About Ken Tumin

Ken Tumin founded the Bank Deals Blog in 2005 and has been passionately covering the best deposit deals ever since. He is frequently referenced by The New York Times, The Wall Street Journal, and other publications as a top expert, but he is first and foremost a fellow deal seeker and member of the wonderful community of savers that frequents DepositAccounts.

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Useful CD Tip: Partial Early Withdrawal Without a Penalty

If you have a CD, you probably know about the early withdrawal penalty (EWP). This is the fee that you will be charged if you make a withdrawal from the CD before maturity. One thing that may not be well known is that the EWP typically only applies to a withdrawal of principal (the initial deposit). If you have established the CD so interest is added back to the CD, you may be able to withdraw that accrued interest without a penalty. This can be helpful if you need that money for some emergency. It can also be useful if you want to use that money for another CD before the rate drops.

If you think you might need the accrued interest in your CD, check with your bank or credit union to see if they will allow a penalty-free early withdrawal of the interest. Make sure to inform the CSR that your intent is to only withdraw the accrued interest and not the principal. A reader mentioned in the forum that a Capital One representative quickly and easily transferred the accrued interest of his CD into his checking account.

It's important to note that not all banks and credit unions allow you to withdraw accrued interest without a penalty before the CD matures. And if they do allow it, they may not make it an easy process. So you should first check on this in the account disclosure before opening a CD. Also, banks may require you to decide before the CD is opened about how interest will be paid (let it accrue or receive the interest by check). Once the CD is opened, they may not allow a change.

Below are 3 internet banks and the options they provide for withdrawing interest:

CIT Bank

CIT Bank provides the following information in its FAQs section regarding interest payments:

How do I receive interest?
You can allow the interest earned to remain in your account and take advantage of compounding. Otherwise, posted interest on your CIT Bank CD can be withdrawn from your account at any time by contacting our Customer Service Center at 855-GO-BANKCIT (855-462-2652). For convenient and quick access to your interest payments, we can electronically transfer the funds to the linked checking or savings account of your other bank. Or, if you prefer, we can issue and mail an official check.

Discover Bank

I can't find a similar FAQ at the Discover Bank website. However, I was able to find the following information regarding CD withdrawals from a hard copy of a Discover Bank account agreement that I received last year. Make sure to review the latest disclosure from Discover Bank before opening a CD.

You can withdraw interest that has been posted to your Account anytime during the term of your CD by:

* Registering via the Account Center to have interest automatically transferred to your Discover Money Market or Online Savings Account.
* Registering via the Account Center to have interest automatically transferred to a bank account that you designate.
* Requesting an Official Bank Check sent to you in the amount of interest posted to your CD.

If you withdraw all or part of the Issue Amount (the amount of your initial deposit or the amount of your renewed deposit in the case of a renewed CD) from your Discover CD Account prior to the day of maturity, we may charge your Account an early withdrawal fee.

Ally Bank

As I mentioned above, not all banks allow CD holders to withdraw accrued interest from a CD before maturity. Ally Bank is one of them. In Ally's account agreement, it states that "you may not make a partial withdrawal of funds you deposit in a CD prior to the maturity date". You can designate that interest be disbursed monthly, quarterly, semi-annually or annually. This can be done when the CD is opened or during the CD term. However, once interest is added to the CD, it can't be withdrawn. Here's what I was told by an Ally CSR in a chat session:

When you open the CD online or by phone the CD is automatically defaulted to have the interest remain on deposit and post at maturity. You may contact us at anytime during the term to set up interest disbursements and we can send you the interest up to the point of contacting us and going forward until the CD matures. You will not receive a penalty if you choose to have the interest disbursed.

Final Notes

One thing to remember if you decide to withdraw accrued interest from your CD is that this will slightly lower the APY. The APY is typically higher than the interest rate since APY factors in the compounding of the accrued interest. If interest isn't added back into the CD, the APY will be the same as the interest rate. In today's low interest rates, you won't see much difference between the APY and the interest rate.

Another important thing to remember is that once a CD is renewed, all of the interest that had accrued before renewal is considered part of the principal of the renewed CD.

