bank rates

Bad CD Rate? No Early Withdrawal For You

I admit being partial to 24-month CDs.

But as CDs opened in 2008-09 mature and rates keep dropping, I’ve had to consider longer maturities to maintain some semblance of yield.

Bad CD Rate? No Early Withdrawal For You

This has required focusing on early withdrawal features. After all, I don’t want to get stuck, if and when rates take off.

I’m surprised that many of my current banks reserve the right to say no to early redemption, using language in their account documents like “withdrawals before the maturity date require Bank’s consent” (USAA) and “the Bank will not agree in advance to allow withdrawal before maturity” (Wells Fargo).

I’d naively thought I could always close a certificate of deposit if I paid the bank a specified penalty, like six months of interest.

This language raises the question: under what circumstance will the bank veto an early withdrawal?

Will, say, Flushing Bank nix my closing a 60-month, 2% CD when, a year or two from now, prevailing 24-month rates are 5%-plus again (where they were in 2007)?

What about 3%-plus? Will the bank tell me now what it will do then? Can I rely on feel-good assurances (bank managements do turn over, you know)?

I’m getting queasy here.

Another grim discovery I’ve made is the “make-whole” or “breakage” penalty in vogue among certain banks. This requires you to indemnify the bank for the theoretical cost to it of your withdrawal.

Take American Express Bank. It charges you the “cost recovery value” of withdrawn funds, if that’s greater than a flat six months of interest.

The cost recovery value is essentially the difference between the amount of interest the bank would pay you if you held your CD to maturity, and the amount it would pay on a newly issued CD with approximately the same maturity date.

Thus, if after two years you redeem your $10,000, 2%, 60-month CD, and the bank is then offering a 36-month CD at 5%, your penalty would be about $900, or 9% of principal, versus about $100, or 1% of principal (the six months’ interest penalty).

Other banks imposing this type of penalty include Capital One, Union Bank and OneWest. I’m feeling exposed.

For 24-month CDs, I’m OK with a bank having all the early redemption veto rights and penalties it wants. But I think I’ll go elsewhere for that 60-month CD.

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Comments (3)
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3 Existing Comments
  1. Joe George said:
    on January 22nd at 08:59 am

    One should look at a longer term CD as investing in a corporate bond that has the backing, not of the corporation but of the FDIC. As with a corporate bond, if rates go up, the value of that bond falls. Therefore, you invest in these instruments with the intention of holding them until maturity. Since liquidity is important to most of us, invest longer-term, wisely.

  2. John said:
    on January 26th at 06:48 pm

    My 2 cents on this: my experience with Flushing Bank has been that their penalties vary by term, which is fair and are not onerous. It’s disclosed when you open the account and the bank has stood behind it. If I may offer a piece of advice which has worked for me: think about CD laddering – helps to mitigate against yield exposure by spreading savings over different terms/yields.

    There’s a good article on this on bankaholic.com:
    http://dev-bankaholic.pantheonsite.io/calculators/cd-ladder-calculator/

  3. SeniorSaver said:
    on January 27th at 07:46 am

    Thanks, John, for the comments. I’ve done some calculations of late and laddering makes a lot of financial sense. The issue for me is one of the discipline required to build the ladder at multiple banks and keep it going. I just can’t help myself when I see a good 2-year CD deal–I want to sell the farm and put all my money in it!