Important Details of CD Early Withdrawal Penalties

When you open a CD, it can be difficult to understand the details of the CD's early withdrawal penalties. Banks and credit unions often don't make it easy. The rate tables often only include the warning that early withdrawals may be subject to a penalty. One important thing to note is that the penalty is up to the bank or credit union. The size of the penalty and other details about the penalty can vary greatly for different banks. To understand these details, you'll need to review the CD disclosure. Here are some of the basic features and issues of the early withdrawal penalty to review in the disclosure.
Early Withdrawal Penalty Size
The obvious feature is the size of the penalty. This is typically specified in the number of days or months of interest. For maturities over one year, a penalty of 6 months of interest is common. So if you make an early withdrawal at exactly 6 months after you open the CD, you'll lose all 6 months of the interest. If you close the CD after one year, you'll lose half of the accrued interest.
The penalty size isn't always this simple. Here's what EverBank includes in its disclosure:
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of the total interest that would have been earned on the principal balance of the account if funds had not been withdrawn prior to the maturity date.
For a 60-month CD, one-fourth of the total interest would be equal to 15 months. As you can see, this is much more severe than 6 months.
The complexity is often even worse. Here's what US Bank includes in its disclosure:
If your account has an original maturity greater than one year, the penalty will be the greater of either A or B, plus a $25 early withdrawal fee.
A. One-half of the interest that would have been earned on the funds withdrawn if held for the entire term.
B. 3% of the amount withdrawn.
In this case, the penalty will be at least as big as one-half of all the potential interest that can be earned. For a 60-month CD, that's 30 months of interest.
Some of the Principal Can Be Lost
What happens if you close a CD just a couple of months after you opened the CD? Can you lose some of your principal? Yes, it is possible that the penalty will eat into your principal. It depends on the bank or credit union. A few institutions won't eat into your principal. PenFed is one example. Here's what PenFed's disclosure describes:
Certificates with a term of 5 years or greater
If redeemed within 365 days of the issue date or any renewal date, all dividends will be forfeited.
If redeemed thereafter, but before the maturity date, dividends for the most recent 365 days will be forfeited.
So if you close the PenFed CD very early, you'll just lose all of the interest but none of the principal.
From my experience, PenFed is in the minority on this penalty feature. Most institutions don't provide any reduction of the penalty if closed very early. So if you close the CD 3 months after you opened the CD and the penalty is 6 months of interest, you'll not only lose all 3 months of accrued interest, but also you'll lose some of your principal equal to 3 months of interest.
Some institutions point out this feature in the disclosure. For example, Fort Knox Federal Credit Union has the following in its disclosure:
the owner shall forfeit an amount equal to 180 days dividends whether earned or not on certificates with maturities greater than 24 months.
So if you close the CD before you have earned 180 days of dividends (interest), you'll still lose 180 days of dividends.
Partial Withdrawals and Withdrawals of Interest
If you need some of the CD money, you sometimes have more options than just closing the entire CD. One option may be to just withdraw some of the accrued interest. Some banks like Nationwide specifically allow this in their disclosure:
You can only withdraw interest credited in the term before maturity of that term without penalty. You can withdraw interest any time during the term of crediting after it is credited to your account.
If the accrued interest isn't enough, you can then take out some of the principal. Many banks will allow a partial withdrawal of principal, and the penalty will only be based on the amount of the principal that was withdrawn.
Some banks don't allow partial withdrawals. One notable example is Ally Bank. Here's what Ally includes in its disclosure:
You may not make a partial withdrawal of funds you deposit in a CD prior to the maturity date. If you withdraw all of the funds you have deposited in a CD prior to the maturity date, we will close your CD, add the accrued interest to date to the balance and impose a penalty on your early withdrawal.
Bank Refuses an Early Withdrawal Request
It's bad enough that you will lose some interest, but it's possible that a bank can refuse the early withdrawal request. Some banks give themselves this right to refuse an early withdrawal in their disclosures. Here's what is specified in US Bank's disclosure:
Except as required by law, withdrawal prior to maturity will be permitted only with the consent of the bank which may only be given at the time of withdrawal.
Fort Knox Federal Credit Union also has a similar clause in their disclosure:
Withdrawal of the principal amount of your Certificate may be made only with the consent of the Credit Union
Not all banks and credit unions have this type of clause. Some clearly state in the disclosure that early withdrawals are allowed. Nationwide Bank's disclosure is one example:
You may make withdrawals of principal from your account before maturity. Principal withdrawn before maturity is included in the amount subject to early withdrawal penalty.
