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Is Your Credit Union a Part of the Shared Branch Network?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:
- The bank refuses to allow an early withdrawal
- 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According to Discover Bank's FAQs, the penalty for terms over 5 years is "9 months simple interest on the amount withdrawn".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
| Year of Early Withdrawal | Discover's 2.45% 10-yr CD latest rates | PenFed's 2.76% 7-yr CD latest rates | INOVA's 2.50% 6-yr CD latest rates | Ally's 1.74% 5-yr CD latest rates |
| Early Withdrawal Penalty | 9 months | 12 months | 6 months | 2 months |
| year 1 | 0.61% | 0.00% | 1.24% | 1.45% |
| year 2 | 1.52% | 1.37% | 1.87% | 1.59% |
| year 3 | 1.83% | 1.83% | 2.08% | 1.64% |
| year 4 | 1.99% | 2.06% | 2.18% | 1.67% |
| year 5 | 2.08% | 2.20% | 2.25% | 1.74% (no penalty) |
| year 6 | 2.14% | 2.29% | 2.50% (no penalty) | n/a |
| year 7 | 2.18% | 2.76% (no penalty) | n/a | n/a |
| year 8 | 2.22% | n/a | n/a | n/a |
| year 9 | 2.24% | n/a | n/a | n/a |
| year 10 | 2.45% (no penalty) | n/a | 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.
Your posting is just hypothetical and does not account for FDIC rule that if bank or CU might become insolvent if most of the CD are withdrawn, then they can refuse to close any or all CDs and be within the banking or credit regulations in effect today.
All CD withdrawals are contingent by the bank or CU to permit you to close it. They can refuse EWP at any time even without FDIC regulations call upon in effect.
However, since one never knows "which" may be that bank that will "try" to do such things, this is the reason that I have never put all our funds into just "one" bank or even cu. I spead funds arounds and make sure those I select are in the best financial condition I can find at the time. If such a calamity some are posting about ever happens in our country, no investment will be a safe place to protect your money, imo. Once the dominos start falling, it won't just be CDs that are affected. We either feel we can trust our government or we don't. There is an election coming up this year. If you are truly concerned for these problems, just make darn sure you pull that lever for the right candidate and let's make sure we "don't" have "change that we don't want to believe in".
Well said
Bottom line is, one has to tread very carefully before depending on EWD's as a CD strategy. Unfortunately, they have not proven to be 100% dependable. I tend to agree with the posters who say that one should open a CD based on the premise that it will go to maturity.
Now, if it was ING/Capital One, I wouldnt trust them for a second.
And Ken has posted the risk many times.
I buy CDs hoping I can find a better alternative before it ends that justifys taking the penalty.
It hasnt happened yet.
I think I need to have more of my money in the stock market because low rates should help stocks.
Even a 20 PE is a 5% earnings yield which is far better than any long term CD.
But, I usually buy things with lower CDs.
I used to make a lot of money in stocks. Over time, as liquidity opportunies arise, I find myself unable or unwilling to take the same risks as when I bought them.
I was a better investor when I had other, regular income because I was more willing to take risks.
Now, with no outside income other than interest & stock gains, if any, I am too cautious.
While i am very young to be retired, I dont want to be forced to get a job again and my previous occupation as a curbstone car dealer is not as lucrative as it used to be and enforcement in my area is much tougher than it used to be.
Lots of anti-curbstoning campaining going on. Much of it false & misleading of course.
Just because a guy sells cars off the side of the road does not automatically mean he is out to cheat you anymore than the guy with a car lot & high overhead. And 99.9% of the time, As is means as is no matter who you buy from.
I have to say that I totally disagree with you. In your post, you say that "There are plenty of safe investments here that pay close to the same rate." PLEASE, tell me where one can get 3.63% fixed rate for 10 years. The highest I see in a 10-year CD is about 2.70%. That's almost a 1% difference, or 37% more interest over the life of the investment! I don't think that difference is "tiny." I also don't see much risk in these bonds...they have never been defaulted on, pay interest 2x a year, and are very easy for US citizens to buy and redeem at maturity. If there were 3.63% CD's I would buy them. Please tell us where!!! As to a 10-year term, I truly feel that rates will be LOW for at least 5-7 years before they make a slow climb up. 10 years for a decent rate looks good to me.
Geez......I cant get through to you. This is insanity. Not only locking in 3.63% for ten years......but opening yourself to so many risks......political risk,currency exchange risk,default risk,nuclear annilation risk,terrorism risk,liqidity risk.......wow.......and all for 3.63%. Insanity defined.
Also, don't know how posters can assess "risk" on Israeli bonds -- they have never been defaulted upon from what I read as well. The 'risk' you are speaking of is purely conjecture.
AND Ken: Please consider removing posts like #25 which are highly insulting to all of us.
I believe the vast majority of people who visit Ken's site on a regular basis also agree with you.
I inquired about this and was told that, "Rates are always subject to change, but because you are committing to a specific term your rate would be in effect for the duration of the stated term". The Step Up APY is only 0.10% less than the fixed rate (2.50% vs 2.40%), which seems like a worthy trade off to be able to bump up once. Still, this "fine print" is giving me some pause while deciding between the Step Up vs tradtional fixed rate CD.