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Ken Tumin founded the Bank Deals Blog in 2005 and has been passionately covering the best deposit deals ever since. He is frequently referenced by The New York Times, The Wall Street Journal, and other publications as a top expert, but he is first and foremost a fellow deal seeker and member of the wonderful community of savers that frequents DepositAccounts.

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Comparing the Best Long-Term CD Rates After Early Withdrawal Penalties

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Comparing the Best Long-Term CD Rates After Early Withdrawal Penalties

I thought it was a good time for another comparison of the top long-term CDs if the CDs are closed early. Unfortunately, two of the banks that were in my last comparison have cut their rates. As you might have expected, Ally Bank continues to make small rate cuts. The cuts have slowed a bit over the last couple of weeks, but there was another tiny rate cut yesterday that lowered the 5-year APY from 2.04% to 2.03%. Discover Bank slashed its 10-year CD APY from 3.00% to 2.50% last month. Due to that big cut, I've replaced Discover with Pentagon Federal Credit Union's 7-year CD. As I described yesterday, PenFed's 7-year CD has a large early withdrawal penalty of 1-year of interest. That's the reason I have excluded it from my recent comparisons. However, the rate is now high enough (relative to the others) to offset this large penalty.

One risk with this long-term CD strategy is that the bank or credit union could raise the early withdrawal penalty on the existing CD. As we learned with Fort Knox Federal Credit Union, this is an actual risk. As I reported last month, the NCUA ruled in favor of Fort Knox FCU. It should be noted that even though the institution may be able to increase the early withdrawal penalty, they do have to give you 30 days notice, and during this time you should be able to close the CD with the existing EWP.

There may be risks that it could be more costly than you had expected to close a CD before maturity. However, there's also the risk that interest rates will stay low for a long time. Using CD ladders with long-term CDs is a good strategy to help with both of these risks.

With Discover Bank removed from the comparison and PenFed added, I now have three credit unions in addition to Ally Bank. I consider all three of these to be all-access credit unions in that anyone can join by first joining an association. PenFed makes this easy. As I described yesterday, you can join the association online while you are applying for PenFed membership, and the minimum cost is $15. Velocity Credit Union also makes it fairly easy in their online application, and the cost is also $15 (see my review). It's a little more difficult and expensive at Garden Savings FCU. There's no online application, and the cost to join the association is $50 (see my review).

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. Ally Bank no longer has the best yield when the CD is closed at year one. Due to its recent rate drops, Ally's CD is now tied with Garden Savings FCU. Soon after year two, Velocity Credit Union's post-penalty yield takes the lead. Due to PenFed's large early withdrawal penalty, its early closure yields stay below the other credit unions. However, PenFed has an advantage over Ally Bank in year 4 and 5.

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 10/06/2011:

Approximate Yields After Early Withdrawal Penalties

Year of Early Withdrawal PenFed 7-yr 2.75% 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 2.03% 5-yr CD latest rates
Early Withdrawal Penalty 12 months 6 months 3 months 2 months
year 1 0.00% 1.30% 1.69% 1.69%
year 2 1.37% 1.96% 1.97% 1.86%
year 3 1.83% 2.18% 2.07% 1.92%
year 4 2.06% 2.29% 2.12% 1.94%
year 5 2.19% 2.62% (no penalty) 2.26% (no penalty) 2.03% (no penalty)
year 6 2.29% n/a n/a n/a
year 7 2.75% (no penalty) n/a n/a n/a

Searching for Top CD Rates

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, CD rates, IRA rates, Pentagon Federal Credit Union, Garden Savings Federal Credit Union

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Comments
10 Comments.
Comment #1 by jacob posted on
jacob
In addition to your post, I wanted to point out something seemingly obvious yet very clever and is attributed to the thread on the senate credit union post. Someone mentioned they were given the right to close a higher interest cd early without penalty as that is a good deal for the bank and in this case was a good deal for the investor as they gave up a high rate for a few months to put money in for 5 years at 3.3%. What this reminds us that in a couple of years, these 5 year cd's that are 2.5% to 3% will be 3 year cd's and its very likely that if rates go up, the 3 year cd rate could be 3% when the prevailing 5 year rate be 4 or 4.5% and at that time you might be able to close the cd without penalty, especially if you are buying a new cd with the same bank.  In addition after a couple of years, we will see if banks try to ammend their EWD policy and that risk of them changing it during the life of the cd will also be better known as I would expect that to get alot more attention if rates are indeed rising which after years of them dropping will be very newsworthy. 

1
Comment #2 by Anonymous posted on
Anonymous
Dream on, dream on dream on #1--sorry BUT rates ain't goin up for 7-10 yrs! Take the int. rate and run for the hills if you get over 1%!!! Months ago people were turning up their noses at Apples 3.50% for 10 yrs and Discovers 3% for 10 yrs---now that seems like a lot --and as time goes by 2% will seem extravagant! Stop waiitng for the next trolley car to suddely appear--it ain't this is 2011 and times have changed!Remember 2010 when people were turning up their noses at 4% and kept saying "rates have to go up"???? No more----no more.

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Comment #3 by jacob posted on
jacob
i dont have a great opinion one way or the other on rates, I was simply pointing out potential strategies to employ should they rise and holders of current cd's want to "roll" their cd to a hire rate without potentially incurring a penalty. If rates dont rise then its great just to sit with the highest rate possible as the previou poster stated. 

1
Comment #4 by mak1118 posted on
mak1118
Just ladder your cds, I use a 7 year ladder.

3
Comment #5 by Anonymous posted on
Anonymous
I just checked Ally's website. Their 2.03% 5year CD is not without penalty. I chatted with their CR and confirmed this is NOT "no penalty" CD.

1
Comment #9 by Anonymous posted on
Anonymous
#5  - He didn't say that Ally is no penalty.  They are all "no penalty" if you keep them to maturity. In the case of PenFed it is 7 years. With the others it is 5 years.

1
Comment #6 by Paoli (anonymous) posted on
Paoli
My only hope for interest rates for savers next year and onward is that there "might" always be one or two banks or credit unions who will (for some insane reason) need more deposits and will grant us the Heavenly manna of a 2% rate which Ken or one of you on here will shout out to us and save our financial lives!  I just hope it isn't too far to drive to in one day from where I am cause I prefer to handle my CDs in person.  We have to just "watch and wait" and remember to share anything good with each other.  That's what this site is all about, isn't it?   Thanks in advance because 2012 can drown me if I'm not right!

2
Comment #7 by mak1118 posted on
mak1118
Paoli:  I have been opening CDs at banks and credit unions for years and have never had a problem,never.

2
Comment #8 by mak1118 posted on
mak1118
Paoli: I forgot to say I open most of them online or through the mail and I always wire the money.

2
Comment #10 by williamt posted on
williamt
Re Garden Savings Federal Credit Union's 5-year CD:  Although I live nowhere near New Jersey, I liked opening my cd at Garden Savings (some time ago when their 5-year rate was even higher), because I'm happy when it ISN'T necessary to provide my social security number online and I have another option. I did everything with Garden Savings and The Newark Museum (the organization which provided eligilibity for membership in Garden Savings) easily and quickly via phone and/or mail/fax.  Having dealt with a large number of credit unions over my lifetime, I consider Garden Savings among the best, along with Navy Federal. 

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