Related Pages: CD rates
  |     |   Comment #1
When I'm lucky enough to have money in a relatively high interest paying CD, I'm very reluctant to withdraw it.  For example, I currently have a 7 year CD with USAA Bank that's paying just under 4% APY.  This is by far and away the best bank interest yield I have at the moment, so I figure I'm much better off letting the interest accumulate and also gain the relatively high rate by today's standards.  If I need money, I prefer to take it from an account with a poorer yield.
  |     |   Comment #2
Capital One and Navy FCU allows this also. PFCU does not but does allow switiching monthly from accrual to withdrawal.
  |     |   Comment #3
This is a good article overall, and especially as regards the explanation about Ally Bank.  I have to make a yearly decision about my interest there.  This year I have decided to allow the interest to be compounded, meaning I will take a hit (i.e., pay a penalty) if I withdraw the interest prior to maturity of the entire CD.  Next year?  Well, I don't know yet.  I'll decide that next year.  
  |     |   Comment #4
I was able to do this with IGo Bank....but it was not easy. Had to make repeated calls. I will not bank with them again. They angered me from the start......when I opened a CD by ACH......they held my money for a week before paying interest. I will never use them again.....and I can't wait until my CD matures so I can close it and never do business with them again.
  |     |   Comment #5
Thank you, #4, for your post.  And thumbs up.  Holding of ACH money for a week without paying interest is outrageous.  That bank sounds to me like a must to avoid!
  |     |   Comment #6

 If you need the interest you can get any time you want.   monthly ect.   I understood that you cant have the interest already posted to the CD, but you can change the interval of posting and recieve a check or add to savings any interest accrued after notifying them.
  |     |   Comment #7
Previously, I believed Credit Unions were great compared to banks.  Now I believe the CUs are taking advantage of the current interest rate environment.  Most are implementing the same terms and conditions as the banks.  And the CUs interests rates are the same/close to the banks.  I find this very strange since the CUs don't pay as many of the Taxes the banks do.  It seems to me the CUs are finding a way to take advantage of it's members.
  |     |   Comment #15
#7 -- Credit Unions typically pay higher rates and have lower loan rates.  Not all, but many.  However, they can only pay more, if they are making more.  Credit Unions are severely restricted when it comes to what they can invest their funds into.  If they are only making 0.50% on their money, they would be losing money if they paid you above that.  With loans still down in most areas of the country, many of them don't have much of a spread to work with.
  |     |   Comment #16
#15.........I'm sorry but any bank, CU, company or individual (in other words any entity) who is only able to eke out 0.5% on their investments is either out & out lying to you about their returns, or is exceedingly stupid or suffers from an incredible lack of imagination. I know more than a dozen small business owners & none of them are making less than 1% on their short term investments.............to say nothing of their longer term ones. I mean really, give me a break. 
  |     |   Comment #8
But I thought the big banks were all evil & that credit unions & community banks were the champions of the little guy? :)
  |     |   Comment #9
#8  I never said that. Most of all of them take advantage of the little guy!
  |     |   Comment #11
#9........I know, I was just messing with you. However, there are a lot of people here & elsewhere who, imo, naively believe in the evilness of large banks vis a vis community banks & credit unions.
  |     |   Comment #10
To quote myself from March 28, 2011:

There is some elbow room with Ally.  You can set the CD to keep funds in the account, and if you need the earned interest you can request to have the CD modified to pay out the accumulated interest on a monthly or quaterly basis, so you only have to wait 1 or a few months to get the interest.

The Oct 2010 Deposit Agreement has changes from the Jan 2010 agreement that restrict some flexibilities.  Section 5 now says "Annually ... we will automatically add the interest ... to the principal amount" so this can limit how much non-principal interest you can accumulate.
  |     |   Comment #12
Just for the record, so there is no misunderstanding, I'm a long time reader of Ken's work here on the internet.  Ken knows a whale of a lot more than I do about all this banking stuff.  Period.  I hope that's clear.

But even for Ken, the Ally interest payout policies must be a challenge.  It's because, as someone else already has pointed out, they changed.  And they were convoluted to begin with.  I believe many reps at the bank itself are not all that clear on interest payout terms.  I can tell you when I have tried to make changes to my accounts, re interest payout, sometimes several telephone calls were needed before finally the changes were effected.  This is speculative, but it would not surprise me in the least if CD interest payout policies were continuing to evolve and change even now.

I try to make a decision each year a month or two in advance, effective on the anniversary date of my account opening.  It worked for me this year.  Next year?  Only God knows what'll happen then.  But the decision is either to fold interest back into my CD (compounding) or move the interest to my Ally checking.  I don't mess with the monthly, quarterly, semi-annual, whatever, stuff.  It's too complex because at Ally, as Ken already has pointed out, a decision to compound interest is a decision to either leave the interest on deposit until CD maturity or agree to a penalty on early interest withdrawal.  And agreeing to a penalty on early withdrawal of interest is a big deal to me.  Just to me.  Not trying to convert you to my way of thinking about this.  Just telling you how I look at it.

