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What to Know About Treasury Inflation-Protected Securities (TIPS)Issues of Long-Term CDs and Early Withdrawal Penalties
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BY Ken Tumin
With the historic rate cut by the Feds, banks have begun slashing deposit rates. There are still some opportunities to lock into a high rate but most of these CDs have long terms of up to 5 years. Are these good deals?
There are two economic possibilities to consider: one that favors long-term CDs and the other that makes them undesirable:
The typical early withdrawal penalty for long-term CDs is around 6 months of interest. The smallest I've found is 3 months of interest. Some have penalties as high as half the term in interest. This would be 30 months of interest for a 5-year CD. The shorter the penalty, the less cost it'll be to close the CD and re-invest it into a higher rate CD.
Can banks refuse an early withdrawal request?
The other concern that some readers have mentioned is when the bank has a clause in their disclosures that state they have the right to refuse an early withdrawal request. Penalties would apply only if they consent on the withdrawal.
I haven't seen cases where banks have used these clauses to prevent customers from making withdrawals. It appears this is rarely used by banks. But since it's in writing, it is possible, and it is a legitimate concern.
I asked Chris at Jumbo CD Investments about this, and 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.
Chris had a good recommendation when banks have this small print about restricting withdrawals:
If you have experienced banks that have refused early withdrawals from CDs or if you had success with such letters, please leave a comment.
To find some 5% 60-month CDs that are still widely available as of the morning of 12/18/08, please refer to my previous post.
There are two economic possibilities to consider: one that favors long-term CDs and the other that makes them undesirable:
- PRO: Rates will remain low for many years similar to what happened in 2001 in the US and in Japan through the 90's
- CON: All the money being pumped into the economy by the US government will lead to high inflation at some time between 1 and 5 years from now. This will force substantial increases in interest rates similar to what happened in the early 80's when CD rates were over 15%.
The typical early withdrawal penalty for long-term CDs is around 6 months of interest. The smallest I've found is 3 months of interest. Some have penalties as high as half the term in interest. This would be 30 months of interest for a 5-year CD. The shorter the penalty, the less cost it'll be to close the CD and re-invest it into a higher rate CD.
Can banks refuse an early withdrawal request?
The other concern that some readers have mentioned is when the bank has a clause in their disclosures that state they have the right to refuse an early withdrawal request. Penalties would apply only if they consent on the withdrawal.
I haven't seen cases where banks have used these clauses to prevent customers from making withdrawals. It appears this is rarely used by banks. But since it's in writing, it is possible, and it is a legitimate concern.
I asked Chris at Jumbo CD Investments about this, and 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.
Chris had a good recommendation when banks have this small print about restricting withdrawals:
Some of our clients would issue a letter and have the bank sign, indicating that they would allow for the closure at the stated penalty. This is quite effective. Most banks are willing to sign because they really don’t intend to not allow the withdrawal.
If you have experienced banks that have refused early withdrawals from CDs or if you had success with such letters, please leave a comment.
To find some 5% 60-month CDs that are still widely available as of the morning of 12/18/08, please refer to my previous post.