Early Withdrawal Penalty Changes
Another potential issue is if the bank decides to increase the early withdrawal penalty during the term of your CD. Such a change would be very unusual, but some banks include a clause in their disclosures that may give them a right to make such changes. For example, Capital One Bank has the following in its direct banking CD agreement:
We have the right to change this agreement, including fees and charges applicable to the CD, at any time. These changes may include the addition of new charges or terms. If we make changes, you will be notified as required by applicable law.
Most banks don't make it clear about their right to make changes to existing CDs, and as we've discussed in November, the risk of this happening is not clear.
One reader commented that BB&T changed its early withdrawal penalties on an existing CD. However, as one reader explained, this could be considered an immaterial change due to its very small impact.
Bottom Line
If inflation and interest rates do rise substantially, there will be much more attention paid to early withdrawal penalties of CDs. Once a CD is opened, there's not much that can be done. The time to review the early withdrawal penalty features is before the CD is opened.
Edit 3/29/2011: Changed Fort Knox FCU disclosure to a newer version.
Edit 4/08/2011: Changed PenFed's disclosure to a newer version.
For me, changing the rules in the middle of the CD term is the issue not the amount of the change in the EWP. It is the idea that a bank and its customer entered into a contract. The customer agreed to let the bank have use of his money for a specified amount of time and the bank agreed to pay a certain amount of interest during that time. If the bank retains the right to change those terms any time they please and pretty much in any way they please, there is something ethically wrong with that picture. The customer cannot stroll into the bank and make any changes in the contract any time they please.
If it is stated in the contract that the bank has the right to make changes before the term is up, there is no way I am going to believe any verbal assurance that bank's CSR might make that they would not do that. I got just such a verbal assurance and then in the middle of the CD term the bank changed the EWP anyway. When I open CD's now, I either make sure there is no such clause in the contract or I open the CD with the full knowledge that the bank can change the rules at any time and will have no reticence about doing so. To believe otherwise is just plain folly on the customer's part.
This presumption could be helpful if, for example, any given bank or CU tries to unilaterally alter premature withdrawal terms on an existing CD to be more onerous, relying solely on the authority of the bank's general "right to amend" clause.
In addition, contracts must be construed in a way that makes sense of the entire document. If a bank were to take the position that it could unilaterally alter to the depositor's detriment the premature withdrawal terms, what would stop the bank from also just flat-out reducing the interest rate to 0%? Yet no court would likely copnclude that was a reasonable interpretation of the terms of the agreement. Courts are understandably loath to construe contracts in a way that puts one party -- particularly the unrepresented "little guy" -- entirely at the mercy of the other contracting party. The premature withdrawal terms are every much as material part of the bargain as the interest rate, and thus should be equally as protected from unilateral change by the bank.
A cautionary note is that if the bank or CU clearly says it can make changes, or discloses draconian premature withdrawal penalties, the depositor would likely be bound by those terms.
By saying that they reserve rights to change the term of the contract, the customer is actually taken out of the one sided agreement and has no other recourse but to obey the bank’s rules.
This happens at CUs. The bank's interest is aligned with its shareholders.
Basic economics tells us that as soon as the velocity of money returns to normal, the increase of the monetary base will result in an equal increase in prices. Thus, assuming there is no QE-3, 4, 5, 6 and on to infinity, prices are eventually going to more than triple within, perhaps, 5 years. But, there WILL be more QE episodes, and the monetary base will be going up to infinity, along with the QEs, subject to a few depressionary pauses along the way.
Keep in mind that we are now living in an Orwellian society with an economy run by a very corrupt Federal Reserve that is controlled by a handful of casino-banks out of New York and London. They are engaged in a massive program of theft against savers. Savers are having their assets raided in order to give the value of their money to firms like Goldman Sachs, JP Morgan Chase, Merrill Lynch, Barclays, and so on. Don't be stupid. Investing in a long-term CD is sheer folly. Investing in a shorter term CD accomplishes little to nothing because interest rates are so low.
Stay in the best paying liquid money market accounts and, whenever there are big price dips (for example, during the next pause in the QE to infinity hit parade, buy gold, silver, and platinum). Forget about long term bank investments. If you buy long term CDs, you are going to be wiped out.
