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

It has been 6 weeks 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, and after last week's Fed meeting, we may see more. 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.

The only institution that hasn't cut its rates since August is Discover Bank which continues to offer a 2.10% APY 10-year CD. Patelco Credit Union cut its special 7-year CD from 2.50% to 2.00% APY. I was going to replace this CD with PenFed's 2.02% APY 7-year CD. However, I decided to replace it with Discover Bank's 2.00% APY 7-year CD. Even though the yield is a tad lower, Discover Bank's early withdrawal penalty is a little smaller.

I kept both Ally Bank and Barclays Bank in the table. They both cut their CD rates by 5 basis points since last month. For nationally available bank CDs, their rates aren't the best, but they have the smallest early withdrawal penalties. If you just want the highest rate, CIT Bank continues to have the highest 5-year bank CD rate with a 1.90% APY Jumbo CD.

I added a new institution to the list. It's Eli Lilly Federal Credit Union which has a special 5-year CD with a 2.00% APY. In addition to being a top rate, Eli Lilly FCU also has a small early withdrawal penalty of 90 days of interest. Like PenFed and Patelco, it's an all-access credit union that makes it easy for anyone to join via an association. I have more details in my Eli Lilly FCU and CD review. One downside to this CD is that it's only a limited time special. So it may not last long.

How The CD Rates Compare

As you can see in the table below, Eli Lilly FCU's CD is the clear leader for 5 years and under. For terms over 5 years, it's hard to justify Discover Bank's 10-year CD. Its rate isn't much higher than its 7-year CD. Both have the same early withdrawal penalty of 9 months of interest.

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 last 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".

According to Eli Lilly FCU's certificate disclosure, for a certificate account that has an original maturity of one year or more: "The penalty we may impose will equal 90 days dividends on the amount withdrawn subject to penalty."

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.

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 APYs are based on the yields listed at the institutions' websites as of 9/18/2012:

In addition to the rates, banks and credit unions can change the early withdrawal penalties for new CDs. Make sure to review the latest disclosures from the bank or credit union before opening a new CD or renewing a CD.

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.