With some recent rate cuts, I thought this would be a good time for another comparison of some top nationally available long-term CDs. There was one small pleasant surprise. I just noticed that Ally Bank increased its 5-year CD yield from 1.66% to 1.69%. It's not much, and I don't know how long this new rate will last, but in today's interest rate environment, we have to take any good news we can get. For those who just opened Ally's 5-year CD when the yield was 1.66%, you should be automatically bumped up to 1.69% thanks to Ally's Ten Day Best Rate Guarantee.
Ally Bank isn't the only internet bank with a mild early withdrawal penalty. Barclays new internet bank has an early withdrawal penalty of 3 months of interest for all terms. Its 5-year CD rate of 1.75% APY is a little higher than Ally's 5-year CD rate. Thus, it gives Ally some competition, and I decided to add this CD to the table below.
Another change was the replacement of INOVA Federal Credit Union with Justice Federal Credit Union. INOVA FCU recently slashed its CD rates. Its 6-year CD yield plummeted from 2.50% to 1.40%. Justice FCU continues to offer a very competitive 5-year CD yield of 2.20% APY for a $100K minimum deposit (2.10% APY for a $500 minimum). Also, Justice FCU has a reasonable early withdrawal penalty of 180 days of interest. Please refer to my Justice FCU CD review for more details about its CDs and membership.
The other two institutions on the table have kept their rates the same since my last post.
PenFed's 7-year CD yield remains at 2.50%. There's another alternative to PenFed. Patelco Credit Union is also an all-access credit union, and it is offering a 2.50% APY 7-year CD with the same early withdrawal penalty. You can get a higher rate at Navy Federal Credit Union. It's offering a 2.75% APY 7-year CD with a $100K minimum deposit (2.60% APY for a $20K minimum). However, membership is primarily limited to those who have a connection with the military (see post).
Risks of Planning for an Early Withdrawal
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:
- 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. 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. Even though the NCUA did allow one of these credit unions to increase the early withdrawal penalty on existing CDs, it did require that the credit union notify members at least 30 days before the change took effect. That will at least allow members to redeem their CDs before the new penalty takes effect.
Early Withdrawal Penalty Details
All of these 5 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 5-year CD at Justice Federal Credit Union is 180 days of interest. Details are listed at the bottom of Justice FCU's certificates page.
Barclays early withdrawal penalty is 90 days of interest. Details are listed in Barclays terms and conditions.
Effective Returns on CDs after Paying Early Withdrawal Penalties
Below is a comparison of the 5 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, Justice FCU takes the top spot through year 5.
If you compare the three banks (Discover, Barclays and Ally), Ally continues to take the top spot for year 1 and 2. However, Barclays comes very close for both of these years. At year 3, Barclays' yield matches Ally's yield. However, Discover Bank's 10-year CD yield exceeds both, and it continues to lead for 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 5/8/2012:
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||Justice FCU's Jumbo 2.20% 5-yr CD latest rates||Ally's 1.69% 5-yr CD latest rates||Barclays' 1.75% 5-yr CD latest rates|
|Early Withdrawal Penalty||9 months||12 months||6 months||2 months||3 months|
|year 5||1.91%||2.00%||2.20% (no penalty)||1.69% (no penalty)||1.75% (no penalty)|
|year 7||2.01%||2.50% (no penalty)||n/a||n/a||n/a|
|year 10||2.25% (no penalty)||n/a||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.