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Are You Ready for a Cashless Society?Rates and Early Withdrawal Penalties of the Best Long-Term CDs
Long-term CD rates continue to trend down. The latest cut is at Ally Bank. Almost every week there has been a small rate cut, and that is continuing. Ally's 5-year CD rate just fell from 2.33% to 2.32% APY. But Ally isn't alone. You can find higher 5-year CD rates at banks, but not by much. The highest bank 5-year CD rate is 2.60% APY at the new internet bank airbanking.com (as of 7/27/2011). I first reviewed airbanking and its CDs in this July 15th post.
We have several credit unions on our 5-year CD rates table with higher rates than airbanking. The two highest are Connexus Credit Union and Melrose Credit Union. Both have downsides. Connexus requires an active checking account, and Melrose Credit Union has a harsh early withdrawal penalty. Consumers Credit Union has a Jumbo 59-month CD rate that's close to Melrose 5-year CD rate, but unlike Melrose, it's early withdrawal penalty is only 120 days of interest. Like Melrose and Connexus, Consumers Credit Union makes it easy for anyone to join.
Because of Consumers Credit Union's competitive 59-month Jumbo CD, I decided to compare it with Ally's 5-year CD and iGObanking's 10-year CD. The table below assumes an early withdrawal is done, and it shows the effective yields after taking into account the early withdrawal penalties. As you can see, Ally only has the best rate when the CD is closed after 1 year. After that iGObanking quickly takes the lead. Consumers Credit Union's rates are between iGObanking and Ally for years 2 to 5.
We have long discussed the risks that the banks or credit union may increase the early withdrawal penalties on existing CDs or prohibit early withdrawals. You can review this post for my last discussion of this. It's possible that rates could start rising if the debt ceiling debate becomes a crisis. However, as I mentioned in my last weekly recap, it's also possible that such a crisis could further depress CD rates. So there's also risks in waiting for higher rates.
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 7/27/2011:
Approximate Yields After Early Withdrawal Penalties
| Year of Early Withdrawal | iGObanking's 10-yr 3.5% CD | Consumers CU Jumbo 59-mo 2.75% CD | Ally's 5-yr 2.32% CD |
| Early Withdrawal Penalty | 6 months | 4 months | 2 months |
| year 1 | 1.73% | 1.83% | 1.93% |
| year 2 | 2.61% | 2.29% | 2.12% |
| year 3 | 2.91% | 2.44% | 2.19% |
| year 4 | 3.06% | 2.52% | 2.22% |
| year 5 | 3.14% | 2.75% (59-mo, no penalty) | 2.32% (no penalty) |
| year 6 | 3.20% | n/a% | n/a |
| year 7 | 3.25% | n/a | n/a |
| year 8 | 3.28% | n/a | n/a |
| year 9 | 3.30% | n/a | n/a |
| year 10 | 3.50% (no penalty) | 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.
The 5 yr rate for >$10k is 2.88 APY. For a CD ladder, their Option3 plan spreads your funds evenly over 5 terms (1yr/1.51%, 2yr/2.02%, 3yrs/2.52%, 4yrs/3.09%, 5yrs/3.55%). They offer two shorter ladders as well, the shortest diving between 30month/2.32% and 5yr/3.55%. The longer rates were better than I could find anywhere else.
I was able to join as an "industry retiree" being a former employee of an airline (no longer in existence) qualifying for a pension (not yet collecting). Their telephone reps and local office reps were very professional and helpful.