Best Long-Term CD Rates After Early Withdrawal Penalties

Update 9/20/11: Discover Bank has cut its 10-year CD APY to 2.50%, and Ally has cut its 5-year CD APY to 2.09%.

This is another comparison of some top long-term CDs if the CDs are closed early. I added one new credit union to my comparison since last week. A reader emailed me about his positive experience with Garden Savings Federal Credit Union. He considered this credit union a "solid and competitive credit union, with pretty liberal membership features". He also said that he "found it very easy to join The Newark Museum and then to open up a CD." I just did a new post on this credit union. Its 5-year CD rate isn't the best, but it's higher than Ally's 5-year CD rate and its early withdrawal penalty is just a little bit bigger at 3 months of interest.

Like Garden Savings FCU, Velocity Credit Union makes it easy to join via an association. It currently has a higher rate on its 5-year CD, but the early withdrawal penalty is larger (6 months of interest). I just did a new post on this CD.

Another reason for an updated table is a lower Ally Bank 5-year CD rate. It's now 2.11% APY as of 11:20am EDT 9/15/2011. Hopefully, it won't keep falling. For the last month, the rate has been falling a few basis points every few days. I'm glad they have the 10-day best rate guarantee. Once you apply, you don't have to worry about getting stuck with a lower rate.

I'm happy to report that the 5-year CD rate at Velocity Credit Union and the 10-year CD rate at Discover Bank have remained the same. Don't forget AAA members can receive an extra 5 basis points at Discover Bank. This is one of the very few CDs where you can still get a 3% APY.

Below is a comparison of the four CDs. The table shows the yields for each year after the CD is opened. These yields take into account the loss from the early withdrawal penalty. As you can see, Ally has the best rate if the CD is closed at one year although it's not much higher than Garden Savings. If the CD is closed at two years, Garden Savings has the top rate, but it's just a little bit higher than Velocity and Ally. At year three, Discover Bank becomes the leader and remains the leader except for year five when Velocity CD matures.

As we have discussed many times in the last year, there are two risks if you plan to make use of an early withdrawal:

1. The bank refuses to allow an early withdrawal
2. The bank increases the early withdrawal penalty on your existing CD

I have more discussion of these risks in my last long-term CD strategy review.

The early withdrawal yields listed below 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 9/15/2011:

Approximate Yields After Early Withdrawal Penalties

Year of Early Withdrawal	Discover's 3% 10-yr CD latest rates	Velocity CU's 2.62% 5-yr CD latest rates	Garden Savings FCU's 2.26% 5-yr CD latest rates	Ally's 2.11% 5-yr CD latest rates
Early Withdrawal Penalty	9 months	6 months	3 months	2 months
year 1	0.74%	1.30%	1.69%	1.76%
year 2	1.86%	1.96%	1.97%	1.93%
year 3	2.24%	2.18%	2.07%	1.99%
year 4	2.43%	2.29%	2.12%	2.02%
year 5	2.54%	2.62% (no penalty)	2.26% (no penalty)	2.11% (no penalty)
year 6	2.62%	n/a	n/a	n/a
year 7	2.67%	n/a	n/a	n/a
year 8	2.71%	n/a	n/a	n/a
year 9	2.75%	n/a	n/a	n/a
year 10	3.00% (no penalty)	n/a	n/a	n/a

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To search for nationwide CD rates and CD rates in your state, please refer to the best CD rates section of DepositAccounts.com.

Tags: Ally Bank, Velocity Credit Union, Discover Bank, CD rates, IRA rates