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Comparison of Long-Term CD Rates After Early Withdrawal Penalties - January 2013

POSTED ON BY

It has been about four months since my last comparison of the top nationally available long-term CD rates after early withdrawal penalties. So I thought it would be useful for an updated comparison. 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.

Long-term CD rates are just a little bit lower than they were four months ago. The highest yield is 2.05% for a 5-year CD at Citizens State Bank. Longer terms of 7 years and 10 years don't help with yields. Even Discover Bank's 10-year CD has only a 2.00% APY.

With these yields so low, you may want to consider shorter-term CDs. However, many of these don't have yields higher than internet savings accounts. One exception is Pentagon Federal Credit Union (PenFed) which currently has the best mid-term CD rates (1.25% APY 1-year, 1.60% APY 2-year and 1.85% APY 3-year).

If you do think it's likely that rates will be higher 2 or 3 years from now, these PenFed CDs will be better choices than any of the long-term CDs that I list below. The risk with these PenFed CDs is that rates continue to fall, and you will have even more dismal CD choices 2 or 3 years from now.

How The CD Rates Compare

Citizens State Bank may have the CD with the highest rate, but it has the largest early withdrawal penalty of 24 months of interest. As you can see in the table below, the effective rate goes way down if you close this CD early even after 4 years. So this CD isn't a good choice if you think it's likely that you'll close the CD early to take advantage of higher rates elsewhere.

Update 1/25/13: Barclays increased its 5-year CD APY from 1.70% to 1.85%. The table has been updated with this change.

Ally Bank's 5-year CD only has the lead under one year. Note, this assumes you don't get the 25bps renewal bonus. Starting at the first year, Barclays' 5-year CD has the rate advantage thanks to the recent rate hike. Discover Bank's 10-year CD is close to Ally at year 3, and it takes the lead at year 4.

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

The risk of Ally Bank refusing an early closure went up last year when it updated its CD disclosure. Due to this disclosure change, Ally joined other banks that have language in their disclosures which gives the bank the right to refuse an early closure. I reviewed these banks and credit unions in this 2011 post.

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 2012. 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.

Also, it should be noted that PenFed has increased the early withdrawal penalty on its 5-year CD, but it did the honorable thing by only making this change effective on new CDs. The change did not apply to existing CDs.

Early Withdrawal Penalty Details

Below I list 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 fees section of the Discover Bank's FAQs, the penalty for terms over 5 years is "9 months simple interest on the amount withdrawn".

PenFed's CDs with terms from 1 to 4 years have an early withdrawal penalty of up to 180 days of dividends. CDs with terms of 5 or 7 years have a EWP of up to 365 days of dividends. Note, the penalty doesn't eat into the principal so if you redeem the 7-year CD before 365 days from the issue date, you'll just lose all of the accrued interest. Please refer to PenFed's disclosure for more details (bottom of PenFed's Money Market Certificate page).

To view Citizens State Bank's EWPs, refer to the fee tab in this Citizens State Bank CD page. At the bottom of the page it states "For accounts with original maturity of five years we may impose a fee equal to 24 months' interest on the amount withdrawn subject to penalty."

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.

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

If you want an easy way to calculate the effective interest rates on your own, a reader developed this useful online calculator. It can calculate the effective interest rate for any month that a CD is closed before maturity.

These CD APYs are based on the yields listed at the institutions' websites as of 1/23/2013: (Barclays' CD updated on 1/25/13)

