Comparison of Long-Term CD Rates After Early Withdrawal Penalties

With some recent rate changes, I thought this would be a good time for another comparison of some top nationally available long-term CDs. 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.

Not all of the rate changes were cuts. The new internet bank Barclays increased its 5-year CD yield from 1.75% to 1.80%. Barclays is similar to Ally Bank in that it has a mild early withdrawal penalty (EWP). With an EWP of 3 months of interest, it's not quite as good as Ally's EWP of 2 months of interest, but it's half the amount of the typical EWP for 5-year CDs. Barclays CDs do have one downside that may be an issue for some. Currently, Barclays CD customers cannot receive interest disbursements. So you have to let the interest be added back into the CD until maturity. I have more details in my Barclays and CD review.

There was one institution that has reduced its rates. Pentagon Federal Credit Union (PenFed) reduced its 7-year CD yield from 2.50% to 2.40%. Because of this change, I replaced PenFed with Patelco Credit Union which recently introduced a 7-year CD and IRA CD. Patelco's 7-year CD still has a 2.50% APY as of 6/5/2012. The EWP is the same as PenFed's EWP (1 year of interest). I have more details about Patelco and this CD in my Patelco Credit Union and CD review.

For the other three institutions, their rates have remained the same since my last comparison.

Discover Bank continues to have the highest CD rate from an internet bank. The downside is that it has a very long term of 10 years. However, the early withdrawal penalty is reasonable for such a long term (just 9 months of interest).

Ally Bank often makes small rate changes to its 5-year CD, but its current rate has held for several weeks.

Justice Federal Credit Union has maintained its 5-year CD rates since March. I've included the Jumbo CD rate in the table below. This requires a $100,000 minimum deposit. The regular CDs which require a minimum deposit of $500 have rates that are 10 basis points lower. One downside with Justice FCU is that it can be difficult to join. I have more details in my Justice FCU CD and membership review.

How The CD Rates Compare

As you can see in the table below, Ally continues to be the best deal if you close the CDs within one year. However, with Barclays recent rate hike, Ally doesn't have much of a lead over Barclays. For closing a CD at year 2 or later, Barclays' CD becomes a better deal than Ally's CD. However, Discover Bank's CD becomes a better deal than both Barclays and Ally starting at year 3.

The rate hike at Barclays wasn't enough to surpass Justice FCU which continues to have the top spot for CDs closed from 2 to 5 years.

Risks of Planning for an Early Withdrawal

Comparing the yields if the CDs are redeemed early assumes that the customer will be able to close the CD early with the early withdrawal penalty specified at the time the CD is opened. 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. Below I review the early withdrawal penalty details for each of these institutions. I include links showing where the EWPs are described by the institutions. Please note that institutions can change these EWPs. Make sure to check with the institution for the latest EWP details before opening the CD.

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

Patelco Credit Union recently came out with this 7-year CD and IRA CD. Thus, this 7-year term isn't mentioned in the credit union's membership handbook. There is small print in Patelco's CD page that describes the early withdrawal penalty for the 7-year CD as follows:

There is a 365-day interest penalty for early withdrawal that will not be waived regardless of eligibility for distribution from an IRA except in circumstances of death or legal incompetence.

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.

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 6/5/2012:

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.