It has only been one month since my last comparison of the top nationally available long-term CD rates after early withdrawal penalties. There haven't been many rate changes, but one bank is making a big change to its early withdrawal penalties. So I thought it would be useful to publish a new comparison table. 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.
As was mentioned last week, Discover Bank is increasing its early withdrawal penalties. For the 10-year CD, the EWP is going up from 9 months to 15 months of interest. For CDs opened or renewed through 3/14/13, the EWP will be 9 months of interest. For new CDs opened, and existing CDs renewed, on or after 3/15/13, the EWP will be 15 months of interest.
It's important to note that Discover Bank's new EWP will not affect existing CDs. This is similar to what PenFed did in 2011. Its 5-year CD EWP increased from 180 days months to 365 days of interest. Like Discover, PenFed applied this change only to new CDs. Even though the larger EWPs are disappointing, it's nice to see these institutions doing the honorable thing by not increasing the EWP on existing CDs (like what two credit unions have done). Of course, this doesn't guarantee that they will stay honorable in the future, but at least it gives a little bit of assurance.
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
Due to the recent rate increase at Barclays, its 5-year CD is now the best deal if closed early from year one to four. And if it's held until maturity, it's also the best deal at year five.
In the past, Ally Bank's 5-year CD was the best deal if closed at year one or two due to its small EWP. Even though Barclays's EWP is a little larger, Barclays' rate is high enough to have the edge. The only exception is if you are able to get Ally's Loyalty Rewards bonus.
The EWP change at Discover Bank makes the 10-year CD much less attractive if you think you might want to close the CD after one or two years. You definitely don't want to close the CD before the first 15 months or you will lose some principal. As you can see, if you close at year one, the loss of 3 months interest is like a negative half of a percent.
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:
- The bank refuses to allow an early withdrawal
- 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.
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.
Discover Bank has full details of its early withdrawal penalties (both new and old) listed in section 36 of the deposit account agreement.
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).
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 2/25/2013:
|Year of Early Withdrawal||Discover 2.00% 10-yr CD, pre 3/15 latest rates||Discover 2.00% 10-yr CD, post 3/15 latest rates||PenFed 2.00% 7-yr CD latest rates||Ally 1.59% 5-yr CD latest rates||Barclays 1.85% 5-yr CD latest rates|
|Early Withdrawal Penalty||9 months||15 months||12 months||2 months||3 months|
|year 5||1.70%||1.50%||1.60%||1.59% (no penalty)||1.85% (no penalty)|
|year 7||1.78%||1.64%||2.00% (no penalty)||n/a||n/a|
|year 10||2.00% (no penalty)||2.00% (no penalty)||n/a||n/a||n/a|
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.