This is another comparison of four top long-term CDs if the CDs are closed early. This only compares CDs that are nationally available. As usual I included Ally Bank's 5-year CD due to its small early withdrawal penalty (EWP) of 2 months of interest. Its rate is much lower than the best nationally available 5-year CD rate, but Ally's small EWP of only 2 months of interest still makes the CD a good deal.
One new addition in my table is Digital Credit Union (DCU) and its 5-year CD for a minimum deposit of $25K. With a checking relationship, you can get 2.86% APY as of 12/06/2011. However, this requires a checking relationship that includes either an active loan or credit card (see DCU's relationship checking page). Without this relationship, rates are 25 basis points lower. Since most don't want to worry about this type of checking relationship, I included the non-relationship rate for a $25K minimum deposit. That's still very competitive with a 2.61% APY. Only Melrose Credit Union offers a higher rate (2.68% APY). However, I didn't include Melrose since its EWP is harsh. DCU's EWP is the typical 6 months of interest.
To get a higher rate than 5-year CD rates at DCU or Melrose Credit Union, you'll probably need to look for even longer terms. Pentagon Federal Credit Union (PenFed) still offers 2.75% APY on its 7-year CD and IRA CD. The downside with PenFed's 5-year and 7-year CDs is an EWP of up to 12 months of interest. Note, the penalty doesn't eat into the principal. If you close the CD before 12 months, you'll just lose all of the accrued interest.
The highest nationally available CD rate at a bank is 2.50% APY at Discover Bank. The downside is that it has a very long term of 10 years. On the plus side, the EWP is 9 months of interest which is smaller than PenFed's EWP.
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 continues to be the best deal if you close the CDs within one year. For the case of PenFed, you will lose all interest if you close the CD within one year.
After 2 years, DCU becomes the best deal and continues to be the best deal until its 5-year maturity. You might still want to choose the longer-term CDs at PenFed and Discover Bank to hedge against the risk that rates continue to fall and stay low for the rest of this decade.
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
I reviewed the issue of banks refusing an early withdrawal in November, and we learned in September of NCUA ruling in favor of a credit union increasing EWPs on existing CDs. These are legitimate risks, but it's important to remember there's also the risk that rates continue to fall and stay low for many years.
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 12/06/2011:
Approximate Yields After Early Withdrawal Penalties
|Year of Early Withdrawal||Discover's 2.50% 10-yr CD latest rates||PenFed's 2.75% 7-yr CD latest rates||DCU's 2.61% 5-yr CD latest rates||Ally's 1.84% 5-yr CD latest rates|
|Early Withdrawal Penalty||9 months||12 months||6 months||2 months|
|year 5||2.12%||2.19%||2.61% (no penalty)||1.84% (no penalty)|
|year 7||2.23%||2.75% (no penalty)||n/a||n/a|
|year 10||2.50% (no penalty)||n/a||n/a||n/a|
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