PenFed Credit Union 5-Year Certificate Now Earns 3.50% APY
Virginia-basedPenFed Credit Union (PenFed) is celebrating the upcoming July 4th holiday with limited-time rates on two of its Money Market Certificates (MMC). Now through July 7, 2022, PenFed is offering excellent rates on the 5-year MMC (3.50% APY) and 2-year MMC (2.75% APY). Either MMC can be opened with a $1k minimum deposit, with no stated balance cap.
The 2-year and 5-year MMC are also available as IRA Certificates (Traditional, Roth, SEP, and CESA) earning APYs a uniform 5 bps lower. The Traditional, Roth, SEP require a $1k minimum opening deposit, while the CESA requires a lower $500 minimum deposit.
As stated in the Money Market Certificate Application, the Early Withdrawal Penalty (EWP) for terms greater than six months reads as follows:
2. Certificates Having a Term Greater Than Six Months
a. If redeemed within the first year, all dividends will be forfeited.
b. If redeemed thereafter, but prior to the maturity date, the early withdrawal penalty will equal 30% of what would have been earned if the certificate had been held to maturity, not to exceed total dividends earned.
PenFed reserves the right to require a written notice of up to 60 days of the intention to withdraw funds pertaining to this certificate.
The EWP is definitely punitive, but at least the penalty will not eat into the principal. The worst-case scenario is the loss of all earned interest – nonetheless, the principal will remain intact. An early withdrawal from a 2-year MMC in the first year would result in a loss of all dividends earned during the first 12 months. Any early withdrawal following the 12 months would result in a loss of approximately 7 months of dividends.
A 5-year MCC will also forfeit all dividends earned in the first 18 months, with any early withdrawal following the 18 months resulting in loss of approximately 18 months of dividends.
According to the Disclosure section at the bottom of Money Market Certificates page,
For all certificates funded by ACH, funds cannot be withdrawn within the first 60 days of the account opening.
On the other hand, PenFed continues to allow penalty-free partial withdrawals of IRA MMCs for members over the age of 59 1/2. The following is an excerpt from the IRA MMC disclosure:
Partial withdrawals for members over the age 59 1/2 (including Required Minimum Distributions) and qualified distributions regardless of age (including Disability) may be processed from IRA certificates without incurring an early redemption penalty.
This withdrawal policy could possibly be one of the reasons why PenFed now keeps its IRA MMC rates five bps lower than its standard MMCs.
Funding and Distribution of Funds
Funding an MMC can be done by ACH, wire transfer, or check. PenFed does not participate in the CO-OP Shared Branch network.
Earned dividends can be added back into the MCC; transferred to a Regular Share, checking, or Money Market Savings account; or distributed by check to the address on file.
Maturing funds can be distributed through an ACH transfer (this is new), by check to the address on file, transferred to a PenFed Regular Share, checking, or Money Market Savings account, or rolled over into a new certificate.
Unlimited beneficiaries can be named, with assigned percentages available. Social Security number, full legal name, and physical address are required for each beneficiary.
Renewal Policies
As stated in the Money Market Certificate Disclosure,
At the time of establishing a certificate, you may elect to have your certificate automatically renew. You may change your renewal selection any time during the term of the certificate, but prior to the maturity date.
1. Automatically Renewable Certificates – If you selected this option, your certificate will automatically renew at maturity. There is no grace period during which penalty-free withdrawals may be received following the maturity of this certificate.
2. Non-Renewable Certificates – If you selected this option, your certificate will not renew automatically at maturity. If you do not renew the certificate, the funds in the certificate will be transferred to your Regular Share account, checking account, or MMSA, according to your selection, and will earn dividends based on the dividend rate then in effect for that account. If you elected to have your certificate funds paid to you, your certificate will no longer earn dividends after payment.
Availability
Headquartered in McLean, Virginia, PenFed Credit Union’s field of membership (FOM) had been open to almost every U.S. citizen or resident alien for many years, with a long list of ways to qualify. For those who did not qualify through residency, employment, or military relationship, joining one of two charitable organizations provided a pathway to PenFed membership.
Determining PenFed membership eligibility has become moot: the only requirement for joining is a $5 deposit in a Savings/Share account.
The Membership Application has been streamlined down to three simple steps.
Step 1 – Eligibility – Good news! PenFed membership is open to everyone, including you.
Step 2 – Provide Your Info – Enter your name, phone number, email and address to get started.
Step 3 – Open An Account – Open your savings account with just a $5 initial deposit and you’re a PenFed member!
Joining PenFed and/or opening a Money Market Certificate can done online or at any of the 39 full-service branches located in California, the District of Columbia (3), Florida (3), Georgia (2), Hawaii (3), Maryland, North Carolina, Nebraska (2), New Jersey, New York (4), Pennsylvania (2), Texas (10), Virginia (5), and Wisconsin.
You will need to maintain a $5 Savings/Share Account as part of your PenFed membership.
PenFed participates in the Allpoint ATM network providing members with access to 85,000 surcharge-free ATMs at large retailers such as Target, CVS, and 7-Eleven.
