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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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Comparison of Long-Term CD Rates After Early Withdrawal Penalties

POSTED ON BY

With some recent rate changes, I thought this would be a good time for another comparison of some top nationally available long-term CDs. 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.

Not all of the rate changes were cuts. The new internet bank Barclays increased its 5-year CD yield from 1.75% to 1.80%. Barclays is similar to Ally Bank in that it has a mild early withdrawal penalty (EWP). With an EWP of 3 months of interest, it's not quite as good as Ally's EWP of 2 months of interest, but it's half the amount of the typical EWP for 5-year CDs. Barclays CDs do have one downside that may be an issue for some. Currently, Barclays CD customers cannot receive interest disbursements. So you have to let the interest be added back into the CD until maturity. I have more details in my Barclays and CD review.

There was one institution that has reduced its rates. Pentagon Federal Credit Union (PenFed) reduced its 7-year CD yield from 2.50% to 2.40%. Because of this change, I replaced PenFed with Patelco Credit Union which recently introduced a 7-year CD and IRA CD. Patelco's 7-year CD still has a 2.50% APY as of 6/5/2012. The EWP is the same as PenFed's EWP (1 year of interest). I have more details about Patelco and this CD in my Patelco Credit Union and CD review.

For the other three institutions, their rates have remained the same since my last comparison.

Discover Bank continues to have the highest CD rate from an internet bank. The downside is that it has a very long term of 10 years. However, the early withdrawal penalty is reasonable for such a long term (just 9 months of interest).

Ally Bank often makes small rate changes to its 5-year CD, but its current rate has held for several weeks.

Justice Federal Credit Union has maintained its 5-year CD rates since March. I've included the Jumbo CD rate in the table below. This requires a $100,000 minimum deposit. The regular CDs which require a minimum deposit of $500 have rates that are 10 basis points lower. One downside with Justice FCU is that it can be difficult to join. I have more details in my Justice FCU CD and membership review.

How The CD Rates Compare

As you can see in the table below, Ally continues to be the best deal if you close the CDs within one year. However, with Barclays recent rate hike, Ally doesn't have much of a lead over Barclays. For closing a CD at year 2 or later, Barclays' CD becomes a better deal than Ally's CD. However, Discover Bank's CD becomes a better deal than both Barclays and Ally starting at year 3.

The rate hike at Barclays wasn't enough to surpass Justice FCU which continues to have the top spot for CDs closed from 2 to 5 years.

Risks of Planning for an Early Withdrawal

Comparing the yields if the CDs are redeemed early assumes that the customer will be able to close the CD early with the early withdrawal penalty specified at the time the CD is opened. 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. 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. Below I review the early withdrawal penalty details for each of these institutions. I include links showing where the EWPs are described by the institutions. Please note that institutions can change these EWPs. Make sure to check with the institution for the latest EWP details before opening the CD.

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

Patelco Credit Union recently came out with this 7-year CD and IRA CD. Thus, this 7-year term isn't mentioned in the credit union's membership handbook. There is small print in Patelco's CD page that describes the early withdrawal penalty for the 7-year CD as follows:

There is a 365-day interest penalty for early withdrawal that will not be waived regardless of eligibility for distribution from an IRA except in circumstances of death or legal incompetence.

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.

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 6/5/2012:

Year of Early Withdrawal Discover's 2.25% 10-yr CD latest rates Patelco CU'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' 1.80% 5-yr CD latest rates
Early Withdrawal Penalty 9 months 12 months 6 months 2 months 3 months
year 1 0.56% 0.00% 1.09% 1.41% 1.35%
year 2 1.40% 1.24% 1.65% 1.55% 1.57%
year 3 1.68% 1.66% 1.83% 1.60% 1.65%
year 4 1.82% 1.87% 1.92% 1.62% 1.69%
year 5 1.91% 2.00% 2.20% (no penalty) 1.69% (no penalty) 1.80% (no penalty)
year 6 1.97% 2.08% n/a n/a n/a
year 7 2.01% 2.50% (no penalty) n/a n/a n/a
year 8 2.04% n/a n/a n/a n/a
year 9 2.06% n/a 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.