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. They also now require you to close a CD, with penalty, if you wish to retitle your CD into a trust account (e.g., Living Revocable Trust). This would've bitten me, as I only had a trust account with Ally but when I opened additional CDs online they were titled in my individual name so I can to contact them to make adjustments.
As another poster said, the real issue people should focus on is the probability of very high inflation in the future and the erosion of the value of our CD's. I worry about this much more than the bogus issue raised by the BB&T poster.
If simply stating what happened to me is "needlesly scaring people," then we are in more trouble than we can imagine. By all means, let's all continue to avoid facing troubling things when they arise and keep those rose-tinted glasses on.
If the amount of the change in my case is "immaterial," how much money would you say would make it "material?" $50, $100, $5000? Where is the cutoff before it becomes "material? The issue with me is not the amount of money involved. It is the fact that the rules were changed in the middle of the game.
What possible reason could a bank have to put in a clause that they retain the right to change the EWP if they never see any situation in which they would do so? If the clause is there, whatever you might be told verbally about it is the only thing I see that is immaterial.
Bottom line, anytime you open a CD and that clause is there, just keep that possibility in the back of your mind just in case. Go into it with your eyes open and at least you will not get an unwelcome surprise down the road.
Thanks for the heads up. If you click on the disclosures link in this article, it states the penalty at Fort Knox is still 90 days for all of their CDs but if you go to the Fort Knox website itself and click on Site Map and then on the Membership Agreement, it states the penalty is 180 days for CDs greater than 24 months and still 90 days for those less than 24 months. Since it does not state anything about CDs that are exactly 24 months, I wonder if we could win in court if we claimed there was no penalty for those CDs. Hee Hee
Most CD's allow the bank to change the terms of the EWPs; read the forms that the bank has or ask them if that is the case. This is UNLESS the EWP "rules" are stated in the form of an agreement which they will abide by and is not subject to change or modification. Big difference. The latter is a CONTRACT, the former is an informal agreement that can be broken or modified by the bank. CDs are binding; EWPs usually are not. Read your agreement from the bank and inform yourself, or ask the bank. I'm sure that they will tell you that. I do not have time to give you examples of EWPs which were changed, but if I were you, I would not rely on them UNLESS THEY ARE CONTRACTUAL, especially with rates predicted to rise and depositors possibly looking to break CDs. if you do not know the difference between an informal policy which can change and a CONTRACT, consuilt an attorney.
I called Fort Knox twice and was told both times that all 5 year cds are now 180 day EWP no matter when you opened it even if it was opened 1 year ago or 3 years ago. This is what I was told twice today from 2 different Fort Knox credit union employees. I would say that is retroactive.
Maybe you won't be a fan anymore I just called for a third time maybe you better call them.
I just called the main branch and talked to a supervisor myself and was just told 1 minute ago that it is retroactive all CDs are now 180 days whenever you opened it. I don't know who you are calling but I have 4 CDs there and I have no reason to make this up,I am angry because the only reason I opened them up was because of the 90 day EWP. Their main branch phone# is 1-800-285-5669
The older penalties:
Early Withdrawal Penalties. Except as otherwise disclosed, for Certificates of Deposit
with a term of less than three (3) months, the penalty shall be an amount equal to all
interest that would have been earned during the term of the Certificate of Deposit. For
Certificates of Deposit with a term of three (3) months to twelve (12) months, the
penalty shall be an amount equal to three (3) months simple interest on the principal
amount withdrawn. For Certificates of Deposit with a term greater than twelve (12)
months, the penalty shall be an amount equal to six (6) months simple interest on the
principal amount withdrawn.
The new penalties:
EarlyWithdrawal Penalties.Except as otherwise disclosed:
Certificates ofDepositwith a termof less than three (3)months, the penalty shall be an amount equal to all interest thatwould have been earned during the termof theCertificate ofDeposit or $25,whichever is greater.
ForCertificates ofDepositwith a termof three (3)months to twelve (12)months, the penalty shall be an amount equal to three (3)months simple interest on the principal amountwithdrawn or $25,whichever is
greater.
ForCertificates ofDepositwith a termgreater than twelve (12)months, the penalty shall be an amount equal to six (6)months simple interest on the principal amountwithdrawn or $25,whichever is greater.
As for the $25 not affecting anybody, I would think it would affect small investors quite a bit if they had to close small CD's early.
Did you read #34? Don't forget to let me know if you are still a fort knox fan or maybe just a little less of a fan.
Peace-I have a friend who works at BB&T, so I gave her a call and their change was retroactive as well.
