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Survey of the Best CD Early Withdrawal Penalty Options

Survey of the Best CD Early Withdrawal Penalty Options

Over the past few weeks, we began a focused examination of Early Withdrawal Penalties (EWP) on CDs here on the blog, beginning with a general overview of the attribute, an explanation of its importance for consumers, where to find pertinent information on it, and a couple of ways a product with the right EWP can actually be advantageous. In our second article, we probed the aggregate data from our database and analyzed EWP averages on a range of products, pinpointed the upper and lower end benchmarks for EWPs, and researched how they might be affected by factors such as institution size and institution type. Here in this third and final installment, we’ll get specific and practical by highlighting some of the best CDs we’ve found according to the parameters set out in the prior articles.

Recall from the previous articles that simply finding a CD with a healthy APY, while paying no regard to how its EWP might be structured, is not necessarily a safe approach. Likewise, we trust that none of our readers would consider it a good idea to reach for a CD with a great (low) EWP if that same CD had a non-competitive APY. Indeed, the best option for consumers who cannot absolutely guarantee that they will have no need to extract money from the CD before maturity is one with both a healthy APY and a low EWP. With that in mind, we set out to find some of the best combinations of APY and EWP, focusing primarily on the longer-term CD products for reasons discussed in the previous articles.

Best Long Term Products

Long Term, Nationally Available CDs with High APYs and Low EWPs

Xcel Federal Credit Union60 Month CD2.20%180 Days
Colorado Federal Savings Bank5 Year CD2.15%180 Days
Ally BankHigh Yield 5 Year CD2.00%150 Days
The above APYs and EWPs, as well as all of those to follow, are accurate as of 04/14/16. Please refer to our CD rate tables for the latest APYs and EWPs.

Most consumers begin the search for their preferred product by comparing APYs, which is where we began, as we filtered out all but the most competitive APYs among nationally available products. From there, we drilled down to only those that had favorable associated EWPs. The product with the best combination of high APY and low EWP we found was the 5 Year CD from Xcel Federal Credit Union (note: several better options existed last week when we began preparing this post but their rates/EWPs have since changed). According to our Early Withdrawal Penalty Calculator, this particular product's 2.20% APY and 180 Day EWP would be competitive with the best nationally available 2- and 3-Year CD options if broken before maturity (see also chart below).

For sake of comparison with the Xcel CD, we searched out the lowest EWP on a 5 Year CD with nationwide availability and a relatively high APY and compared it to the Xcel CD. As seen in the above table, the High Yield 5 Year CD from Ally Bank carries an EWP of 150 days, which is only 30 days less than the Xcel CD. Yet, even with the much lower APY of 2.00%, the Ally Bank product is in the black one month sooner and outperforms the higher-rated Xcel CD up through 15 months. As seen in the chart below, the Ally Product also boasts a higher APY than the highest nationally available two year product and a rate that is competitive with the highest 3 Year CD. The 30-day difference in EWP is the reason.

Monthly Effective APYs

Best Long Term Products with Limited Availability

The nationally available long term CD products all paled in comparison to some of the products that are limited in availability by region or other membership requirements. Our research showed that the longer-term CD products with the highest APYs accompanied by low EWPs are not nationally available. Two such 5 Year CDs in the chart below are immediately intriguing for their high APY and low EWP combination of 2.75% and 180 days.

Long Term, Limited-Availability CDs with High APYs and Low EWPs

General Electric Credit Union5-Year Share Certificate2.75%180 Days
Deere Employees Credit Union60 Month Share Certificate2.75%180 Days
IH Mississippi Valley Credit Union60 Month CD2.63%120 Days
Patelco Credit Union60 month CD2.50%180 Days
Jefferson Financial Credit Union60 Month Share Certificate2.38%90 Days

Because of that combination, these CDs become competitive with shorter term CDs when broken at the one-year mark, boasting an effective APY of 1.37% versus the highest nationally available rate of 1.36%. They become highly advantageous shortly thereafter, quickly climbing to 1.85% at 18 months and 2.08% at two years. The following graph shows the advantage of the General Electric CD, in particular, versus the highest nationwide rates on several shorter term lengths:

General Electric CU 5 Year CD Effective APY vs. Nationwide

Note that for the sake of a cleaner comparison graph, the curve for the General Electric CD shows a 0% APY for the first six months. It would carry a negative APY during that time in reality.