  Tags: Ally Bank, Discover Bank, Justice Federal Credit Union, CD rates, IRA rates, Barclays

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Comments
23 Comments.
Comment #1 by Kaight posted on
Kaight
This is for anyone who might already actually have closed an Ally CD early and moved proceeds to an Ally checking account.  How long did it take Ally to process your closure request and move your funds?  Ally does not have the best reputation for "back room" work.  I'm wondering if they are "living down" to that reputation.

1
Comment #2 by Anonymous posted on
Anonymous
When I did this last year, the funds were in my Ally checking account in either 1 or 2 days, I can't remember which. The bigger issue was that they made a mistake in calculating my balance. I had to call them back and point out the mistake, and then they fixed it within another day. But that sort of thing should never happen in the first place.

4
Comment #3 by Anonymous posted on
Anonymous
they have a loyalty bonus of .25 percent for renewing cds.  THis moves the 5 year rate to 1.93 which is good in combo with the low penalty for early withdrawal

4
Comment #4 by KenBDG posted on
KenBDG
@Kaight, I've described my experience with an early closure of Ally's No-Penalty CD in this blog post. It did take about 2 business days for the funds to be made available in my Ally savings account.

@Anonymous #3, Thanks for the reminder about Ally's loyalty bonus. I reviewed it in this blog post.

7
Comment #5 by Kaight posted on
Kaight
Thank you, Ken.  That is a very interesting blog post.  You experienced a two day access delay in a situation where no penalty calculation was required.  I would not anticipate a shorter access delay for myself.  My CDs are not penalty free.  It's also fair to assume you were strolling through the exit door, not attempting to squeeze through along with hundreds (thousands?) of other account holders.

This is quite a noteworthy, and thought provoking, development.

1
Comment #6 by Anonymous posted on
Anonymous
I wonder if rates go up and people start closing CD's with Ally that this dosen't cause the bank to fail.  I have read that GM wants to start a new finance unit and no longer use Ally for vehicle loans.

1
Comment #7 by Anonymous posted on
Anonymous
#6  I believe that somewhere hidden in all the rules and regulations there is a clause to prevent a "run" on a bank.  Such things as advance notification of intent to withdraw, not allowing early withdraws from CDs, etc.  The fed will do anything to prevent a run on a bank if they want.  However this is just my perception.

2
Comment #8 by Paoli (anonymous) posted on
Paoli
I disagree about certain perceptions of "a run on a bank".  I was involved some years ago with a big bank failing in my hometown and it was kept "very" quiet.  Because of my total involvement in my finances, I found out about it before it was made public.  Those of us who were behind the door that day got all of our funds withdrawn without a tado.  As I was leaving they were putting up a sign on the bank's door stating the bank was closed and giving others a phone number to call to find out how and where to get there deposits if they wanted to withdraw after the other bank which was taking it over was back open.  As far as I remember, it all went very smoothly and quickly so as not to cause any media participation or negative news.  The last thing the Fed wants, imo, is for it to get out that they aren't taking care of all "insured" deposits as they say they will.  I try to oversee the financial standing of all my banks periodically for "just in case".

2
Comment #9 by Anonymous posted on
Anonymous
Paoli  What you experienced was a Bank being closed by the FDIC.  It wasn't a "run on the bank".

4
Comment #10 by Paoli (anonymous) posted on
Paoli
#9  I know but that was my point.  The Feds made sure there was no "Run" because they took care of those who were there and then closed the bank giving others info as to how to get their money back.  I think they would do this for other banks to avoid "Runs".

1
Comment #11 by Anonymous posted on
Anonymous
Paoli,  I think were are in agreement.

"The feds will do anything to prevent a run on a bank, if they want".

