What to Do with Maturing CDs? Choosing the Best New Long-Term CD

Many 5-year CDs with interest rates over 5.00% will be maturing this year, and several readers with these CDs have been trying to decide what to do with that money. Unfortunately, there isn't any great option for money that you want to keep 100% safe. No one likes to lock into long-term CDs with today's low rates. Also, no one likes earning less than 1.00% in savings accounts and short-term CDs.

One strategy that I've described many times is choosing long-term CDs with competitive rates and with mild early withdrawal penalties. 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

I reviewed the issue of banks refusing an early withdrawal in November, and we learned in September of NCUA ruling in favor of a credit union increasing EWPs on existing CDs. These are legitimate risks, but it's important to remember there's also the risk that rates continue to fall and stay low for many years.

Another strategy is to choose the best long-term CD rates without any plans of early closure. If this is for money that you won't need for 5 or more years, the main risk will be losing out on higher rates if interest rates start rising. CD ladders can help minimize this risk since you'll have some CDs maturing on regular intervals allowing you to take advantage of those higher rates.

Finally, a third strategy is to keep your money liquid in short-term CDs, savings accounts or reward checking accounts. This might be a smart strategy if interest rates shoot up in the next year or two. However, if conditions continue as they have been in the last three years, you'll miss out on higher rates that you could have received if you had chosen long-term CDs.

In future posts, I'll do some comparisons between the second and third strategy based on possible future interest rates. I can't say how interest rates will change over the next 5 years, but I can provide several possible scenarios and review how the earnings of the above strategies will differ.

In this post, I'll review the first strategy of choosing competitive long-term CDs with mild early withdrawal penalties. There are a few credit unions and banks which I exclude from this review. These might have the best rates, but they have harsh early withdrawal penalties. These include Melrose Credit Union which has the best nationally available 5-year CD APY (2.68% as of 1/16/2012), US Bank which has the best 5-year CD APY at a nationwide bank (2.25% for 59 months as of 1/16/2012) and Capital One which ties with Discover Bank for the best bank 10-year CD APY (2.55% for Costco members or 2.50% for others as of 1/16/2012). The early withdrawal penalties of these institutions are so harsh that there's no reason to calculate the post-penalty yields. Savings account yields will likely be better than these post-penalty yields.

The four long-term CDs that I'll review in this post are the same ones that I reviewed in December: Discover's 10-year CD (w/o AAA bonus), PenFed's 7-year CD, Digital Credit Union's 5-year CD (Jumbo w/o relationship) and Ally Bank's 5-year CD (w/o renewal bonus). Unfortunately, rates have dropped at DCU and at Ally since December.

All of these four institutions have reasonable early withdrawal penalties.

According to Discover's FAQs, the penalty for terms over 5 years is "9 months simple interest on the amount withdrawn".

PenFed's disclosure states that certificates with a term of 5 years or greater that are redeemed after 365 days will have an early redemption penalty of "dividends for the most recent 365 days." If closed before 365 days, all dividends will be forfeited which means that the penalty won't eat into the principal.

The early withdrawal penalty of the 5-year certificate from Digital Credit Union (DCU) is up to "all dividends (accrued and posted) for 180 days on the amount withdrawn." Like PenFed, the penalty won't eat into the principal. The full details are described in DCU's Certificate Request Form.

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.

Below is a comparison of the four 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. As you can see, Ally continues to be the best deal if you close the CDs within one year. For the case of PenFed, you will lose all interest if you close the CD within one year.

After 2 years, DCU becomes the best deal and continues to be the best deal until its 5-year maturity (except for around 4 years when PenFed has a slight advantage). It's interesting to see how close the yields are between Discover Bank, PenFed and DCU for closures at year 3 and 4. You might want to choose the longer-term CDs at PenFed and Discover Bank to hedge against the risk that rates continue to fall and stay low for the rest of this decade.

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 1/16/2012:

Approximate Yields After Early Withdrawal Penalties

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.