Ken already, in this article, has pointed out that at many other institutions credited interest can be withdrawn at any time penalty free.  I'm pretty much accustomed to that privilege.  I suppose that's why Ally's way of doing things is, for me (only), noteworthy.  Ally's way, to me, is different from my personal norm.  I deal with it as best I can.
  |     |   Comment #13
You must consider that Ally can fail.   If they do and the FDIC lets another bank take over the new owner does not have to abide by Ally's terms.  You do have the option to take your funds out.  Ally gets a lot of money via car loans and "floorplan" loans to dealer (For inventory stock).  GM, one of Ally's biggets customers recently purchased Americredit and is starting to make it's own car loans floorplans with dealers. GM's has a lending agreement with GM that ends in December 2012  Chrysler has a preferred lending agreement with Ally that ends April 2013 and Chrysler is in talks with other banks to take over the agreement.
  |     |   Comment #14
I believe Uncle Sam still owns a large piece of Ally
  |     |   Comment #17
The options that a small business owner has to invest in are vastly different than what a credit union has access to.  Credit Unions primary investment vehicle is loans.  Have you seen loan rates lately (let alone loan quality)?  After loans it is Government Bonds, Treasuries, and CDs.  And not a lot there either.

What they earn is the difference between what they are paying their members and the return they can make.  If they pay their members 1.00% in savings, they have to find a CD, Bond, or Treasury paying better.  The spread they make has to cover all of their expenses.  Pairing all savings dollars with long term investments just to get some yield would have a diasastrous outcome if rates rise.

The 0.50% I refer to is the spread some are making, not the yield on their money.  However, have you checked out money-market rates lately.  A credit union can't just go plunk down their money in any old bank account.  Most banks won't take it and they are left earning what their corporate credit union or fed funds is paying.  Which on a good day is about 0.25%.  And even if they found a decent money market rate, they can only put $250K at each bank.  When we are talking about millions in excess funds ($ they can't lend), chasing money market rates in $250K increments wouldn't be a very good use of their time.

  |     |   Comment #18
#17........Are you suggesting that Credit Unions are prohibited by law to engage in credit card lending, suto loans, personal loans or other highly lucrative endeavors? Because if they aren't prohibited by law then I stand firmly by my comments.
  |     |   Comment #19
First, this post wasn't about what credit unions can or can't do it was about tips on early withdrawal penalties. 

Second, a previous commenter took a shot at credit unions for having abysmal rates and operating just like banks.  Sorry Ken, for taking this off on a tangent and responding.

I was pointing out that they can't pay out more than what they are earning.  Matter of fact, even though credit unions are non-profit, they still have expenses so in fact need to have a yearly postive cashflow.

Sure they can lend.  Lending is not risk free.  However, they can only lend to people that fit within their membership groups, so they can't in fact just lend to anyone.  Auto loans are around 3.50%.  If they are paying an average of 1.00% for the deposits to lend, that gives them 2.50% to cover expenses and have postive cash flow.  If they are earning 8 - 12% for quality personal loans, that leaves them more.  Of course, they only earn it if they are paid back. Although, I wonder how big the market is right now for quality personal loans.

If a credit union paid too much above bank rates, they would be flooded with cash that they don't need and can't infact, lend.  I have credit union clients paying almost nothing and are still being flooded with cash, cash that they are unable to lend. And as I pointed out, their investment alternatives aren't very good either.

I'm sure if a credit union could afford to pay 5%, they would love to.  They can't. 

  |     |   Comment #20
#19........I don't desire to get into a protracted duscussion with you on a subject that has very very little relevance to me personally. Without further commenting on the veracity of your argument, I do however like to point out that your argument & passionate defense would be well received by anyone with the job title of credit union "apologist". 
  |     |   Comment #21
My experience over the many years with earned interest for cus or banks is that I have to make my decision on the day of purchase as to what I want to do with the interest.  I always opt for monthly or quarterly withdrawals by check or direct deposit to my local bank (if that option is available) so that I can always be in control of getting the interest.  This way I can use it if needed or put it aside in another account to build up for another CD purchase later.  Unless you are purchasing a CD for an enormous amount with the institution, the paltry difference you would make by letting it compound is not worth it to me.  Years ago when I was first building up our future savings and did not need the interest to use, those few dollars were worth it but not at this stage of the game. 

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