The General Electric CD’s effective APY outperforms the highest nationwide rate of every term length from one to four years.

We also included in the graph one of the top nationally available savings account rates of 1.17% from Incredible Bank (and for the sake of simplicity, represented it as a constant rate over the course of the term). The heart of this EWP conversation revolves around liquidity of consumers’ resources and acquiring the best rates available for their given investment periods. For the first 10 months or so of the above example, the best combination of those two attributes is actually the savings account, assuming the rate remains constant. After that point, the General Electric CD quickly overtakes it and become the best longer-term option.

Looking again at the chart of limited availability CDs above, you will see that there is one product that offers a standout EWP of only 90 Days, which is half the EWP of most of the others. Jefferson Financial Credit Union offers a 5 Year CD with an APY of 2.38% and the aforementioned 90 Day EWP. We compared that product to the General Electric CD and found that the Jefferson Financial CD made it into the black three months sooner than the General Electric CD and outperformed it until the 24 month mark:

General Electric CU 5 Year CD Effective APY vs. Jefferson Financial CU

Even lower APY products than the one offered by Jefferson Financial can overshadow their higher-rated competition when matched with the right EWP. The following is a list of a few 5 Year CDs with limited availability that possess comparably smaller APYs and EWPs as low as one-sixth of the length of those with higher APYs:

Long Term, Limited-Availability CDs with Good APYs and Excellent EWPs

Icon Credit Union60 Month CD Special2.16%90 Days
Toyota Financial Savings Bank60 Month CD2.02%30 Days

This comparison, using our Early Withdrawal Penalty Calculator, juxtaposes the effect of breaking three different 5 Year CDs before maturity, two from the first "Limited Availability" chart above and one from the second, including the one with the highest APY shown and the one with the lowest EWP shown. It reveals the best return on a 5 Year CD broken at one year (or slightly beyond) is actually from the CD with the lowest APY charted (2.02%), because of the associated–and unusually low–30 day EWP. The following chart is a visual representation of the comparison:

Comparison of Effective APYs Month by Month on Four 5 Year CDs

The best return on a product broken in the second year comes from the IH Mississippi Valley Credit Union CD, which carries a 2.63% APY and a 120 day EWP. That particular product is more productive than the General Electric Credit Union CD, which carries a higher rate of 2.75%, until the middle of the fourth year. Here again, the difference is the EWP. Very low EWPs can make quite a difference in effective gains on a broken CD.

EWPs Matter on Shorter Term Products, Too…

For good reason, the examples we’ve offered thus far have mainly consisted of longer term CDs, but shorter term CDs should be scrutinized, as well. Even the 1 Year CD can be greatly affected by an EWP. For instance, AloStar Bank of Commerce offers a 1 Year CD with an APY of 1.35% and a 30 day EWP. If broken at six months, it still offers a yield of 1.13%, which is higher than all other nationally available 6 Month CDs. Contrast those numbers with iGObanking’s 12 Month CD, which offers a similar rate of 1.25% but an EWP of 180 days. With such an extreme EWP, breaking the CD at six months would mean simply a return of principal with no interest, versus the 1.13% yield of the Alostar CD.

Other Short Term High(er) APY/Low(er) EWP combination CDs include:

Shorter Term, Limited-Availability CDs with Good APYs and Excellent EWPs

Select Federal Credit Union24 Month CD2.00%90 Days
1st United Services Credit Union36 Month Share Certificate2.00%180 Days
Patelco Credit Union36 Month Share Certificate1.75%90 Days

Utilizing DepositAccounts’ Tools to Find & Compare Options

This article is filled with examples of top CDs broken down by using DepositAccounts’ Early Withdrawal Penalty Calculator, a very handy tool created for just this purpose. We should note that DepositAccounts also offers another tool that incorporates the broken CD concept for consumers considering a wider range of options for safely growing their bank deposits. On our banking calculators page, you will find a link to the Where to Grow Your Cash tool, in which you can explore options for maximizing your savings over a given period of time.

