Long-Term CD Rates and Early Withdrawal Penalties - Updates and Concerns
Jump to section:
- Early Withdrawal Yield Table
- Approximate Yields After Early Withdrawal Penalties
- CD Early Withdrawal Concerns
I'm glad to see Pentagon Federal Credit Union (PenFed) kept its certificate rates the same for November. Its long-term CD rates are very competitive, and I was worried that PenFed might follow others and lower its rates. Here's a recap of PenFed's long-term CD rates:
- 3.49% APY 7-year CD
- 2.75% APY 5-year CD
- 2.50% APY 4-year CD
- 2.00% APY 3-year CD
Minimum deposit is $1,000. The rates are also available in an IRA. These yields are listed in PenFed's Money Market Certificates page as of 11/01/2010. Even though PenFed typically maintains CD rates through the month, they no longer guarantee it. For more details about PenFed CDs and membership, please refer to my PenFed CD review.
As a comparison to the top rates at internet banks, PenFed's 5-year CD rate isn't any better. You can also get a 2.75% APY 5-year CD at Sallie Mae Bank. However, for a 7-year CD, the best you can find at an internet bank is only 2.90% APY at USAA Bank (as of 11/1/2010) and that requires a $95K minimum deposit.
Early Withdrawal Yield Table
Below is an 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. I also included Ally Bank's 5-year CD which has a 2.49% APY as of 11/01/2010 with only a 60-day early withdrawal penalty.
Approximate Yields After Early Withdrawal Penalties
|Year of Early Withdrawal||PenFed's 7-year 3.49% CD||PenFed's 5-year 2.75% CD||Ally's 5-year 2.49% CD|
|year 5||2.78%||2.75% (no penalty)||2.49% (no penalty)|
|year 7||3.49% (no penalty)||n/a||n/a|
As you can see from the above table, if you think you're going to leave the CD untouched for a little over 3 years, PenFed's 7-year CD is better than Ally's 5-year CD. For more details about Ally Bank's CDs and early withdrawal penalty, please refer to my Ally Bank CD review.
CD Early Withdrawal Concerns
Planning to utilize an early withdrawal on a long-term CD to get a better short-term CD has two potential gotchas: 1) the institution refuses to allow an early withdrawal and 2) the institution increases the early withdrawal penalty during the term of your CD.
Some institutions will include in their disclosures the right for them to refuse an early withdrawal request. That right does not appear to be in either PenFed's or Ally's disclosures.
The second issue is that the institution may decide to increase the penalty on existing CDs. I've received assurances from Ally Bank that they would not increase the penalty on existing CDs. Any changes would only affect future CDs (see post).
I do not have reason to believe that PenFed would change an early withdrawal penalty on existing CDs, but there may be some cause for concern. The reader me1004 posted in this forum thread the replies he received from Fort Knox FCU. Their compliance office appears to maintain that they have the right to increase an early withdrawal penalty on existing CDs. They claim that they only have to give members a 30 day notice before the change.
I'm continuing to look into this issue. Do other institutions have this same policy? And do their regulators have any stand on this issue? I think we all agree that the CD disclosure should be considered like a contract. If it states that the early withdrawal penalty is X, that should be in effect until the CD matures. If an institution can change an early withdrawal penalty on an existing CD, then what stops it from changing the maturity date or the interest rate?
Banks Mentioned in this Post:
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