Ally Bank Changes Deposit Agreement Covering CD Early Withdrawals

Ally Bank has made an amendment to its deposit agreement that covers CD early withdrawals. The early withdrawal penalty size was not changed. That remains 60 days of interest. The primary change was the addition of the phrase "If we consent to the redemption of a CD or IRA CD prior to the maturity date." Based on this addition, new Ally CD holders should not assume that they will be allowed to make an early withdrawal in the future (excluding the No Penalty CD). This change is effective as of September 27, 2012. I don't remember receiving notification of this change from Ally. Thanks to the DA reader Primary who noted this change in the DA forum.

To review the details of the change, refer to the last page of the September 27th deposit agreement (PDF). This last page has the title "AMENDMENTS TO THE DEPOSIT AGREEMENT DATED JUNE 18, 2011." Below is an excerpt of the September 27th change. I've added emphasis to the "consent" portion.

The language on Page 7 of the Deposit Agreement following the Early Withdrawals “bullet” is deleted in its entirety and replaced with the following language:

You may not make a partial withdrawal of principal from a CD or IRA CD prior to the maturity date. If we consent to the redemption of a CD or IRA CD prior to the maturity date, we will close the CD and impose a penalty. The penalty amount will be equal to the loss of 60 days interest calculated at the interest rate in effect for the CD or IRA CD at the time the redemption request is made. The penalty will be imposed on the balance of the CD or IRA CD. Any accrued (but not yet posted) interest will be applied as a credit against the penalty amount. If the accrued interest exceeds the penalty amount, the excess accrued interest over the penalty amount will be paid to you. If the accrued interest is less than the penalty amount, a reduction of the balance may result.

This penalty does not apply in the case of the Ally No Penalty CD, which does not allow withdrawals during the first six days following the date the account is funded. Thereafter, you may withdraw the balance and accrued interest without penalty.

This penalty also does not apply in the case of death, disability or legal incapacity of any owner, or to a withdrawal of up to the required minimum distribution from a CD held in an Ally traditional or SEP Individual Retirement Account (IRA). For more information about withdrawals from Ally IRAs, please see the Custodial Account Agreement and Disclosure Statement provided at the time of your online IRA application and in your Welcome Kit.

Update 10/26/12: I have not been able to receive information from my Ally Bank contact about the effect of the amendment on existing CDs or an explanation for the reason why the amendment was added. The only information that I received from my Ally Bank contact is the following:

Ally Bank ordinarily will consent to the early withdrawal of a CD as long as the depositor pays the penalty. The policy has not changed.

Update #2: Allan Roth at CBS MoneyWatch just published an article on this. He has received a few more assurances from Ally Bank, but I can't say this eliminates the concerns we have.

Long-Term CD Risks

We have discussed the risks of long-term CDs for several years. If you're planning for a CD early withdrawal, there are two potential gotchas:

1. The bank refuses to allow an early withdrawal
2. The bank increases the early withdrawal penalty on your existing CD

These risks become more serious if we see big increases in interest rates. When or if that will happen is open to debate. No one wants to be stuck in a low-rate CD when rates are surging higher.

I've documented two cases of the second gotcha. This has been done by two credit unions as I described in this post.

I don't have recent examples of the first gotcha. In my 2008 blog post, I reported on the experience of Chris at Jumbo CD Investments. He remembered two cases in which a bank refused to release funds. In one case, the bank ended up working with him and his client. They were able to have the bank release the funds after negotiating a higher penalty. The other bank would not budge, and it refused to release the funds.

Banks have little reason to refuse early withdrawals in today's environment of falling interest rates. If rates start rising, banks will have more incentives to refuse especially if rates rise substantially.

Ways to Minimize Long-Term CD Risks

One way to avoid long-term CD risks is of course to avoid long-term CDs. This may help with the possibility of fast rising interest rates, but there's another risk: rates keep falling or stay low. That is what has been happening over the last four years. If you avoid long-term CDs and choose short-term CDs or savings accounts instead, you'll lose out on some interest. Of course as long-term CD rates fall, this becomes less of an issue.

Another way to minimize long-term CD risks is to use CD ladders. With CD ladders, you have long-term CDs maturing in regular intervals. This allows you to take advantage of rising interest rates as the CDs mature.

As the famous adage goes, you shouldn't put all your eggs in one basket. The same can be said of CDs. If you have your CDs in multiple banks or credit unions, it reduces the chance that all of your CDs will be hit with changes in early withdrawal terms.

It's also a good idea to keep on top of the interest rate environment. If interest rates start a big rise, it may be better to be in the first group to request an early CD closure. As mentioned by Chris, "the first "wave" of closures will probably go without a hitch. But as the banks receive more and more requests, more attention could be given, and potential refusals."

Raise Your Rate CDs

Finally, you may want to consider CDs that are designed to help customers if interest rates rise. Ally Bank's Raise Your Rate CDs could be helpful. Ally's 4-year Raise Your Rate CD has a yield that's just a little lower than the 5-year CD yield. The advantage of the 4-year CD is that it gives the customer the right to bump up the rate twice before maturity if the rates on new Ally 4-year CDs have increased. For more details, refer to my post in which I compare these Ally CDs.

CIT Bank also has this rate bump feature on its 1-year and 2-year Achiever CDs. These allow you to raise your rate once during the term. It also allows you to add a deposit before maturity. The add-on deposit won't help dealing with rising rates, but this can help if rates continue to fall. I have more details in my CIT Bank Achiever CD review.

Last week I came across another bank with a raise your rate CD. It's Citizens State Bank, and it's offering a competitive 3-year raise your rate CD. I reviewed this small Florida bank and its online application in this post.

One potential gotcha with raise your rate CDs is the risk that the bank won't keep its CD rates competitive. If the bank doesn't keep up with the rising rates, you may never get a chance to take advantage of higher rates using the bump-up feature.

Edit: Corrected the references of the first and second gotchas.