Hat tip to Bogleheads investment forum participant B’Falls_JT, I learned that Ally Bank now requires its consent before it will allow early withdrawal from a CD. The early withdrawal penalty doesn’t even come into play if the bank doesn’t agree to the early withdrawal in the first place.
Many people advocated buying a 5-year CD from Ally Bank even if you need the money sooner or using the higher yielding 5-year CD as a cheap option in case interest rates go up, because you would come out better off even after paying the low early withdrawal penalty. This policy change adds significant risk to that strategy.
The policy change came in an amendment to Ally Bank’s Deposit Agreement effective September 27, 2012. The original agreement stated:
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. The penalty imposed will equal sixty (60) days of interest.
Although it didn’t say it explicitly, it gave the impression that the depositor can initiate an early withdrawal at will and only pay the early withdrawal penalty of 60 days of interest.
The amended language says:
You may not make a partial withdrawal of principal from a CD or IRA CD prior to the maturity date. If we consent to the redemption of a CD or IRA CD prior to the maturity date, we will close the CD and impose a penalty. The penalty amount will be equal to the loss of 60 days interest calculated at the interest rate in effect for the CD or IRA CD at the time the redemption request is made. The penalty will be imposed on the balance of the CD or IRA CD. Any accrued (but not yet posted) interest will be applied as a credit against the penalty amount. If the accrued interest exceeds the penalty amount, the excess accrued interest over the penalty amount will be paid to you. If the accrued interest is less than the penalty amount, a reduction of the balance may result.
The highlighted part gives Ally Bank the right to refuse early withdrawals. Although the bank may not always exercise that right, it has it in its pocket.
If you need the money sooner and if interest rates haven’t gone up, Ally Bank will probably still let you withdraw early. If interest rates have gone up sharply and Ally Bank is facing mass exodus, it will more likely invoke the consent clause.
I would hope this change only affects new CDs sold after September 27, 2012, not existing CDs sold before that date, but I’m not sure. One customer reported that Ally customer service reps are instructed to say that this is a clarification of existing policy, meaning it applies to both new and existing CDs.
With the unconditional option to break the CD gone, you should plan on holding a CD to maturity and not count on breaking it early, as what a CD means originally. When you hold a CD to maturity, what the early withdrawal penalty is doesn’t matter.
Ally Bank is no longer the rate leader among online banks. Two other online banks, Discover Bank and CIT Bank offer better rates in some terms.
|PenFed CU||Ally Bank||Discover Bank||CIT Bank|
Although the rate differences don’t seem much, if you are going to lock into a CD, you might as well lock into a higher rate. Unlike a savings account, once you lock into a CD, the rate on the CD can’t be lowered. So you don’t have to worry about whether a bank offering good rates today will continue to offer good rates next year. On you are in, you are in it for the whole term.
[Rates were obtained from respective banks' websites on Oct. 24, 2012. They are of course subject to change by the banks before you lock in.]
[Photo credit: Flickr user Images_of_Money]