Enter the appropriate information in each field on the ‘Where to Grow Your Cash’ calculator and click the "Show My Options" button, and multiple strategies for growing your savings are automatically generated based on your inputs. One of those options offered on investment periods of less than five years is called "Use the Rules to Your Advantage." This option processes your inputs and generates a few of the best ‘broken CD’ investment choices based on the broken CD concept we’ve presented over the last three articles. This strategy on a four year $35,000 investment may look something like this:

Percentage of Product Term Charged as EWP

CD EWPs – A Stranger No More!

Over the course of three data heavy articles, we’ve emphasized the bearing EWPs should have on a consumer’s search for a CD if he or she has anything less than 100% surety that it will not need to be broken before maturity. This final article has (hopefully) begun to bring the conversation out of the ethereal by offering some concrete examples. Please remember that EWPs, like APYs, do change. Those listed and charted above are accurate at the time of publishing. Also, please be aware that some risks exist in planning for an early withdrawal of a CD. We have seen rare cases when banks have refused an early withdrawal request and when credit unions have raised the early withdrawal penalties on existing CDs. To learn more about these past cases and these risks, please refer to this article.

Our hope is that, through this research, we have provided beneficial guidelines and have pointed out some worthwhile starting points and tools for your next CD product search.

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Anonymous   |     |   Comment #1
Excellent!  Thanks, Ken.
gbtexas   |     |   Comment #2
Very good research paper, Ken.  Since I'm generally too lazy to do my own calculations, it certainly removes a lot of the mystique surrounding early withdrawals.  So, I for one, appreciate your efforts.
Anonymous   |     |   Comment #3
Thx Ken,Once again, good information.  For those of us getting on in years, a related topic which can be important is the manner by which the institution permits Early Withdrawals WITHOUT penalty in the case where any owner (or joint owner) passes dies, allowing the estate or surviving owner(s) to break the CD with ZERO penalty.  Some banks and Credit Unions clearly state in their disclosures that they permit this...others don't mention, or may only provide verbal answers...which may change over time.  This feature can allow those not in "great" health to still achieve considerably better CD returns.
caliguy1   |     |   Comment #4
Thanks.  My biggest concern about the 5 year CDs is the fact that if the institution loses their FDIC or NCUA membership, but does NOT go bankrupt, and they don't let you take your money out when you're notified about their membership being lost, then you could potentially lose everything if they go bankrupt after that.  Granted the chances are slim, but even if its a slim chance of losing everything that's still something I'd be concerned about.  So, for the longer duration CDs, I would choose bigger institutions like American Express that would be much less likely to go bankrupt.  I'd be too scared to do small ones that could fall into this use case.
Anonymous   |     |   Comment #5
Never heard of this happening. You have an example? I think the FDIC or NCUA would close an institution and protect depositors which is the function of these agencies.
Anonymous   |     |   Comment #6
From Section 8 of the Federal Deposit Insurance Act:  (E)  CONTINUATION OF INSURANCE FOR PRIOR DEPOSITS.--The insured deposits of each depositor in such depository institution on the effective date of the order [Terminating Deposit Insurance] issued under this paragraph, minus all subsequent withdrawals from any deposits of such depositor, shall continue to be insured, subject to the administrative proceedings as provided in this Act.
caliguy1   |     |   Comment #7
I got a response from the FDIC regarding this issue, here's an excerpt
"... should an institution's deposit insurance coverage be terminated, either voluntarily or involuntarily, all depositors of the institution are notified in advance of the change in the institution's insured status, including the effective date of the change.  In addition, funds on deposit as of the date of termination (if any) remain insured for a period of time ranging from six months to two years, at the discretion of the FDIC Board of Directors. "

Unfortunately a 5 year CD can outlast the six months to two years.
Anonymous   |     |   Comment #8
However, neither national banks nor state-chartered banks can operate without deposit insurance. So, the bank would theoretically be closed upon expiration of its insured status. However, in practice, a proceeding to revoke deposit insurance would signal that the bank is in an unsafe and unsound condition. That makes it virtually certain that the bank would be closed well before it's deposit insurance was cancelled.
caliguy1   |     |   Comment #10
Hmm, I'm reading that.. "Banks are not mandated to be FDIC insured, but being insured has become a point of competition among banking institutions."  http://www.investopedia.com/ask/answers/08/fdic-insured-bank-account.asp

