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
|Year of Early Withdrawal||PenFed's 7-yr 3.00% CD||Nationwide's 5-yr 2.60% CD||Ally's 5-yr 2.39% CD|
|year 5||2.39%||2.60% (no penalty)||2.39% (no penalty)|
|year 7||3.00% (no penalty)||n/a||n/a|
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.
People don't need jobs, they need interest -- and lots of it!
Got my statement today. Effective March 1,2011. penfed will no longer offer 2% cashback for supermarket purchases. No reason given. 5% on gas and 1% on everything remains. (Including supermarkets)
BTW, thank you very much Ken for discussing the early withdrawal penalties. Please keep up your good work in this difficult environment. Due to reading your blog over the last few years I still have some CDs tied up at 5% or 6%. Alas, they will mature shortly.
I'll stick with the low rates as long as I can, not going to mess with the traders and pushers, or having to hire a CPA to do the paperwork required with gains and loss statements.
The CU and local banks here are so low its not even worth talking to them when a CD matures, just redo it and hold my nose for now. I stay local though cause I like to be able to walk in and at least look someone in the face. Besides rates aren't all that much better anywhere else now as it is.
I'm keeping a tab on this talk about rates raising sometime this year, maybe late summer or so, we'll see how that works out. It will be interesting to see how many are still left with their savings to re invest by than.
If you are in a high tax bracket, this can soften the penalty appreciably. I was faced with the need to cash in a number of long-term CD's in 2009 to cover a large, unanticipated purchase. What was helpful was that my income was particularly high that year, compared with past years. So I was being taxed at a higher marginal rate than in prior years when most of the interest had accrued, and tax thereon was paid. YMMV!
banks history of honoring early withdrawl: i can atest to penfed being very helpful with an early CD withdrawl. just had to fax them a letter stating my request and it was processed the very same day. while i have no history with ally, i would think a bit if they wouldn't move slow under a rush of requests, especially with a large rateseeker clientele.
will the bank offer a CD backed loan: if in a temporary jam, this could be an option for one needing liquidity immediately and not lose a high long term rate. if you have a large long term CD at a high rate, borrowing on a portion of it for a temporary basis will allow you to keep it.