Comparing the Best Long-Term Certificates of Deposit

CD rates at both Pentagon Federal Credit Union and Ally Bank have again gone down lately. However, both continue to have the best long-term CD deals that are nationally available. PenFed has the best rate on a 7-year CD. Ally Bank's 5-year CD rate isn't the best, but it has the smallest early withdrawal penalty of any institution.

Below is an updated early withdrawal yield table that shows approximate average yields you would receive if you close these CDs early. It allows you to determine if it makes more sense to buy a long-term CD rather than a short-term CD.

I've also included Nationwide Bank which currently offers one of the best 5-year CD rates from a bank. As of 1/21/2011, it has a 2.60% APY for a $100K minimum deposit and a 2.55% APY for a $500 minimum. As I described on Tuesday, it has an early withdrawal penalty of 6 months of interest. I didn't include the CDs from Melrose Credit Union and Salem Five due to their harsh early withdrawal penalties.

With only a 2-month interest penalty for early withdrawals, Ally Bank's 5-year CD continues to be the best deal if you think it's likely that the CD will be closed before 5 years. You might want to do an early closure due to interest rates shooting up or if you need the money.

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 1/21/2011.

Approximate Yields After Early Withdrawal Penalties

I don't have any updates to the potential risks of long-term CDs that I discussed in this November blog post. This includes the risk that the bank could increase the early withdrawal penalty on existing CDs. I've received an assurance from Ally's public relations director that the penalty would not be increased on existing CDs. Allan Roth at The Irrational Investor Blog received a similar assurance from PenFed. You can review Ally's disclosure, PenFed's CD terms and Nationwide Bank's terms and conditions to make your own decision regarding this risk.

For more details on PenFed CDs and membership, please refer to my recent PenFed CD review. For more information on Ally Bank CDs, please refer to my Ally Bank CD review. And for more details on Nationwide Bank CDs, please refer to my Nationwide Bank CD review.

You may be able to get higher CD rates at banks or credit unions in your state. To search for the best deals available both nationwide and in your area, please refer to the CD rates and CD IRA rate tables at DepositAccounts.com.