Glad that you have a plan but hope that when rates increase you do not have to sell your 5 year T note before the due date...your loss just very well be many times more than any of the CD EWP's. Good luck.
I would have never purchased a CD from this credit union with the above language. The fact that you need their permission to withdraw funds is already disqualifying, and I would certainly have asked about the meaning of the ammendment language to see if they are allowed to change the EWP retroactively. Given this language, it may be possible, but I am not sure. It may only pertain to prospective changes. The answer to this question should have been obtained prior to puchasing the CD.
Nothing personal, but if someone (like ME) works in a field (banking for law) and tells you something, maybe you take what they say as the truth rather than be insulting????? I was just trying to educate you and the readers of this blog. In our office, we LOVE Ken and this blog and read it DAILY. What I posted as #14, #17 and #24 was the truth, as you've unfortunately found out. Sorry for you, but maybe your experience will help others who read about it. Good luck.
You obviously relish the "rubbing it in" game even though YOU have proven NOTHING. Your opinion, as well as your boss, is not worth salt unless you have some supporting facts to offer, not your own para opinion, but facts. Lou has been a far more informative poster to this forum than you ever will. BTW, if you ever 'find the time' you might point out a few of the Ohio examples that Lou requested of you. In the meantime, try to hold back on your sarcasm if you can.
In fact, in the threads over the past year, there have been at least three to four posters who said their institution had made such changes retroactively. I just wish I could find those posts again. But the one higher up in this thread is one of them.
Also, you have to look at more than the mere CD "contract" or agreement or whatever it is legally. Also applicable are the other disclosures and terms of service of the institution. Thee clause about changes toterms often is not in a location you woudlexpect, and it often is not a clear as a layman (or laywoman) might like, but its there.
In the discussion in the previous threads, I looked at several banks and credit unions, and they ALL had such a clause somewhere. I don't know if that meant that most institutions have such a clauses buried somewhere, but I certainly expect you will find that very many do, if not most or all of them. So, lou or anyone else, if you won't take a CD with such a clause, you might be nixed from most CDs out there.
What I have been saying in the threads is to be aware of this and give a lot of consideration to whether you will need or really want to get your money out of a CD early before you take those longer terms. To take a longterm CD with the idea you will close it early and end up with more than you would have in a shorter term CD is real speculation, not unlike people speculating in the stock market. But most people in banks and credit unions are there because they don't want to speculate with that money.
Rest assured, when rates rise and all the people speculating decide it is time to pull their money out early as if it were a run on the banks, the banks and credit unions are not going to sit idly on the side and watch all their money disappear; they will do what they need to do, most especially if their solvency is at stake but even just to keep profits up.
"Anonymous - #1, Monday, October 15, 2007 - 4:39 PM
You forgot to add that they are one of the few banks that can prohibit an early withdrawel at their discretion. Most banks must allow it if you pay the penalty. For this reason alone, I passed on their CD. You should mention this in your blog. I could see that if they were having financial problems, they might disallow an early withdrawal. I think bankrate.com downgraded them to 2 stars."
You will note that I also took notice of their financial difficulties. In fact, they were taken over by the FDIC on July 31, 2009, close to 2 years after my warning. I am telling you this, because I know what I am talking about. I own CDs from 14 different banks and credit unions and none of them have the language with which you referred.
Which part of the bank reserves right to change the rules at any time, is not clear to you all.
You (customer) is excluded of any complaint by reading and agreeing to it.
It might be useful for others to express their concerns regarding this issues.
The early withdrawal fee is based on the principal amount withdrawn, at the interest rate on your CD at the time of withdrawal.
Cynics might say, though, that the banks would simply conjure up some other adhesion tactic in response. These outfits need to be strictly regulated; their continual tricks going all the way back to the 1920's should have taught us that. What we learn from history is that we don't learn from history.
PNC Bank on the other hand would not cash our deceased Father's 13-month CD without a 6 month penalty. It matures in October 2017. Their account agreement states in the Early Withdrawal Penalties section: "...will be subject to financial penalty (except in the case of death or legal incapacity of any owner of the CD)". The associate, the branch manager and supposedly her boss's reply was: "Our Dad was the Trustee of the Trust. He passed away, the Trust did not because it is a living document."
Have you heard of others dealing with this interpretation? If a Trust cannot quality in the case of death, then it can't apply to the rule, so the rule should be applying to the Trustee, a human being that can pass away.
Thanks for any feedback / opinion on this situation.