Credit Union Overview
PenFed Credit Union has an overall health grade of "A+" at DepositAccounts.com, with a Texas Ratio of 2.87% (excellent), based on March 31, 2022 data. In the past year, PenFed has increased its total non-brokered deposits by $4.34 billion, an excellent annual growth rate of 21.47%. Please refer to our financial overview of PenFed Credit Union (NCUA Charter # 227) for more details.
Established in 1935, PenFed Credit Union is currently the third largest credit union in the nation, with more than 2.7 million members and assets in excess of $35.3 billion. PenFed’s charitable organization, the PenFed Foundation for Military Heroes,
is a 501(c)3 nonprofit with a mission to empower military service members, veterans and their communities with the skills and resources to realize financial stability and opportunity. Since 2001, the PenFed Foundation has provided more than $38.5 million in financial support to more than 140,000 military families. Thanks to the generosity of the PenFed Credit Union which pays the majority of Foundation overhead, more than 95% of each donation goes directly to support our programs.
How the 2-Year and 5-Year Money Market Certificates Compare
When compared to similar length-of-term CDs tracked by DepositAccounts.com that are available nationwide and minimum deposit requirements of $10k or less, no banks or credit unions have higher rates than currently offered on the PenFed Credit Union 2-year and 5-year Money Market Certificates. The following tables compare the 2-year and 5-year MMCs to the two highest-rate CDs from other credit unions and the two highest-rate CDs from banks.
The above information and rates are accurate as of 6/23/2022.
To look for the best CD rates, both nationwide and state specific, please refer to our CD Rates Table page.
I would like to nominate this PenFed five year CD as the poorest, and most dangerous, CD unveiling of 2022. My vote will go to other CD offerings which do not lock me into a situation from which even Harry Houdini would be hard pressed to escape.
That said, it appears the potentates at PenFed believe interest rates likely could escalate from here. On that much, at least, I agree with them.
Also, it's definitely ornerous when compared to other credit unions.
Most of them have a straightforward "number of days" EWP.
Huh?
The EWP policy is clearly disclosed. So how is it unethical for them to charge any EWP they choose to charge?
And what does it have to do with the IRA versus the non-IRA?
They probably pay a lower APY on the non-IRA because IRA accounts require more administration for them and that's an extra cost.
But what is the connection you are making?
I also know that we disagree on just about everything political, and that’s fine.
Having said all that, there have been a few times when I was favorably impressed with points you made. If not for that I wouldn’t be responding at all. So when I asked my previous question, it was with a sincere desire to try to understand your point. But so far, I still don’t. Except maybe for the part where you apparently feel that other people should be forced to risk their capital and work for less profit than would induce them to voluntarily choose to do so. You seem to be saying you feel they should be forced to do just that. I can’t agree with you on that one, but having heard your political positions don’t see that view as a surprise.
As to your question to me:
“And, P_D you are now saying they have a lower EWP for non-IRA CDs really?? Would you share where you see that?”
It appears you misread my comment. What I said was:
“They probably pay a lower APY on the non-IRA because IRA accounts require more administration for them and that's an extra cost.”
I did not say that the non-IRA CDs have a lower EWP.
There is an unrelated typo in that sentence though. It should have read…
“They probably pay a lower APY THAN the non-IRA because IRA accounts require more administration for them and that's an extra cost.”
So it looks to me that the only point you were making was one I disagree with. I was hoping there was more.
The king of diatribe says that?
Are you kidding me?
If it's a posted policy, I don't understand how it's unethical.
Onerous, yes.
Think about it.
Bold, Underlined,Three Exclamation Points.
Forbes: CD RATE FORECAST Published: Jun 7, 2022
Article states Ken Tumin forecast: Five-year CD rates could be as high as 5.00% by late 2023
Which means that PenFed's 3.50% APY, over five years, produces a significantly superior return when compared with a flat 3.45% brokered CD.
Here's the late-night math I'm basing this on
[please feel free to verify]
After five years:
$100k brokered @ 3.45% = $3,450 * 5 = $17,500
$100k @ 3.5% APY = $18,768.63
. . . which is equivalent to an uncompounded, flat 3.753% five-year return on principal
You raise an important point, and a complicated one.
The APY on a CD purchased directly from an FI is not necessarily directly comparable to the “yield” on a brokered CD. A brokered CD, for example, if purchased on the secondary market may be purchased at above or below par. The price at which it is purchased will affect the yield. In addition, a CD purchased directly may have a different cash flow pattern than a brokered CD sold at above or below par. And it may also have different tax consequences since the gain or loss at maturity of the brokered CD is a capital gain or loss, taxed at different rates than the interest.
Also, with a brokered CD, there may be different yields quoted depending on the terms of the particular security. For example there may be a yield to call quoted in addition to a yield to maturity.
There are a lot of nuances. But I think the general observation that you cannot directly compare the yield calculation on a brokered CD with the APY of a direct CD is accurate. It’s not apples to apples.
