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CD Early Withdrawal Penalties

Posted By Jim On 06/16/2010 @ 7:33 am In Banking | 3 Comments

Not all CD early withdrawal penalties are created equal. I’ve long assumed that the standard penalty schedule of 3-months and 6-months was ubiquitous but with recent news that Ally Bank charges a mere 60 days has thrown by world view into disarray! Fortunately, early withdrawal penalties are disclosed in the Truth in Savings document a bank must publish about its bank products. Understanding them is crucial in our economic times and they often take a back seat to the headline interest rate.

I like to draw this analogy – The interest rate is the flash, it’s like the horsepower of the engine in a car, but knowing the early withdrawal penalty is like knowing the state of your spare tire. Tou don’t want to be surprised at a time of crisis.

I’ve long used ING Direct for our CD ladder [3] because of it’s great interface and, formerly, great interest rates. At ING Direct, the early withdrawal penalty was the standard schedule I outline below.

As it turns out, there is far more variance than there is agreement and the variances can be significant.

Standard Early Withdrawal Penalty Schedule

For long time readers, this will be old news but this is your standard schedule for an early termination penalty:

  • CD term of 12 months or fewer – 3 months or 90 days interest penalty
  • CD term of greater than 12 months – 6 months or 180 days interest penalty

Banks will vary from this basic schedule, adding in another tier (or two) for longer maturity periods (Discover Bank charges 9 months of interest for CD terms greater than 5 years), or excluding 12 month CDs in the lower 3-month penalty tier. Regardless of their twists, the basic penalty schedule is similar to the one above.

Ally Bank 60 Day Penalty
As you may remember from earlier this week, Ally Bank has a 60 day early withdrawal interest penalty [4] regardless of the CD’s term. When the early withdrawal penalty is so light, it makes a lot of sense to start opening 60-month CDs if your penalty is only 60 days.

Bank of Internet Early Withdrawal Penalty Schedule

How will a bank try to discourage this? Look at Bank of Internet’s early withdrawal penalty schedule (credit to – Ken at Deposit Accounts [5], which is a fantastic site for banking news, for unearthing this from Bank of Internet’s Truth in Savings document [6]):

  • CD term of 3 thru 5 months, one and a half month loss of interest, accrued or not;
  • CD term of 6 thru 11 months, three months loss of interest, accrued or not;
  • CD term of 12 thru 23 months, six months loss of interest, accrued or not;
  • CD term of 24 thru 35 months, twelve months loss of interest, accrued or not;
  • CD term of 36 thru 47 months, eighteen months loss of interest, accrued or not;
  • CD term of 48 months or greater, twenty four months loss of interest, accrued or not

Bank of Internet will penalize you 2 years of interest on a 5-year CD whereas Ally Bank will only penalize you 60 days on the same CD. At the time of this writing, Ally Bank’s yield on their 5-year CDs is better than Bank of Internet but if the two were the same or similar, I’d be much more inclined to go with the less punitive early withdrawal penalty.

EverBank Early Withdrawal Penalty Schedule

Everbank has a pretty simple early withdrawal penalty (from their Terms [7]):

3.1.5.6. Early Withdrawal Penalties: We will impose an early withdrawal penalty on withdrawals made before the maturity date of the CD. This penalty will be equal to one-fourth of the total interest that would have been earned on the principal balance of the account if funds had not been withdrawn prior to the maturity date. Early withdrawal penalties may be waived, at our discretion, in the event of death or legal incompetence of any of the account holders, as shown on our records.

You would lose 25% of the interest that you would’ve earned had you not closed out the CD. So on a 12 month CD, you’d lose 3 months of interest. On a 2 year CD, you’d lose 6 months of interest. The schedule isn’t as nice as the standard one, once you exceed 2 year maturity periods, but it’s certainly better than Bank of Internet’s.

The takeaway from this is that you should review CD early withdrawal penalties in addition to interest rates.

(Photo: eklektikos [8])


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[2] Email: mailto:?subject=http://www.bargaineering.com/articles/cd-early-withdrawal-penalties.html

[3] CD ladder: http://www.bargaineering.com/articles/bvc-4-certificate-of-deposit-ladders.html

[4] Ally Bank has a 60 day early withdrawal interest penalty: http://www.bargaineering.com/articles/ally-bank-cd-60-day-early-withdrawal-penalty.html

[5] Ken at Deposit Accounts: http://www.depositaccounts.com/blog/2010/06/the-best-cd-rate-is-not-always-the-best-deal.html

[6] Bank of Internet’s Truth in Savings document: https://www.bankofinternet.com/tis.aspx

[7] Terms: http://www.bargaineering.com/articlesWe will impose an early withdrawal penalty on withdrawals made before the maturity date of the CD. This penalty will be equal to one-fourth of the total interest that would have been earned on the principal balance of the account if funds had not been withdrawn prior to the maturity date. Early withdrawal penalties may be waived, at our discretion, in the event of death or legal incompetence of any of the account holders, as shown on our records.

[8] eklektikos: http://www.flickr.com/photos/eklektikos/278691547/sizes/m/

Thank you for reading!