the bridge account at the start of the next quarter. I moved my money back into the bridge account last week just in time to see the S&P 500 jump over 3%. Even if we’re flat for the next 179 days, I’ll get the full 3% return. Nice. You can make these transfers at any point with no penalty.

The only downsides to this account is that you don’t get full exposure to the upside of the S&P 500 fluctuations and that the maximum you can keep in the account is $3,000 which also serves as a limiting factor on any return. I’m not sure whether you can have this account within a tradional or Roth IRA.

Anyone else out there with experience in this type of account? I’d love to hear your thoughts and feedback.

Read the 2010 UPDATE

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