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Updated Comparison of Top Long-Term CD Rates After Early Withdrawal Penalties

POSTED ON BY

With some recent rate cuts, I thought this would be a good time for another comparison of some top nationally available long-term CDs. Unfortunately, Discover Bank just reduced its 10-year CD yield from 2.45% to 2.25% APY (2.30% APY for AAA members). Its 7-year and 5-year yields remain the same. At the start of March, Pentagon Federal Credit Union reduced its 7-year CD yield from 2.76% to 2.50% APY.

The two others that were in my last comparison haven't changed their rates (as of the morning of 3/22/2012). Ally Bank's 5-year CD yield remains at 1.74% APY and INOVA Federal Credit Union's 6-year CD yield remains at 2.50% APY.

In addition to comparing the yields if the CDs are held to maturity, this post compares the yields if the CDs are redeemed early. This takes into account the early withdrawal penalties. As I've explained many times, 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 reviewed the issue of banks refusing an early withdrawal in November. About the risk of banks increasing the early withdrawal penalties on existing CDs, there have been two cases of this at credit unions. The last one was in January. Don't forget there's also a risk that rates continue to fall and stay low for many years.

A reader has told me that he was able to get a written letter from Ally Bank confirming that the early withdrawal penalty won't be increased on his CD. He said this took considerable time. I'm currently working with my Ally contact to provide an easy way for Ally CD holders to get this type of written assurance from Ally Bank. I'll let you know when I get more information. Ideally, an institution's disclosure would contain a statement that says explicitly that the early withdrawal penalty in effect when the CD was issued will remain in effect until the CD matures. I have never seen such a statement in any bank disclosure so I think the next best thing is a written letter that makes this assurance.

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.

If you close the CD at or after 2 years, INOVA FCU takes the top spot until year 7 when the PenFed CD matures.

All of these four institutions have reasonable early withdrawal penalties.

According to Discover Bank's FAQs, the penalty for terms over 5 years is "9 months simple interest on the amount withdrawn".

PenFed's disclosure states that certificates with a term of 5 years or greater that are redeemed after 365 days will have an early redemption penalty of "dividends for the most recent 365 days." If closed before 365 days, all dividends will be forfeited which means that the penalty won't eat into the principal.

Ally Bank continues to have the smallest early withdrawal penalty for 5-year CDs. The penalty is equal to just 60 days of interest. Details are listed in the deposit agreement which is available at Ally's legal information page.

The early withdrawal penalty of the 6-year CD at INOVA Federal Credit Union is 180 days of interest. This is based on what I've been told by the credit union service representative. A reader also reported that he confirmed this in the disclosure. Unfortunately, the disclosure isn't available online.

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 3/22/2012:

Approximate Yields After Early Withdrawal Penalties

Year of Early Withdrawal Discover's 2.25% 10-yr CD latest rates PenFed's 2.50% 7-yr CD latest rates INOVA's 2.50% 6-yr CD latest rates Ally's 1.74% 5-yr CD latest rates
Early Withdrawal Penalty 9 months 12 months 6 months 2 months
year 1 0.56% 0.00% 1.24% 1.45%
year 2 1.40% 1.24% 1.87% 1.59%
year 3 1.68% 1.66% 2.08% 1.64%
year 4 1.82% 1.87% 2.18% 1.67%
year 5 1.91% 2.00% 2.25% 1.74% (no penalty)
year 6 1.97% 2.08% 2.50% (no penalty) n/a
year 7 2.01% 2.50% (no penalty) n/a n/a
year 8 2.04% n/a n/a n/a
year 9 2.06% n/a n/a n/a
year 10 2.25% (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, Discover Bank, Pentagon Federal Credit Union, INOVA Federal Credit Union, CD rates, IRA rates

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Comments
4 Comments.
Comment #1 by Ryan (anonymous) posted on
Ryan
Thank you very much for calculating and posting this information.   It is very helpful in terms of longterm planning.  

2
Comment #2 by Anonymous posted on
Anonymous
Most of the time the EWP is stated in the terms of the certificate, and in that sense, is contractual.

Meaning that if this is stated in writing, the institution can no more change the EWP than the interest rate for the duration of the term.

No additional promises should be needed.

A contract is a contract, and as such is unequivocally & legally binding to both parties.

Otherwise, no such agreement would have meaning.

2
Comment #3 by Anonymous posted on
Anonymous
Please beware of Melrose CU's severe and obscure EWP on long-term CD's.

Not only is it 180 days interest, but also a claw-back of all the interest earned above whatever their standard MM was at the time of opening.

Let's say you took out a 5yr CD @ 2.50% on $10,000, and the MM paid .50% at that time.

In two years you decide to break this CD.

You would not only owe Melrose aprox. half the first years interest ($123.29), but an additional 2.00% (the difference between the 2.50% & .50%) for the two years ($400).

This is not only extreme, but somewhat misleading and hard to figure out.

Beware of Melrose CD's that look too good to be true.

6
Comment #4 by Steve S. (anonymous) posted on
Steve S.
I opened 3 10-year IRA cds, paying 3% at Discover bank over the last several years.  At the time I opened each of them I was told there would be no penalty as long as I kept $2500 in the account.  Now I'm told they've changed their policy and there is a  9-month penalty on those accounts.  It seems to me that they duped people into opening long term cds by saying at the time of opening the account that there was no penalty.  Can anything be done to rectify this obvious case of false and deceptive advertising.

1