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Avoiding Early Withdrawal Fees on CDs by Withdrawing Only Accrued Interest

Like many people who realized three or four years ago that interest rates were not going to go up at the time, I locked some money into 5-year CDs back then.

These CDs are now within a year or two of maturity.   The early withdrawal fees on these are either 6-months’ interest or 12-months’ interest.   As long as you don't need the cash, a quick calculation that most people can do in their heads shows that the penalty would be more than any additional yield that you can get and it therefore makes more sense to hold them until maturity.

Yet, as rates have risen, the interest that these CDs are now paying is a little lower than today’s best online savings rates and is quite a bit lower than current best online one-year CD rates.

All online banks that I am aware of will allow you to withdraw the interest that has accrued to the CDs without any penalty.   While the release of accrued interest is not a transaction that can always be done online, I found that with some online banks it is a 2-minute phone discussion.

It releases a small part of the money in the CD, freeing that money to earn a higher rate.


Sexy and Dangerous: Avoid the 3.50% Toronto Dominion Callable Step-Up CD

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TD Ameritrade is sending out notices to some of its clients offering a new callable step-up CD offered by Toronto Dominion, its parent.

This new product - which offers an initial 3.50% APY interest rate - is dramatically more sexy than their offerings just a few months ago which we discussed and recommended against here.  

After two years, the newly-offered Toronto Dominion CD will pay 4.50% APY for years 3 and 4 and 5%, if it isn’t called away sooner by the issuer.   The issuer has the right to call the CD any time after year 1.   

BestCashCow has never liked brokered CDs.   We recommended that they be avoided when rates where much lower and we basically recommend against them now for the same reason.  Since they cannot be broken with the payment of an early withdrawal penalty, they represent a significant risk to anyone who may require earlier liquidity.   Since this CD has a maximum maturity of 5 years, should you need to get out of it in the early years, you could take a real bath trying to find liquidity in a market that doesn’t exist (where TD Ameritrade is the only buyer).    Should you die before the CD’s maturity, your heirs will likely inherit a fraction of what they would inherit were you to buy a straight 5-year CD.

Moreover, interest rates are presumably still rising and the Fed is likely poised to bring the Fed Funds rate above 3% by the end of 2019.   If you must reach for yield, you can get 2.70% on a one-year CD and then have the liquidity in 12 months to find a new product with a higher rate.  

But, we’ve just had an election that has left the US in an even worse place than we were immediately after the Russians handed Trump the Presidency 2 years ago.   And, that opens up the prospect of falling rates.   Should that happen, this product will be called away on the first possible call date in November 2019.   While you may have brought in 80 basis points more than you would have made in the 1-year CD that pays 2.70%, you will not have been compensated for the risk that you took. 

Sexy?  Yes.

But, dangerous as hell.  

Your better bet is to look at online one-year CDs.

Editor’s Note: The Toronto Dominion product is listed under CUSIP 89114QER5.


How to Avoid Early Withdrawal Fees on A CD

As interest rates have begun to rise, I’ve received numerous questions from readers asking about ways that they can get out of paying early withdrawal fees on long-term Certificates of Deposit that they may have bought a couple of years ago, but that are no longer attractive.

As I stated in an earlier article, I strongly recommend against breaking any CD until the rate that you are earning falls below the current rates on comparable savings rates.   In a rising rate environment, you do not want to break a CD in order to get another CD that you may then need to break.   I have 2 years left on a 5-year CD at 2.25% and I will not break it until online savings rates are firmly above 2.25%.  

If you do need to withdraw your money early, the withdrawal is entirely at the discretion of the bank or credit union.   Most banks and credit unions will waive it because of death or adjudged incompetence of the holder, or because a bank merger causes the holder to be over FDIC limits.  Early termination fees may be waived due to other hardships at the bank’s or credit union’s discretion.

Reg D forbids banks from allowing any withdrawal within 7 days of issuance (this restriction also applies to No Penalty CDs), but there are no other limits on a bank’s ability to waive early withdrawal fees.   Any bank officer (or other website) that will tell you that they are lawfully required to charge the early withdrawal fee is misinformed.

However, a contract is a contract and you enter into a time deposit contract when you purchase a CD.   When you break a contract, any contract, the counterparty has a right to extract penalties.  In this case, the bank has made commitments based on its expectation that they are borrowing the money for the course of the CD at the indicated rate.

As with any contract, the party entitled to a penalty can exercise its discretion not to extract the penalty (to waive it).  But, if I were an officer of a bank or credit, I would not be inclined to waive it simply because the customer can now get a higher rate.  Would I waive it if the customer committed to do further business with my bank or credit union?   Would I waive it on a one-time basis if the customer agreed to roll into a higher yielding but longer term CD?   Maybe.