In the case you cited I think your calculations are correct. You can think of it as APR versus APY. Since the interest on the brokered CD is not compounded, the quoted yield represents simple interest similar the the “APR” on a directly purchased CD. But the PenFed direct CD compounds interest daily (I did not check this but I am assuming it from comments I read here). Therefore the 3.5% APY on the PenFed CD is a yield which includes the effect of compounding at the stated compounding interval. But the 3.45% yield on the brokered CD is simple interest without considering the effect of compounding. It is similar to a direct CDs “APR.”
In the example you gave, I also think alan1’s point is correct. The coupon payments on the brokered CD can be reinvested and if the rate of return is greater than zero, it would increase the total return possible to the date of maturity. But the final result in terms of dollars would depend on what return you can earn on the reinvested interest payments. You could end up with less or more than you would with the PenFed CD.
Complex analysis with many unknowns. I don’t think you can make a blanket statement about which of these two options is superior as there is a speculative aspect to the comparison in addition to the relative pros and cons of purchasing a direct CD versus a brokered CD and how they fit the buyer's needs.
There are no withdrawal penalties. It just gives you more flexibility.
If the Penfed CD had only a 6 month penalty, I would consider it.
(1) 5.63% of the principal AND
(2) Total interest earned up to the date of early withdrawal
So, the EWP will not eat up any part of the principal.
This is from the Penfed site:
12-, 15-, 18-, 24-, 36-, 48-, 60- and 84-month certificates:
Within 365 days from the open date of the certificate, the penalty will be the last 365 days of dividends earned.
After 365 days from the open date of the certificate have elapsed, the penalty will be 30% of gross amount of dividends that would have been earned if the certificate had reached maturity.
“Early Redemption Penalties:
Penalties are imposed for early withdrawal of Money Market Certificates. This will reduce earnings on the account. You must provide your request in writing.
Please refer to the Money Market Certificate Application for further details…”
The Money Market Certificate Application describes the EWP for a 5 year certificate as follows:
“2. Certificates Having a Term Greater Than Six Months
a. If redeemed within the first year, all dividends will be
forfeited.
b. If redeemed thereafter, but prior to the maturity date, the
early withdrawal penalty will equal 30% of what would have
been earned if the certificate had been held to maturity, not
to exceed total dividends earned.”
NOTE: This description of the EWP is also what Ken quoted in his post above.
In my original post, I converted all this into a numeric value as follows:
Full interest earned over 5 years, if certificate is held to maturity = 18.77% of principal (1.035 raised to the power of 5, Minus 1)
EWP = 30% of the full interest over 5 years = 30% of 18.77% = 5.63% of principal BUT subject to the limitation that the EWP cannot exceed the actual interest earned.
I hope this makes my original post more clear.
I like your restatement of the terms of the penalty. Good conceptual grasp.
The only comment I have on it is that your calculation assumes annual compounding. Does this CD have annual compounding? If not the 5.63% figure will not be accurate although may still be a reasonable estimate.
I did not research this CD so I don't know the answer to that question although annual compounding would be unusual.
Either way, I like what you did.
I did verify my calculation of interest earned against the examples given on the PenFed site before posting my comment.
1) First - you are not stupid. Even Warren Buffet has made some mistakes (and he's acknowledged several of them in his annual reports to shareholders). Is Buffet stupid? One thinks not, based upon the historical record.
2) Next, gather all statements, documents (especially Terms and Conditions docs.), etc., paper and digital, that you have dealing with these CDs. Make notes of all conversations (or recollections of prior conversations) that you, or anyone else authorized to speak for you, have made with PenFed regarding these CDs. What did the PenFed reps. tell you?
3) Next - why exactly do you say “I will lose ALL dividends on both of them”? To me this sounds unusual, although admittedly I haven't held PenFed CDs for some time. Are you sure about that? Do the T&C docs say that? Research exactly what the basis for that statement is. Search DepositAccounts.com for all articles/posts re. PenFed CDs. Note all mention of restrictions on dividend payouts, especially for CDs that are “cashed out” early.
4) Explore any “hardship case” rules that might be mentioned in PenFed's docs. which might allow you to end the CDs early, ideally receiving all dividends accrued and having the EWP waived.
5) Only then (when you have your ducks in a row) contact PenFed, and see what can be done. State that your goal is to be able to remain a PenFed customer and to invest in “new” PenFed CDs.
6) If their solution doesn't satisfy you, use the DepositAccounts.com tools for breaking a CD and reinvesting the funds in a new higher-rate CD for a first approximation. But also do the math by hand - because no automated tool can foresee all fees, differences in interest calculation, etc. Confirm your understanding of costs with PenFed before you have them “do the deed”.
Look at the bright side, it's only a .75% cd and a 1% cd, take the loss off your taxes and chalk it up to a learning experience.
a. If redeemed within the first year, all dividends will be forfeited.
b. If redeemed thereafter, but prior to the maturity date, the early withdrawal penalty will equal 30% of what would have been earned if the certificate had been held to maturity, not to exceed total dividends earned.
Even if one has sufficient funds so as not to worry much about EWPs, it still reduces the value proposition, especially when there are other high yielding CDs without the same punitive early withdrawal penalties.