Year of Early Withdrawal Discover 2.00% 10-yr CD latest rates PenFed 2.00% 7-yr CD latest rates Citizens State 2.05% 5-yr CD latest rates Ally 1.59% 5-yr CD latest rates Barclays 1.85% 5-yr CD latest rates
Early Withdrawal Penalty 9 months 12 months 24 months 2 months 3 months
year 1 0.50% 0.00% -2.01% 1.32% 1.38%
year 2 1.25% 1.00% 0.00% 1.46% 1.62%
year 3 1.50% 1.33% 0.68% 1.50% 1.69%
year 4 1.62% 1.50% 1.02% 1.52% 1.73%
year 5 1.70% 1.60% 2.05% (no penalty) 1.59% (no penalty) 1.85% (no penalty)
year 6 1.75% 1.66% n/a n/a n/a
year 7 1.78% 2.00% (no penalty) n/a n/a n/a
year 8 1.81% n/a n/a n/a n/a
year 9 1.83% n/a n/a n/a n/a
year 10 2.00% (no penalty) n/a n/a n/a n/a

In addition to the rates, banks and credit unions can change the early withdrawal penalties for new CDs. Make sure to review the latest disclosures from the bank or credit union before opening a new CD or renewing a CD.

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, Barclays, Pentagon Federal Credit Union, Discover Bank, CD rates

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Comments
16 Comments.
Comment #2 by Paoli2 posted on
Paoli2
Robert:  Sure it is.  If you do Form 1040 check Adjusted Gross Income, Line 30 "Penalty on early withdrawal of savings".  I have used it several times for my EWPs.  It can be a help.

6
Comment #3 by Anonymous posted on
Anonymous
These rates are pitiful, and to be hit with a withdrawal penalty would be even more pitiful. Even if you accept the official version of inflation, which I think hugely and intentionally understates the real CPI, you lose a portion of my wealth, year by year, not to mention that you must pay taxes on this pitiful bank interest. In the reality-world, once you consider the smaller portion sizes (my favorite OJ now comes in 56 ounce bottles and they raised the price from $2 to $2.99), which the Bureau of Labor Statistics conveniently doesn't do, inflation is running at about 10%. The yearly loss of wealth for bank based savers is huge.

The risk of inflation stealing my wealth in a bank, even if Fed policies do not explode into hyperinflation, which I suspect will eventually happen, is now 100%. As a rational person, I've come to agreement with those who advocate saving in metals. Banks seem to be good only for paying day-to-day expenses from transactional accounts, like checking. Last year, with that in mind, I bought a huge amount of platinum when it was at $1,400, more than I would have risked in a bank CD, because I could touch and feel the platinum. Bank failure wasn't an issue, so FDIC insurance was also not an issue, though, perhaps, theft insurance might be. At any rate, a year later, platinum prices are close to $1,700 per ounce.  That is not to say that I might not lose money, by next year, on the platinum I buy at $1,650, but, eventually, with inflation at about 10%, and probably going higher, the price of tangible rare goods will inevitably rise at least that fast.

In the future, will continue to buy precious metals, instead of bank CDs, because CDs pay too little interest and, in my opinion, are no longer "safe" places to store wealth.

5
Comment #5 by Anonymous posted on
Anonymous
While it's not the same as closing a CD early and withdrawing all the funds, I've been able to withdraw accumulated interest above the original amount of the CD without penalty. This can be helpful if you need some money quickly or if you're gone above the insurance limit due to interest accumulation. I’ve also been able to convert a CD from one that accumulates interest to one that pays me the interest on a monthly basis. Both of these strategies can help if you need to get some cash out of a CD without closing it.


5
Comment #6 by Anonymous posted on
Anonymous
Can someone explain how one goes about buying precious metals. Does one buy bars and keep them in a vault or is there some other way?

 

1
Comment #7 by Anonymous posted on
Anonymous
You can either pay for storage or have them delivered to your home and store them yourself.  If you are just getting started, go to APMEX and check out what they have.  For your first purchase I recommend either Gold Eagles, Gold Buffalos, Canadian Maple Leafs or Kruggerrands.  They are widely recognized and can be resold with ease.

If you have a large amount to invest, go to Tulving.  His minimum order quantities are high, but his prices can't be beat.

