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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.


Could Trump Fire Fed Chairman Jay Powell?

It is very standard practice that the Chairman of the Federal Reserve is appointed to a 4-year term by the President of the United States.   It is also custom that in between appointments, the President refrains from commenting on Federal Reserve policy.

It has already been several months since the President defied custom by trying to jawbone Federal Reserve Chairman Jerome Powell into not raising rates.

Jerome Powell acted independently, raising the Fed Funds rate to 2.00% to 2.25% in September, while indicating that further rate moves are on the way.

Now that the stock market has begun to fall, the President is escalating his rhetoric, including telling the Fox News microphone that the Fed has “gone loco”.

This brings into question the issue of whether Trump would try to fire Powell should the stock market continue to fall precipitously.   Actually, with this President, the question is not “would he” but “could he”.

And, my analysis after reading the Federal Reserve Act of 1913 is he could.   Section 10.2 gives the President broad latitude to remove any member of the Federal Reserve “for cause”.   It states.

The members of the Board shall be ineligible during the time they are in office and for two years thereafter to hold any office, position, or employment in any member bank, except that this restriction shall not apply to a member who has served the full term for which he was appointed. Upon the expiration of the term of any appointive member of the Federal Reserve Board in office on the date of enactment of the Banking Act of 1935, the President shall fix the term of the successor to such member at not to exceed fourteen years, as designated by the President at the time of nomination, but in such manner as to provide for the expiration of the term of not more than one member in any two-year period, and thereafter each member shall hold office for a term of fourteen years from the expiration of the term of his predecessor, unless sooner removed for cause by the President. Of the persons thus appointed, 1 shall be designated by the President, by and with the advice and consent of the Senate, to serve as Chairman of the Board for a term of 4 years, and 2 shall be designated by the President, by and with the advice and consent of the Senate, to serve as Vice Chairmen of the Board, each for a term of 4 years, 1 of whom shall serve in the absence of the Chairman, as provided in the fourth undesignated paragraph of this section, and 1 of whom shall be designated Vice Chairman for Supervision.

There is a host of legislation and precedent laying out what constitutes "cause" for removal of an appointed official.   I believe that the President inherently has broad authority to do this (especially when he is unchecked on this matter, as he is now, by the legislative branch).   Precedent in the form of the 1935 case of Humphrey’s Executor v. United States would indicate that the President’s power may be limited, but it has been widely suggested that Justice Kavanaugh would provide the deciding vote in overturning that case.   Under any circumstance, there is an open issue here, and with this President that means it could happen.

I’ve stated on BestCashCow frequently and repetitively that I see little reason to buy CDs in the current environment.   That view would change quickly if Trump continues to jawbone Jay Powell and takes further action towards firing him.


Interest Rates Rise: What it Means for CDs

Rate information contained on this page may have changed. Please find latest cd rates.

Over the last two days, we have seen the 10 and the 30-Year US Treasury rates move higher.   The financial media is saying they “spiked” but the 10-year US Treasury is now at 3.20% (from 3.00%) and the 30-year US Treasury is now at 3.45% (from 3.15%) that I don’t think represents a spike.

I have been saying for some time that we will see much higher interest rates in the US.   I first warned against all fixed-rate bond holdings in September 2017 when the 10-year US Treasury was at 2.10%, see this article).   You should to continue to avoid bonds, except those that have escalation clauses or those that otherwise produce more interest as long-term bonds rise.

Those who read the BestCashCow newsletters will note that I have strongly encouraged depositors to buy short-term CDs (one year or less) over long term CDs, and expressed a preference for savings and money market accounts over CDs.

CDs at well-recognized online banks provide not only guaranteed income over the life of the CD, but usually allow for early withdrawal with the payment of a penalty (often, the right to allow early redemption even with the payment of the penalty is retained by the bank, so we urge caution here, especially with lesser known or less financially stable names.  Learn more here. {https://www.bestcashcow.com/can-you-always-withdraw-your-money-early-from-a-cd.html}).

Even if you can get out by paying a fee, if rates are going up, you still want to avoid locking in at this time.

We think inflation is here.   We think interest rates could be dramatically higher in a year.  We are seeing savings and money market rates over 2% at banks nationally and in most local markets and at credit unions.  While 1-year CD rates at 2.65% look attractive now, we are betting that you will see savings and money market rates at or around these levels shortly.

Bottom line: Exercise caution vis-a-vis all CD purchases at this time.