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Ken Tumin founded the Bank Deals Blog in 2005 and has been passionately covering the best deposit deals ever since. He is frequently referenced by The New York Times, The Wall Street Journal, and other publications as a top expert, but he is first and foremost a fellow deal seeker and member of the wonderful community of savers that frequents DepositAccounts.

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5 Top Long-Term CD Rates After Early Withdrawal Penalties


5 Top Long-Term CD Rates After Early Withdrawal Penalties

With some recent rate cuts, I thought this would be a good time for another comparison of some top nationally available long-term CDs. There was one small pleasant surprise. I just noticed that Ally Bank increased its 5-year CD yield from 1.66% to 1.69%. It's not much, and I don't know how long this new rate will last, but in today's interest rate environment, we have to take any good news we can get. For those who just opened Ally's 5-year CD when the yield was 1.66%, you should be automatically bumped up to 1.69% thanks to Ally's Ten Day Best Rate Guarantee.

Ally Bank isn't the only internet bank with a mild early withdrawal penalty. Barclays new internet bank has an early withdrawal penalty of 3 months of interest for all terms. Its 5-year CD rate of 1.75% APY is a little higher than Ally's 5-year CD rate. Thus, it gives Ally some competition, and I decided to add this CD to the table below.

Another change was the replacement of INOVA Federal Credit Union with Justice Federal Credit Union. INOVA FCU recently slashed its CD rates. Its 6-year CD yield plummeted from 2.50% to 1.40%. Justice FCU continues to offer a very competitive 5-year CD yield of 2.20% APY for a $100K minimum deposit (2.10% APY for a $500 minimum). Also, Justice FCU has a reasonable early withdrawal penalty of 180 days of interest. Please refer to my Justice FCU CD review for more details about its CDs and membership.

The other two institutions on the table have kept their rates the same since my last post.

Discover Bank continues to offer a 10-year CD APY of 2.25% (2.30% APY for AAA members).

PenFed's 7-year CD yield remains at 2.50%. There's another alternative to PenFed. Patelco Credit Union is also an all-access credit union, and it is offering a 2.50% APY 7-year CD with the same early withdrawal penalty. You can get a higher rate at Navy Federal Credit Union. It's offering a 2.75% APY 7-year CD with a $100K minimum deposit (2.60% APY for a $20K minimum). However, membership is primarily limited to those who have a connection with the military (see post).

Risks of Planning for an Early Withdrawal

In addition to comparing the yields if the CDs are held to maturity, this post compares the yields if the CDs are redeemed early. This takes into account the early withdrawal penalties. As I've explained many times, 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. Even though the NCUA did allow one of these credit unions to increase the early withdrawal penalty on existing CDs, it did require that the credit union notify members at least 30 days before the change took effect. That will at least allow members to redeem their CDs before the new penalty takes effect.

Early Withdrawal Penalty Details

All of these 5 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 5-year CD at Justice Federal Credit Union is 180 days of interest. Details are listed at the bottom of Justice FCU's certificates page.

Barclays early withdrawal penalty is 90 days of interest. Details are listed in Barclays terms and conditions.

Effective Returns on CDs after Paying Early Withdrawal Penalties

Below is a comparison of the 5 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, Justice FCU takes the top spot through year 5.

If you compare the three banks (Discover, Barclays and Ally), Ally continues to take the top spot for year 1 and 2. However, Barclays comes very close for both of these years. At year 3, Barclays' yield matches Ally's yield. However, Discover Bank's 10-year CD yield exceeds both, and it continues to lead for year 4 and 5.

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 5/8/2012:

Approximate Yields After Early Withdrawal Penalties

Year of Early Withdrawal Discover's 2.25% 10-yr CD latest rates PenFed's 2.50% 7-yr CD latest rates Justice FCU's Jumbo 2.20% 5-yr CD latest rates Ally's 1.69% 5-yr CD latest rates Barclays' 1.75% 5-yr CD latest rates
Early Withdrawal Penalty 9 months 12 months 6 months 2 months 3 months
year 1 0.56% 0.00% 1.09% 1.41% 1.31%
year 2 1.40% 1.24% 1.65% 1.55% 1.53%
year 3 1.68% 1.66% 1.83% 1.60% 1.60%
year 4 1.82% 1.87% 1.92% 1.62% 1.64%
year 5 1.91% 2.00% 2.20% (no penalty) 1.69% (no penalty) 1.75% (no penalty)
year 6 1.97% 2.08% n/a n/a n/a
year 7 2.01% 2.50% (no penalty) n/a n/a n/a
year 8 2.04% n/a n/a n/a n/a
year 9 2.06% n/a n/a n/a n/a
year 10 2.25% (no penalty) n/a 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.

