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Harsh Early Withdrawal Penalties at Some Banks & Credit Unions

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Harsh Early Withdrawal Penalties at Some Banks & Credit Unions

No one likes the idea of locking into a long-term CD in today's awful interest rate environment. However, there might not be any better alternatives for your safe money. No one knows how long these low rates will last. If it lasts longer than expected, today's long-term CDs will be a better choice than keeping that money in a savings account while you wait for higher rates.

One thing that can help reduce the worry about long-term CDs is the ability to make an early withdrawal. You'll have to pay a penalty, but if the penalty isn't too harsh, it could be a good move if interest rates have shot up.

Not all long-term CDs are created equal. Some banks and credit unions can make it difficult and costly for you to redeem a CD before maturity. The most worrisome case is if the bank refuses an early withdrawal request. Some banks and credit unions give themselves the right in their disclosures to refuse an early withdrawal. I reviewed some of these banks and credit unions in my post Inflation Dangerous Banks - Those That Could Refuse CD Early Withdrawals.

Another worry is the bank or credit union increasing the early withdrawal penalty on your existing CD. There have been examples of this at two credit unions. The last one was at CEFCU (see post).

In this post my focus is on some banks and credit unions which offer top CD rates but have early withdrawal penalties that are larger than average. I link to the institutions' disclosures, but make sure you request the latest disclosure from the institution before opening the account.

Melrose Credit Union

Melrose Credit Union has a long history of being a CD rate leader. The credit union allows anyone to qualify for membership so it might seem its CDs would be perfect for CD investors. However, one important downside is a harsh and confusing early withdrawal penalty. Here's what is stated in Melrose June 2010 disclosure:

18-60 Months term: Forfeiture of the first 180 days Dividend and a Reduction to the Share Savings Rate at the time of purchase.

Currently, Melrose Credit Union's share savings account rate is 0.75%. So it appears that if you redeem the CD early, it would be like you had invested in a CD with a 0.75% rate. On top of that you would forfeit 180 days of dividends.

Bank of America

Bank of America rarely has top CD rates, but its 10-year CD rate has been competitive. For those who prefer brick-and-mortar banks, it's a good alternative to Discover's 10-year CD. However, BofA's early withdrawal penalty is harsh. According to BofA's disclosure:

For cds with terms of 12 months or longer, the penalty is an amount equal to $25 plus 3% of the amount withdrawn

Currently, BofA's 10-year CD rate is 2.30% APY. So the EWP would equal over 15 months of interest. That's actually not too bad. As a comparison, Pentagon Federal Credit Union's 7-year CD has an early withdrawal penalty of one year of interest. However, BofA's penalty becomes much worse when CD interest rate falls. For example, its current 5-year CD rate is 1.11% APY. So a penalty of 3% would equal about 32 months of interest.

US Bank

US Bank has long offered a very competitive 59-month CD special (currently 2.00% APY). Unfortunately, the early withdrawal penalty is harsh. According to the US Bank disclosure:

If your account has an original maturity greater than one year, the penalty will be the greater of either A or B, plus a $25 early withdrawal fee.

A. One-half of the interest that would have been earned on the funds withdrawn if held for the entire term.

B. 3% of the amount withdrawn.

At best the penalty will be as costly as Bank of America's EWP. At worst, it will be larger due to case A. If one-half of the interest earned on the entire term is larger than 3%, that will be the penalty. That's the case for the 59-month CD special. Thus, the EWP is equal to 29.5 months of interest on the amount withdrawn plus a $25 fee.

Bottom Line

As you can see, early withdrawal penalties can be costly. In addition, you can lose some of your CD principal. So you could end up with less than what you started with.

If you do need some money from the CD, you should check if you can withdraw accrued interest from the CD. This is the case when you have interest added to your CD. Many banks and credit unions allow you to withdraw all accrued CD interest without a penalty. I have some other tips and issues of early withdrawal penalties in this blog post.

If you have a CD ladder, you may have no plans for an early withdrawal. Nevertheless, you never know what the future will bring. So it makes sense to factor in the early withdrawal penalties when deciding on CDs. I reviewed some of the best long-term CDs with mild early withdrawal penalties in this blog post.


  Tags: Bank of America, US Bank (OH), Melrose Credit Union, CD rates

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Comments
7 Comments.
Comment #1 by Sherry (anonymous) posted on
Sherry
Good information. I went with several 5 year CD's from Ally and that was about two years ago. At that time everyone was saying to not lock in to any long term CD's as it has to go up from here. Two years later, my 3% CD's don't look that bad. Good article Ken!

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Comment #2 by Pamela (anonymous) posted on
Pamela
I have yet to regret "Going Long" with a CD.  The 5, 7 and 10-year CD's which I have & that yield 3%-6% look good now.  The EWD's on these are a "Non-Issue" -- I could care less what they are and doubt that I will ever invoke them.

9
Comment #3 by Ryan (anonymous) posted on
Ryan
Thank you for an excellent article, Ken.   I appreciate you putting this all together in easy to understand form.

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Comment #4 by rosie43 (anonymous) posted on
rosie43
You always give us such great informations that WE CAN USE. Especially like the links. THANK YOU!!!

3
Comment #5 by Inforay posted on
Inforay
When I tie my money up in a long-term CD I always inquire whether I will be able to withdraw the interest only, at any time, during the term of the CD, without penalty.  So far, I have been allowed to do so by Capital One, Discover and Key Bank, where  I was able to withdraw the interest portion of the amount in the CD to help with my kids' college tuition.  I also inquire whether, at a future date, I would be allowed to get a monthly check for the interest earned on the CD if after a few years, I find I need the income.  Most banks and credit unions, including PenFed have said that they will allow you to change from having the interest capitalized back into the CD to having it sent to you as a monthly check or deposited into a linked checking account.  Thus far, I have never been wrong with long term CDs.  I still have 10 year CDs earning 5% or more at Capiltal One, Key Bank and PenFed.  In this low rate environment having those is really helpful, overall.

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Comment #7 by Anonymous posted on
Anonymous
As we've seen, you cannot trust banks to allow you to withdraw your money at all, in a pinch. The government agencies have given their blessing to unilateral change in the terms and conditions of CDs, as you have covered in this blog. So, what to do?

I suggest that only a fool will invest in a long-term CD in today's hyper-inflationary environment. The true inflation rate is already in the double-digits, when calculated by the 1980 formula (see, www.shadowstats.com) which removes the gimmicks now inserted in the CPI calculation that are designed to artificially lower the officially reported CPI rate, like "hedonic adjustment", product substitution (when the price of beef goes up, chicken's price is substituted into the basket of goods the next year) etc.

At a 2% rate, your money will depreciate at more than 8% per year, and you will pay taxes on the 2%. This website is an excellent source of information about highly liquid savings and money market accounts, but it is complete folly to buy CDs. The only answer is the purchase of agricultural land for your own use and/or rental if you are not the farmer type, and, for liquid assets, the purchase of gold, silver and platinum. Forget about keeping your money in banks, or in the US dollar, Euro or British pound, or any other fiat currency now being printed in the western world, for that matter.

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