Also, I was reading a credit union's deposit agreement and just realized another use case, which they actually specifically outlined.  If an insured institution merges with another institution, there is a possibility the new combined institution would no longer be FDIC or NCUA insured.  But you'd still potentially be stuck in the 5 year CD.  So, another reason just to be cautious and stick with large, less volatile institutions.
Anonymous   |     |   Comment #13
You'll be able to move your money out if the terms are unilaterally changed.
Anonymous   |     |   Comment #9
The government can change the rules at anytime including closing banks so you can not withdrawal funds or limiting withdrawals (Greece Cyprus). I know of no example where insurance was cancelled or a reason for the FDIC to cancel it. Plenty of banks or CU's that have problems but the agencies either payoff or merge the institution with another. Doral Bank is one example. I wouldn't let this hold me back getting a 5 year or longer CD.
Anonymous   |     |   Comment #14
caliguy1's handle pretty much tells you what you need to know and the dude deserves credit for making full disclosure.  We are beyond the realm here of the black swan.  We have ventured into "Planet X" territory, and everyone already knows of the events forecast for the end of this month!  Be careful.  Be really, really careful.  Keep the blast doors of your subterranean safe space very tightly closed.
Bozo   |     |   Comment #11
Many (if not most) banks or credit unions waive EWPs for folks over 70 1/2 taking RMDs from IRA CDs. It's in the "fine print" of the disclosure statement. Some actually waive EWPs for folks over 59 1/2 (State Farm Bank and Pen Fed). As always, the devil's in the details.
Anonymous   |     |   Comment #12
Exactly!  That is why depositors should read and understand the "details" in the fine print.  Don't rely entirely on "hear say" .  Terms and conditions are not all equal among all banks and credit units.
Bozo   |     |   Comment #15
Disclosure agreements are not exactly "easy reading" for a lazy Sunday afternoon.

I must admit I seldom paid attention to them, until a few years back. I needed some cash from State Farm. The friendly CSR pointed out that, since I was over 59 1/2, and had an IRA CD, I could make a partial withdrawal with no EWP. She even read me the pertinent language from the disclosure agreement (which, of course, I had never read).
Anonymous   |     |   Comment #16
If you take the early withdrawal from an IRA CD after age 59-1/2, I would think it would be counted as a taxable distribution or you could roll it over (1 IRA rollover allowed per year) to another IRA earning a higher rate.  

This early withdrawal "without a penalty feature" would work great as a strategy for pulling funds for a RMD from the lowest rate IRA CD in your portfolio.
Anonymous   |     |   Comment #17
My question would be is there a limit on how much you can withdraw penalty free after age 59-1/2?
Bozo   |     |   Comment #21
Those financial institutions which allow (such as State Farm and PenFed), place no maximum on partial withdrawals from an IRA CD. That said you must keep on deposit at least the minimum for the CD (usually $1000).
Anonymous   |     |   Comment #18
"Disclosure agreements are not exactly "easy reading" for a lazy Sunday afternoon."

Disclosure agreements shouldn't be taken so lightly.  It's your money.  It's up to the depositor to understand the rules and regulations before committing their money.

Not really hard to understand for us "baby boomers" who got a high school education back when we were actually taught something in school.
Anonymous   |     |   Comment #19
Bozo, that's funny...but sad.  They are there to be read and if not read AND understood, then one should get "independent" advice or decline to "invest" due to it being an unsuitable investment.
Bozo   |     |   Comment #20
It's just a fact of life. Most buy CDs (IRA or otherwise), get the paperwork, and the disclosure agreement, and just plop it in a file somewhere.

I'd bet the odds folks actually read (much less understand) their disclosure agreements are something between zero and 1%.
Greg (anonymous)   |     |   Comment #22
Thanks, again, Ken, for this -- the definitive research and write-up, anywhere, on this critical but under-reported issue for income investors.
caliguy1   |     |   Comment #23
Does anyone know what happens if a FDIC insured bank or NCUA insured credit union closes down due to bankruptcy when you have a CD account?  Does FDIC/NCUA cash it out to you?  If so, if you have a long duration e.g. 5 years, and the world is blowing up like in 2008, that usually means interest rates are going to go down, which makes the long duration CDs even more valuable.  BUT, if the bank/credit union closes, then the appreciated value of the CD disappears if it's cashed out.  So, perhaps it's better to go with a bigger bank in that case since you would not want your CD cashed out when that's happening.