Several banks and credit unions have been cutting their CD rates since the Fed's mid-2013 pledge. This has been especially true for Ally Bank. Its 5-year CD APY has fallen from 2.32% to 2.14% since that mid-2013 pledge. Discover Bank's 5-year and 7-year CD rates have also fallen. However, its 10-year CD APY is still 3.00%. It has remained this way for almost a year, and don't forget AAA members can receive an extra 5 basis points. This is one of the very few CDs where you can still get a 3% APY.
Ten years is very long, but Discover Bank's early withdrawal penalty for this CD is 9 months of interest. So you can close the CD early with this penalty. How much does this penalty affect the yield when you close the CD early? One easy example is if you close the CD at 18 months. The 9-month penalty would erase half of your accrued interest. That would cut your effective yield in half from 3% to 1.50%. As you can see in our 18-month CD rates table, this compares very favorably with the best 18-month CD rates.
Ally Bank has the most favorable early withdrawal penalty of 2 months of interest. However, its 5-year CD yield is quite a bit lower than Discover's 10-year CD yield. So if you're going to close these CDs early, it's not obvious which CD would be the best.
Ally Bank's 5-year CD rate has fallen so much that there are a few credit unions which currently offer much higher 5-year CD rates. As of 9/8/2011, the best nationally available 5-year CD APY is 2.68% at Melrose Credit Union. The second best is 2.62% APY at Velocity Credit Union. Both of these credit unions can be considered "all-access" credit unions since they make it easy for anyone in the nation to join.
Below is a comparison of the Discover Bank's 10-year CD, Ally Bank's 5-year CD and Velocity Credit Union's 5-year CD. 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 rates when the CD is closed before 2 years. However, at 2 years, Velocity's CD takes the lead. Then at 3 years, Discover Bank takes the lead except at 5 years when Velocity's CD would be free of a penalty.
I decided to choose Velocity's CD instead of Melrose's CD since Melrose has a harsh and confusing early withdrawal penalty. Velocity's EWP is the standard 6 months of interest. I have more details about this credit union in my last Velocity Credit Union CD review.
As we have discussed many times in the last year, there are two risks if you plan to make use of an early withdrawal:
- The bank refuses to allow an early withdrawal
- The bank increases the early withdrawal penalty on your existing CD
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 9/8/2011:
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||Ally's 2.14% 5-yr CD latest rates|
|Early Withdrawal Penalty||9 months||6 months||2 months|
|year 5||2.54%||2.62% (no penalty)||2.14% (no penalty)|
|year 10||3.00% (no penalty)||n/a||n/a|
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