 

1
Comment #8 by Greg (anonymous) posted on
Greg
While you can deduct EWPs from your taxes, I believe you can do so only if the forfeited interest was reported as income to you on the bank's 1099-INT.  Since you never got that interest, the deduction just lets you back it out.  You don't get to deduct the EWP if only the reduced amount you got is reported (which I gather is not the practice).

In other words, if you should have received $1,000 in interest on a CD you broke in 2012, but incurred, say, a three-month penalty of $250, the bank would normally report on your 2012 1099-INT the full $1,000 as interest income (even though you never got it; go figure), then also report on line 2 the $250 penalty (which you have to deduct elsewhere; you can't just net it from the interest income).

So there's no free lunch here.  Why the bank can't just report the reduced amount ($750) as your actual interest income is a mystery.  Too simple, I guess, and the tax accountants need work.

 

6
Comment #9 by Robert (anonymous) posted on
Robert
@ Greg #8.  I just plug in the numbers from the 1099-INT into Turbo Tax.  I have no idea what happens after that.

2
Comment #10 by irene1 (anonymous) posted on
irene1
Is pentagon federal still offering .25% more on maturing cds to get the account holders to renew the cd like they did last year?

2
Comment #11 by Anonymous posted on
Anonymous
No

1
Comment #12 by Kaight posted on
Kaight
That "withdraw the interest" strategy (see #5, above) oftentimes works.  Just don't try it at Ally Bank after the interest has been credited to your CD . . . . not unless you want to pay an early withdrawal penalty on your interest!

2
Comment #13 by Anonymous posted on
Anonymous
Ally has a 10 day grace period in which you can withdraw the interest.  I've done it with no problems.

3
Comment #14 by Anonymous posted on
Anonymous
If anyone has had experience with Mountain America Credit Union please post it on the blog.

I am considering putting a hefty some into their five year rates.

 

1
Comment #15 by Anonymous posted on
Anonymous
Mountain america customer service is okay, I put 100k in cd, all was ok, just double check every thing , they charge 10 wire in fee

2
Comment #16 by Anonymous posted on
Anonymous
.

.

Dear Anonymous - #3,

>> As a rational person, I've come to agreement with
>> those who advocate saving in metals.

Right ... So as a rational person, do you agree that the price of metals fluctuate?  ... If yes, then do you also agree that whatever has gone up in the past can (and will) come down as well? ... If yes, then as a rational person do you have any sort of 'exit' planned? ... If yes, then do you plan to exit after achieving X peretage of gain, or maybe after suffering Y percetage of loss? ... If yes, what are the X and Y figures you have?

>> In the future, will continue to buy precious metals, instead of bank CDs,

Hmm ... This appears a little one sided.  Do you plan only to buy and never to sell?  If you are comparing metals to CDs the big difference of course is that the CDs have maturity in place, and there is no such maturity for metals, hence the question.

Yours Truly,
Anonymous

5
Comment #17 by Anonymous posted on
Anonymous
.

.

Dear Anonymous - #6,

>> Can someone explain how one goes about buying precious metals.
>> Does one buy bars and keep them in a vault or is there some other way?

Sure ... One can purchase precious metals such as Gold, Silver, Platinum, and Palladium in "coin" form.  For gold such coins are American Eagle, Canadian Mepal Leaf, South African Krugerrand etc. One can purchase Rhodium in "sponge" form which typically comes in bottles.  With Gold and Silver one can get "bars" as well.  Many of the brokers offer services to "hold" the metals one buys for safekeeping (for a charge of course).   Otherwise one can take delivery (Fedex) of the metal and store per his/her capability.

I prefer trading metals by using Exchange Traded Funds (ETFs) instead of actual bullian.  I use GLD for buying/selling gold, and GLL for shorting/covering gold.  These exchange traded funds eliminate the need to take the physical delivery of the metal.  I get to trade these almost as if I am trading common stocks (e.g. almost as if I am buying/selling stock of Bank of America or Goldman Sachs.)  For silver I use SIL and AGQ.

Yours Truly,
Anonymous

2