I just learned that Ally Bank has reduced the early withdrawal penalty for all CD terms to only 60 days of interest. This is a huge change especially for the long-term CDs. Ally's early withdrawal had been 180 days of interest for terms over 1 year. Most banks and credit unions have penalties of at least this much, and some have penalties as high as half the term in interest (that's 30 months for a 5-year term!).
You can see that it's official from page 3 of Ally's deposit agreement:
Early Withdrawals - If you need your funds prior to the end of the term, there is a penalty. All CDs will be assessed a 60-day interest penalty. The exception to this limitation is the Ally No Penalty CD.
If you open Ally's 60-month CD that's currently paying 3.15% APY (as of 1/25/2010), here are the approximate APYs that you would earn if you closed the CD early at the following times:
- 2.10% 6 months
- 2.63% 12 months
- 2.80% 18 months
- 2.89% 24 months
- 2.98% 36 months
- 3.02% 48 months
Here's an example how I calculated the effective APYs for a closure at 6 and 12 months:
( (180 days - 60 days) / 180 days ) * 3.15% = 2.10%
( (365 days - 60 days) / 365 days ) * 3.15% = 2.63%
As you can see, many of these rates are much higher than CD rates available today with comparable maturities. In addition, if rates stay low, you don't have to close the CD. You get protection against low rates that short-term CDs don't offer.
Possible Gotchas?
There could be some gotchas. First, with early withdrawals, there's always the concern the bank could refuse the request. Sometimes bank disclosures give the bank the right to refuse (see post). However, I don't see this in Ally's deposit agreement.
The second potential issue is the time and effort it'll take to close the CD. Readers have reported delays and problems in doing early CD closures at Ally Bank. If you have experienced such problems, please leave a comment.
I did an online chat with an Ally CSR, and asked about this. According to the CSR, you have to contact an Ally Advocate who can submit the closure request. This can be done by phone or secure email while logged into your account. According to the CSR, it'll take 3-5 business days to see the funds in your external account if you choose an ACH transfer. A check that's mailed will take about 5-7 business days from the request. The best option is if you have an Ally savings or money market account. In that case it'll take only 1 business day according to the CSR.
One downside with Ally CDs is that they do not allow partial withdrawals of the CD. A withdrawal of any amount of the principal will cause the closure of the CD. So it makes sense to open multiple small CDs instead of one big one.
Another downside is that Ally is unable to do a one-time interest withdrawal. The only way to withdraw interest is to set up interest disbursements which can be monthly, quarterly or yearly. This can changed during the term.
Note, banks typically allow you to withdraw accrued interest from a CD without penalty. Only the principal is subject to the early withdrawal penalty.
On the positive side, this new early withdrawal penalty applies to existing Ally Bank CDs. I was told this by two CSRs. As I mentioned, the penalty for long-term CDs used to be 180 days of interest. Currently, this isn't an issue since existing Ally CDs are probably paying much more than what you can get now. It could be useful in the future if rates shoot up.
This new early withdrawal penalty is a brilliant loophole in the FDIC's rate caps. It has been reported that the FDIC is requiring Ally Bank to keep its CD rates under the top 5 in the categories listed at Bankrate.com. This came about last year when the American Bankers Association complained to the FDIC about Ally Bank's high rates. Let's hope the bankers don't notice this.
Credit for this find goes to FW member fatwallet21 who mentioned this news in the FW CD thread.