2
Comment #12 by Anonymous posted on
Anonymous
Paoli,  Here's what I was referring to when I stated "I believe that somewhere hidden in all the rules and regulations there is a clause to prevent a "run" on a bank".

The following is an excerpt from a Bank's disclosure statement:

"We reserve the right at anytime to require notice in writing prior to any withdrawal of funds you have on account with us as provided by law or regulation. Such a notice will only be required under extraordinary circumstances, and, if required, will be not less than seven (7) days or such longer period as provided in our bylaws. We reserve the right to refuse any withdrawal or transfer which is attempted by any method not specifically permitted, which exceeds any frequency limitations or violates any minimum or maximum dollar limitation".

3
Comment #13 by Anonymous posted on
Anonymous
#12  That notice would do it but I don't know if it was done years ago.  Maybe they need something like that today.  I still don't think too many banks would enforce it for fear of the media getting hold of it and causing some type of panic.  In the incident I was referring to, people seemed to have more faith in the FED getting their money back to them because even those who could not get in that day, did not seem concerned. 

1
Comment #14 by Anonymous posted on
Anonymous
#13  Having worked at a bank in the 70's for several years, I can tell you similar clauses did exist.  The bank ALWAYS could find a loop hole if they desired.

5
Comment #15 by Paoli (anonymous) posted on
Paoli
#14 Those must have been the high interest rate years and I always had my CDs with local banks I had done business with for years.  Back then they were not so devious as they are today.  I cannot believe any of those banks would have pulled "clause" stunts on us.  I don't remember such clauses in the CDs they sold me but then again, it was a different era.  However, if you worked for banks that long, you must have seen and known the inner workings better than customers.

1
Comment #16 by Anonymous posted on
Anonymous
Perhaps "back then", the bank customers weren't so devious either.  Taking out long term CDs knowing full well they were going to brake the contract if rates were to rise before the CD's maturity date. Honest people used to honor their commitments. 

2
Comment #17 by Anonymous posted on
Anonymous
#16  If a customer back then/now break a CD their not being dishonest.  Part of the CD contract is the option to make a early withdraw with a penalty as stated in the certificate.

3
Comment #18 by Paoli (anonymous) posted on
Paoli
#16  I beg to differ with you!  Back then we were able to get livable CD interest and didn't have our gov ****ing up our economy while their agencies took $800,000.00 vacations on OUR tax dollars.  How come these people who are basically driving us over the financial cliff don't care about what they are doing to millions of elderly people who spent years trying to save for their senior years?  They have no conscience about what they are doing to us and yet you call people names because they are trying to look out for their own future if they can?  Are you sure you are not some politician trying to learn on here how to make more money with all that money Washington is allowing you to play with?  Sorry if I sound harsh but when is anyone going to care about what they are doing to the savers?

3
Comment #19 by Anonymous posted on
Anonymous
"Are you sure you are not some politician trying to learn on here how to make more money with all that money Washington is allowing you to play with?"

Oh, how I wish I were among that "privileged" group.  "If you can't beat them, may as well join them" 

1
Comment #20 by virginia beach aqui (anonymous) posted on
virginia beach aqui
hay paoili what is atado ??

1
Comment #21 by Paoli (anonymous) posted on
Paoli
Oh creeps!  We're back to using Spanish words? If you are Irish and German what is it with the Spanish? You know better than me what "atado" means. It sounds like it's meaning and I am not going back into this with you again or you might find yourself "atado" and you might not be able to get loose this time! You had better come up with something financial or the Happy Deleters will "atado" you for good!

1
Comment #22 by Anonymous posted on
Anonymous
Paoli:  Will you have Apache check his/her email inbox please.

2
Comment #23 by Paoli (anonymous) posted on
Paoli
#22  There is no Apache and nothing is in "my" email inbox. "I" am Paoli.  What is this about?

1