Related Pages: Ally Bank, Salt Lake City, Discover Bank, Salisbury, Justice Federal Credit Union, New York, Macon, Washington, Atlanta, Clarksburg, Chicago, Houston, Los Angeles, San Diego, CD rates, IRA rates, Barclays, Philadelphia

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Anonymous   |     |   Comment #1
Is Ally's bump only a one-time bump?  If so, does that mean they have effectively taken away the CD holder's right to bump to a much higher rate if and when rates shoot up much higher?  So is that why they raised the CD rate so little?
Truth Seeker
Truth Seeker   |     |   Comment #2
As I have said before, it really is crazy to put your money in any of these banks at such low rates for such long periods of time. People who do so put themselves in the line of fire of financial repression. The government is reporting a CPI that is several percentage points lower than reality, and artificially low rates of interest insure that you will have much less buying power from your money, at the maturity of the CD than you did before you invested in it.

I use this site primarily to find the highest interest rate paying money market and checking accounts, into which I periodically transfer funds, as I wait for the stock and precious metals market manipulators to do their dirty work. Then, I move money in and out of those accounts as needed. To lock money in bank and credit union CDs is to insure "victimhood" in the current disgusting environment, where the government is stealing value from "Mom & Pop" and giving it to Goldman Sachs, JP Morgan Chase, and the other NYC banksters.
Anonymous   |     |   Comment #3
Mr. T. Seeker:  I agree with all of your analysis except for the basic premise, that a long term money commitment of 2-2.5% is unwise.  Unless you are assuming central banks will step in continuously ad nauseum to prop up markets, comes a time when stocks/commidities will dip.  Unless your savvy at shorting or market timing, you can lose a boatload.  2% stinks, but it may be the new normal.
Anonymous   |     |   Comment #4
Look at Japan. How many years have they had low interest rates? Think it has been over 30 years.
Anonymous   |     |   Comment #5
Japan is a good example. Does anyone have an idea of what their inflation rate has been for the past 30 years?
Anonymous   |     |   Comment #6
I saw a chart of Japan's inflation rates.  They were basically low maybe averaging a bit over 2% but in 1974 raged to 24.95%!  They however, were able to get it under control again. 
Truth Seeker
Truth Seeker   |     |   Comment #7

I admit that what I am (keeping funds in the liquid highest yield checking & mm accounts I find on this website, and shifting in and out of the precious metals markets, following the government sponsored manipulations) is risky. But, keeping money in long term CDs, as I once did, and as most people here are still doing is far more risky. Well, maybe, it is a no-risk situation after all...but only in the sense that there is zero risk in that the immensely negative returns on current CDs are certain to cause you to have much less buying power 3,4,5, 6, 7 or 10 years from now.
Truth Seeker
Truth Seeker   |     |   Comment #8
In other words, there is no risk of making any money while invested in today's long-term CDs, and no risk of exiting, upon maturity of the long term CD, with anything near the buying power you had when you went into it. That is a no-risk investment I prefer to do without. So, as stated before, I use this site to find the highest yielding liquid accounts, and keep most of my funds in precious metals now, shifting in and out, with a portion of my money, to and from the liquid accounts, following the government sponsored market manipulations.
lou   |     |   Comment #9
Truth Seeker, moving money in and out of precious metals is not an easy way to make money. There are professional Wall Street traders who are unable to successfully navigate these markets. There are other ways to invest your money besides CD's, but one should not kid himself that it does not come with some degree of additional risk. You could invest in high yield bonds, dividend paying stocks, CEFs, MLPs, REITs or a variety of other investments. It always comes down to your risk tolerance level, your investment return objectives, and the amount of money you need to retire comfortably. There is no hard fast rule that equally applies to everyone.

I still have a good percentage of my assets in CD's because I believe the fiscal and monetary policies our country is pursuing will ultimately be reflected in the financial markets.
Anonymous   |     |   Comment #10
Has anyone bought CDs through Barclays Bank in the US?  Is there anything different about it that one should know?  Thanks!
Anonymous   |     |   Comment #12
You need to point out that Discover allow you to make a partial withdrawal at any time without disturbing the terms of the rest of the CD.  Most banks make you cash in the whole CD when you make an early withdrawal.  With Discover, you can just have the interest sent to you monthly without penalty.  Or, if you need more than just the interest, you can pull out a fixed amount comprised of both principal and accumulated interest.  So, lets say you have $165,000 and want to withdraw $1600 a month for 7 years.  You will pay about $17 in penalty in each of the early months.  If you did it every month, the penalty amount rises slightly since you are pulling out more principal than interest as the balance of the CD goes down.  At the end of 7 years, you still have about $58K to buy a new CD.  This feature made a believer out of me and I have 5 CDs with them.  Yes, I'm way over the $250K FDIC limit, but that's not my main concern.  It's figuring out how to maximize my income without buying into a crappy annuity.  I love Discover.