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Early Withdrawal From Cds As A Strategy

piton
  |     |   9 posts since 2016

hi - I'm new to CD's, and using the "Early Withdrawal Penalty Calculator" provided on DA's to help with my decision (and looking for a little help :-)

I did a comparison between 2 currently available jumbo-CDs,

Bank Name    veridian    discover bank

Term (months)    39 mo            120 mo

APY                    1.90%            2.30%

Penalty               6 mo              6 mo (between 1 & 3 years)

If you got the 120 month and withdraw anytime between 7 and 36 months, you will have done better than the veridian, and in fact better than any other 2 or 3 year CD that I'm seeing out there. My question is, is this a legitimate strategy to effectively get a shorter length CD by choosing a longer one and withdraw early. Of course, depending on the rates at 35 months, you would have the option to leave it in too. It seems like this works well both ways. Does this makes sense? thx

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Answers
RickZ
  |     |   218 posts since 2010
While it can be a bit confusing, you should note that you are plugging in the wrong early withdrawal penalty for the Discover CD.  Early withdrawal penalties are based on the original length of the CD, not on the length of time that you maintain the CD.  The early withdrawal penalty for a 10-year Discover CD is 24 months, regardless of when you decide to withdraw the funds.  I imagine that this will significantly affect your analysis.  That being said, there are definitely instances when terminating a longer term CD early will result in a higher yield than a shorter term CD and, in those cases, it can be an effective strategy (keeping in mind, of course, the caveat pointed out by Ricochet below).
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piton
  |     |   9 posts since 2016
thanks for pointing that out rickz, I must be misinterpreting their chart! I thought it was the time you maintained the CD. To good to be true!
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RickZ
  |     |   218 posts since 2010
Welcome to depositaccounts.com.  This is a great site and has helped me a lot over the past several years.  Good luck with everything.
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