Comparing Top Long-Term CD Rates After Early Withdrawal Penalties

I thought this would be a good time for another comparison of some top nationally available long-term CDs. The comparison of the rates takes into account the early withdrawal penalties. This allows you to compare not only the rates if the CDs are held until maturity, but also the rates if closed early. 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. About the risk of banks increasing the early withdrawal penalties on existing CDs, there have been two cases of this at credit unions. The last one was in January. Don't forget there's also a risk that rates continue to fall and stay low for many years.

My last comparison was done in January of four nationally available long-term CDs. Three of the four CDs remain the same except for slight rate changes. These include Discover Bank's 10-year CD (w/o AAA bonus), PenFed's 7-year CD and Ally Bank's 5-year CD (w/o renewal bonus). I removed the 5-year CD at Digital Credit Union (DCU) due to a large rate cut. I replaced that with the 6-year CD at INOVA Federal Credit Union. Like PenFed and DCU, INOVA FCU makes it easy for anyone to join (see my review).

All of these four institutions have reasonable early withdrawal penalties.

According to Discover Bank's FAQs, the penalty for terms over 5 years is "9 months simple interest on the amount withdrawn".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

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.

The early withdrawal penalty of the 6-year CD at INOVA Federal Credit Union is 180 days of interest. This is based on what I've been told by the credit union service representative. A reader also reported that he confirmed this in the disclosure. Unfortunately, the disclosure isn't available online.

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.

If you close the CD at or after 2 years, INOVA FCU takes the top spot until year 7 when the PenFed CD matures.

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 2/27/2012:

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.