Comparison of Long-Term CD Rates After Early Withdrawal Penalties - August 2012

It has been two months since my last comparison of the top nationally available long-term CD rates after early withdrawal penalties. As you might have expected, there have been more rate cuts. So I thought it would be useful for an updated comparison. 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.

Out of the 5 banks and credit unions that were compared in June, the largest rate cut was on the 5-year Jumbo CD at Justice Federal Credit Union. That yield has fallen from 2.20% APY in June to 1.90% APY today. After reviewing the top 5-year CD rates, I decided to replace Justice FCU with The National Republic Bank of Chicago. Its yield is just a little higher than Justice FCU, and it has the same early withdrawal penalty of 6 months of interest. The main reason for the change was due to two significant advantages of the bank. First, it has a lower minimum deposit requirement, and second, it has an easier application process. The bank has an online application with no membership requirements to worry about. One potential downside is that the bank's 5-year CD rate may be more likely to drop before the end of the month. Update 8/8/2012: See note below

There are credit unions that offer higher 5-year CD yields than 1.91% such as US Senate FCU, Melrose Credit Union and Fort Knox FCU. However, all of these have much larger early withdrawal penalties.

In addition to the rate cut at Justice FCU, there was also a large rate cut at Discover Bank. Its 10-year CD APY fell from 2.25% in June to 2.10% today.

I decided to keep Discover Bank's 10-year CD in the table. There are some credit unions with higher rates such as Apple Federal Credit Union which offers a 2.40% APY 10-year CD. However, its early withdrawal penalty of 3 years of interest is much higher than Discover Bank's EWP of only 9 months of interest. Navy Federal Credit Union also has higher rates, but membership is primarily limited to those who have a connection with the military. I also considered replacing Discover Bank's 10-year CD with its 7-year CD which has a 2.00% APY which is only 10 basis points under the 10-year CD rate. This will be a slightly better choice if you want the money at 7 years.

There were only small rate changes with the 5-year CDs at Ally Bank and Barclays. Compared to June, Ally's 5-year CD rate increased by 5 basis points and Barclay's 5-year CD rate decreased by 5 basis points. Both now have almost the same rate. However, it should be noted that Ally has been making small changes to its CD rates almost every week.

Finally, one institution is still offering the same rate that it was offering in June. Patelco Credit Union continues to offer its special 7-year CD with a 2.50% APY. This is now the highest CD rate that's nationally available for any term.

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 two years or sooner. After two years, Patelco Credit Union's 7-year CD becomes the best deal. As more time passes, the high rate will offset a large early withdrawal penalty. In fact, Patelco Credit Union's 5-year yield after the penalty is higher than any of the 5-year CD yields with no penalties.

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 The National Republic Bank of Chicago is 6 months of interest. I was not able to find the CD disclosure at the bank's website. I was informed of this penalty in an online chat session with a bank representative. I have more details in this account review.

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 8/7/2012:

Update 8/8/2012: The National Republic Bank of Chicago just reduced the 5-year CD yield from 1.91% to 1.76% APY. Justice FCU continues to offer 1.90% APY. Another option is CIT Bank which also has a 1.90% APY. However, its EWP is twice the size at 12 months of interest.

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.