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Ally Weakens The Best Feature Of Its CDs

ally logoAlly Bank CDs shine, in particular, because of the online bank’s low early withdrawal penalties.

But that’s all about to change.

In December, the early withdrawal penalty for 3-, 4- and 5-year CDs will increase from 60 days’ interest to 90, 120 and 150 days’ interest, respectively.

Shorter-term CDs still will have a 60-day early withdrawal penalty.

And you’ll still be able to withdraw money anytime from Ally’s 11-month no-penalty CD (0.87% APY), but it barely pays more than Ally’s online savings and money market accounts (0.86% APY).

The early withdrawal penalty increase only affects CDs purchased or renewed on or after Dec. 7.

Should this change by Ally affect where you invest your CD money going forward?

After all, Ally’s low penalties were one of the biggest reasons to open a CD there.

Ally might be changing its policy now in anticipation that three, four or five years from now, rates might actually improve enough that you’d consider closing your old CD early to get a better interest rate with a new CD. The penalties help discourage that behavior.

That’s a problem even today because Ally’s standard rates aren’t nearly as good as the best offers on our CD Rates Leaderboard. (The yields are far more attractive, however, with a loyalty bump.)

Even so, the bigger early withdrawal penalties at Ally are more forgiving than those of competitors:

  • AloStar Bank of Commerce — Penalty is three months’ interest on the amount withdrawn for 1- to 3-year CDs, and 12 months’ interest on longer-term CDs.
  • iGObanking — Penalty is six months’ simple interest for 1- to 5-year CDs.
  • PenFed — Penalty is 180 days of interest on CDs with terms of six months to four years, and 365 days of interest on CDs with terms of five years or longer.
  • Salem Five Direct — Penalty is 4% of the principal withdrawn or $40 per $1,000.

Ally Bank Early Withdrawal Penalties

Term Rate Current Penalty Future Penalty
3-Year CD 1.2% APY $1.97 $2.96
5-Year CD 1.6% APY $2.63 $6.58

With interest rates so low, even Ally’s higher early withdrawal penalties are pretty insignificant unless you’re putting large sums into CDs.

But here are two scenarios where any CD’s early withdrawal penalties could really cost you.

Most CDs renew automatically and give you a seven- or 10-day grace period beginning with the maturity date to take your money out and tell the bank you don’t want to renew.

Once the grace period ends, your new CD will be subject to early withdrawal penalties. If you aren’t aware of this policy or forget about it, and you take all the money out of your 5-year CD on the day after the grace period ends, you’ll pay 150 to 365 days’ worth of interest that your new CD hasn’t even earned yet.

Most banks (PenFed being a rare exception) will take that penalty out of your principal.

The second scenario could occur if you use CDs to stash your emergency fund. A CD’s early withdrawal penalties don’t matter as much if you have a specific timeline for using the money you’re putting into them — say, for a child’s tuition five years from now.

But if you open a 3-year CD today, get laid off tomorrow and need your money by the end of the month, you’ll again pay part of the early withdrawal penalty out of your principal. Creating a CD ladder can help you avoid problems like this one.

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