As we have seen this year, the best CD deals are not short-term CDs. The best deals are the long-term CDs which have mild early withdrawal penalties. They return more than short-term CDs even if you close them early. In addition, if rates continue to stay low, you get the benefit of locking in rates for the long term.
I first noticed this deal with the long-term CDs early this year at Ally Bank which has an early withdrawal penalty of only 60 days. In my January Ally Bank CD review I showed how beneficial this can be. As I described in this post, others have been noticing this benefit with Ally and at other institutions like Discover Bank and Pentagon Federal Credit Union.
With the rate cut that Ally Bank made to its 5-year CD last week (2.55% APY as of 10/11/2010), I thought it would be useful to update the table that shows the effective returns after paying the early withdrawal penalty. In addition to Ally Bank, I've included three other institutions. First is Pentagon Federal Credit Union's 7-year CD which currently has the best yield for any CD available nationwide (3.49% APY as of 10/11/2010). The last time I compared these two was on September 1st when Ally Bank's 5-year CD yield was 2.74%. In addition to these two, I've added two other 5-year CDs.
One addition to the table is the CD from Fort Knox Federal Credit Union which is offering a 3.00% APY 5-year CD (as of 10/11/2010). My last review of Fort Knox FCU was in July. Since that time many of its short-term CD rates have fallen considerably. Also, it placed geographic restrictions on its special CDs. However, its regular CDs appear to be available to all members. In addition, the credit union continues to offer an easy way to qualify for membership via the American Consumer Council (see my review). One thing that I just noticed about Fort Knox FCU is its mild CD early withdrawal penalty. According to its membership agreement, the penalty is only 90 days of interest. However, it should be noted that the agreement states that the withdrawal of principal may be made only with the consent of the credit union.
The second addition to the table is the 5-year CD from Acacia Federal Savings Bank. It currently has the best nationally available 5-year CD rate of any bank (2.85% APY as of 10/11/2010). Acacia Federal used to have a harsh early withdrawal penalty, but this appears to have changed. According to the bank's truth in savings web page, it's only 6 months of interest for terms over 1 year.
For all four institutions, I've included links to the disclosures which describe the early withdrawal penalties. The disclosure excerpts and links are located below the table. Institutions don't always have their latest disclosures on their websites, so please check with the institutions to ensure you have the latest official details.
I did not include the 5-year CD from Melrose Credit Union even though its 5-year CD rate is 3.03% APY. As I described in this post from last year, its early withdrawal penalty is harsh and complicated.
Below is the updated early withdrawal yield table that shows approximate average yields you would receive if you close these CDs early. It allows you to determine if it makes more sense to buy a long-term CD rather than a short-term CD. The early withdrawal yields are based on the spreadsheet developed by Bogleheads forum members. It's available from the Bogleheads Wiki: Comparing CDs. It should be noted that the following simple formula comes very close to this spreadsheet:
Post Penalty APY = (Full APY) x (D - P) / D
D = days into term when the CD was closed.
P = days of the early withdrawal penalty
These CD rates are based on the rates listed at the institutions' websites as of 10/11/2010.
Approximate Yields After Early Withdrawal Penalties
|Year of Early Withdrawal||PenFed's 7-year 3.49% CD||Fort Knox FCU's 5-year 3.00% CD||Acacia Federal's 5-year 2.85% CD||Ally's 5-year 2.55% CD|
|1-year EWP||3-month EWP||6-month EWP||60-day EWP|
|year 5||2.78%||3.00% (no penalty)||2.85% (no penalty)||2.55% (no penalty)|
|year 7||3.49% (no penalty)||n/a||n/a||n/a|
- PenFed's early withdrawal penalty: Page 2 of PenFed's CD application (2/08), it states the following for certificates with a term of 7 years:
a) If redeemed within 365 days of the issue date or any renewal date, all dividends will be forfeited; b) If redeemed thereafter, but prior to the maturity date, dividends for the most recent 365 days will be forfeited.
- Fort Knox FCU's early withdrawal penalty: Page 33 of Fort Knox FCU's Membership Agreement (Sept 2010), it states the following:
8. Early Withdrawal Penalties. You have agreed to leave the principal of this account on deposit for the full term stated in your account or renewal notice. If all or part of the principal is withdrawn before the maturity date, the Credit Union may charge you a penalty. Withdrawal of the principal amount of your Certificate may be made only with the consent of the Credit Union. Unless stated otherwise, the owner shall forfeit an amount equal to 90 days dividends whether earned or not. The penalty may be calculated at the rate paid on the deposit. The penalty will, if necessary, be taken from the principal amount of the deposit.
- Acacia Federal Savings Bank's early withdrawal penalty: In Acacia's Truth in Savings web page, it states the following:
Early Withdrawal Penalty: We will impose a penalty if you withdraw any of the deposited funds before maturity. [...] For an account with an original term of more than one year, the penalty will be 6 month's interest on the amount withdrawn.
- Ally Bank's early withdrawal penalty: On page 4 of Ally Bank's Deposit Agreement (July 1, 2010), it states the following:
Early Withdrawals - If you withdraw funds from your CD prior to the maturity date (except in the case of death or legal incapacity of any owner), you will be assessed a 60-day interest penalty except for the Ally No-Penalty CD, which does not have a withdrawal penalty after the first six (6) days of funding. The Ally No-Penalty CD does not allow withdrawals during the first six (6) days following the date you fund your account (except for the death or legal incapacity of any owner). If you have a Raise Your Rate CD, the 60 day interest penalty will be calculated using the interest rate that applies to your CD at the time of your early withdrawal.