Comparison of Long-Term CD Rates After Early Withdrawal Penalties - January 2013

It has been about four months since my last comparison of the top nationally available long-term CD rates after early withdrawal penalties. 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.

Long-term CD rates are just a little bit lower than they were four months ago. The highest yield is 2.05% for a 5-year CD at Citizens State Bank. Longer terms of 7 years and 10 years don't help with yields. Even Discover Bank's 10-year CD has only a 2.00% APY.

With these yields so low, you may want to consider shorter-term CDs. However, many of these don't have yields higher than internet savings accounts. One exception is Pentagon Federal Credit Union (PenFed) which currently has the best mid-term CD rates (1.25% APY 1-year, 1.60% APY 2-year and 1.85% APY 3-year).

If you do think it's likely that rates will be higher 2 or 3 years from now, these PenFed CDs will be better choices than any of the long-term CDs that I list below. The risk with these PenFed CDs is that rates continue to fall, and you will have even more dismal CD choices 2 or 3 years from now.

How The CD Rates Compare

Citizens State Bank may have the CD with the highest rate, but it has the largest early withdrawal penalty of 24 months of interest. As you can see in the table below, the effective rate goes way down if you close this CD early even after 4 years. So this CD isn't a good choice if you think it's likely that you'll close the CD early to take advantage of higher rates elsewhere.

Update 1/25/13: Barclays increased its 5-year CD APY from 1.70% to 1.85%. The table has been updated with this change.

Ally Bank's 5-year CD only has the lead under one year. Note, this assumes you don't get the 25bps renewal bonus. Starting at the first year, Barclays' 5-year CD has the rate advantage thanks to the recent rate hike. Discover Bank's 10-year CD is close to Ally at year 3, and it takes the lead at year 4.

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

The risk of Ally Bank refusing an early closure went up last year when it updated its CD disclosure. Due to this disclosure change, Ally joined other banks that have language in their disclosures which gives the bank the right to refuse an early closure. I reviewed these banks and credit unions in this 2011 post.

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 2012. 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.

Also, it should be noted that PenFed has increased the early withdrawal penalty on its 5-year CD, but it did the honorable thing by only making this change effective on new CDs. The change did not apply to existing CDs.

Early Withdrawal Penalty Details

Below I list 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 fees section of the Discover Bank's FAQs, the penalty for terms over 5 years is "9 months simple interest on the amount withdrawn".

PenFed's CDs with terms from 1 to 4 years have an early withdrawal penalty of up to 180 days of dividends. CDs with terms of 5 or 7 years have a EWP of up to 365 days of dividends. Note, the penalty doesn't eat into the principal so if you redeem the 7-year CD before 365 days from the issue date, you'll just lose all of the accrued interest. Please refer to PenFed's disclosure for more details (bottom of PenFed's Money Market Certificate page).

To view Citizens State Bank's EWPs, refer to the fee tab in this Citizens State Bank CD page. At the bottom of the page it states "For accounts with original maturity of five years we may impose a fee equal to 24 months' interest 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

If you want an easy way to calculate the effective interest rates on your own, a reader developed this useful online calculator. It can calculate the effective interest rate for any month that a CD is closed before maturity.

These CD APYs are based on the yields listed at the institutions' websites as of 1/23/2013: (Barclays' CD updated on 1/25/13)

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.