Early withdrawing CDs...problems or hidden expenses?

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quisp65
Posts: 128
Joined: Wed Apr 10, 2019 7:44 am
Location: San Diego CA

Early withdrawing CDs...problems or hidden expenses?

Post by quisp65 »

Problems with this path? Hidden expenses? Banks saying NO to opening multiple (4-10) 5 year CDs?

I was planning on going the duration of 1-3 year on CDs as my fixed income but started thinking about buying multiple smaller 5 year CDs with the plan on breaking one when I need the money. Unless there is an issue I'm not thinking... this method seems to be the better approach.

Example:
Best 5 year CD now is from USE Credit Union 1.70% on 5 year IRA CD
180 day EWP
Early Withdrawal calculator shows 5 year CD beating most other durations if I keep it at least 2 years. No problemo....
https://www.depositaccounts.com/tools/e ... enalties=6

1 Year 0.86%
2 Years 1.29%
3 Years 1.43%
4 Years 1.50%
5 Years 1.70%

Again... banks or CUs have problems allowing 4-10 5 year CDs to be opened to make breaking easier?
Plan: 75/25 stock index/cash investments, one-way balance market highs, can lower expenses easily by 1/3rd
sport
Posts: 9533
Joined: Tue Feb 27, 2007 3:26 pm
Location: Cleveland, OH

Re: Early withdrawing CDs...problems or hidden expenses?

Post by sport »

Some banks may allow a partial early withdrawal from a CD, and paying the penalty on that amount only, instead of the entire amount. You would have to determine that for any particular bank.
7eight9
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Joined: Fri May 17, 2019 7:11 pm

Re: Early withdrawing CDs...problems or hidden expenses?

Post by 7eight9 »

If you can take advantage of them I would give consideration to multi-year guaranteed annuites (MYGAs).

Explanation of MYGAs --- https://www.blueprintincome.com/resourc ... annuities/

Example --- Fixed Annuity Rates for September 2020 ---https://www.blueprintincome.com/fixed-annuities

Two and five year rates as high as 2.30% and 3.45% respectively per above link.
I guess it all could be much worse. | They could be warming up my hearse.
nalor511
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Joined: Mon Jul 27, 2015 1:00 am

Re: Early withdrawing CDs...problems or hidden expenses?

Post by nalor511 »

This poster is talking about early withdrawing CDs, so MYGAs (with their exorbitant surrender penalties) probably don't make any sense
Scooter57
Posts: 1473
Joined: Thu Jan 24, 2013 9:20 am

Re: Early withdrawing CDs...problems or hidden expenses?

Post by Scooter57 »

I had no trouble breaking a 5 yr CD at Barclay's Bank when rates shot up a few years ago. The penalty gets deducted from taxes.

Just read the wording on the CU's terms carefully.

Years ago many posters here warnef about one CU that wouldn't allow early withdrawals, changing the term after the fact. That was in 2013. But since then I have never seen another case reported and I follow depositaccounts.com daily. I have seen the early withdrawal penalties increase at many institutions. Many are now one year's interest, some even if you withdraw before the year is over.
7eight9
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Joined: Fri May 17, 2019 7:11 pm

Re: Early withdrawing CDs...problems or hidden expenses?

Post by 7eight9 »

nalor511 wrote: Sat Sep 05, 2020 12:33 pm This poster is talking about early withdrawing CDs, so MYGAs (with their exorbitant surrender penalties) probably don't make any sense
They do make sense unless the poster is planning on breaking all of the them within the time frame. Money that won't be withdrawn (except in case of the direst of emergencies) could go into higher-yielding MYGAs. If they are planning on breaking a 5 year CD in year 2 why not just buy a 2 year MYGA?
No reason for that money to earn a lower yield from a CD. Money that is likely to be withdrawn should stay in CDs.
I guess it all could be much worse. | They could be warming up my hearse.
marcopolo
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Joined: Sat Dec 03, 2016 10:22 am

Re: Early withdrawing CDs...problems or hidden expenses?

Post by marcopolo »

7eight9 wrote: Sat Sep 05, 2020 11:34 am If you can take advantage of them I would give consideration to multi-year guaranteed annuites (MYGAs).

Explanation of MYGAs --- https://www.blueprintincome.com/resourc ... annuities/

Example --- Fixed Annuity Rates for September 2020 ---https://www.blueprintincome.com/fixed-annuities

Two and five year rates as high as 2.30% and 3.45% respectively per above link.
Just to clear, these are sold by insurance companies, and ratings seem to affect the rates quite a bit.
The rates you are quoting above are for B++ rated companies. A+ and A++ rated companies have MYGA rates closer to the CD rates discussed above.
So, yes, you are getting a higher rate, but at higher risk. You could do the same using junk bonds, or any other host of lower rated credit risks.

One may be willing to take on the credit risk to reach for higher yield, but it is not an apples-to-apples comparison to compare the B++ rated MYGA to FDIC insured CDs.
Once in a while you get shown the light, in the strangest of places if you look at it right.
7eight9
Posts: 1444
Joined: Fri May 17, 2019 7:11 pm

Re: Early withdrawing CDs...problems or hidden expenses?

Post by 7eight9 »

marcopolo wrote: Sat Sep 05, 2020 5:35 pm
7eight9 wrote: Sat Sep 05, 2020 11:34 am If you can take advantage of them I would give consideration to multi-year guaranteed annuites (MYGAs).

Explanation of MYGAs --- https://www.blueprintincome.com/resourc ... annuities/

Example --- Fixed Annuity Rates for September 2020 ---https://www.blueprintincome.com/fixed-annuities

Two and five year rates as high as 2.30% and 3.45% respectively per above link.
Just to clear, these are sold by insurance companies, and ratings seem to affect the rates quite a bit.
The rates you are quoting above are for B++ rated companies. A+ and A++ rated companies have MYGA rates closer to the CD rates discussed above.
So, yes, you are getting a higher rate, but at higher risk. You could do the same using junk bonds, or any other host of lower rated credit risks.

One may be willing to take on the credit risk to reach for higher yield, but it is not an apples-to-apples comparison to compare the B++ rated MYGA to FDIC insured CDs.
It isn't necessarily apples to apples but MYGAs from well rated companies are a very viable fixed income alternative for many investors.

B++ is "Assigned to insurance companies that have, in our opinion, a good ability to meet their ongoing insurance obligations."
http://www.ambest.com/ratings/guide.pdf

Additionally, investors in MYGAs enjoy the support of their state guaranty associations.
https://www.nolhga.com/policyholderinfo/main.cfm
I guess it all could be much worse. | They could be warming up my hearse.
Blue456
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Joined: Tue Jun 04, 2019 5:46 am

Re: Early withdrawing CDs...problems or hidden expenses?

Post by Blue456 »

Scooter57 wrote: Sat Sep 05, 2020 3:05 pm I had no trouble breaking a 5 yr CD at Barclay's Bank when rates shot up a few years ago. The penalty gets deducted from taxes.

Just read the wording on the CU's terms carefully.

Years ago many posters here warnef about one CU that wouldn't allow early withdrawals, changing the term after the fact. That was in 2013. But since then I have never seen another case reported and I follow depositaccounts.com daily. I have seen the early withdrawal penalties increase at many institutions. Many are now one year's interest, some even if you withdraw before the year is over.
+1.
You really have to read credit union terms and conditions. Some may not allow you to break a CD early.
skepticalobserver
Posts: 1094
Joined: Tue Jul 29, 2014 11:29 am

Re: Early withdrawing CDs...problems or hidden expenses?

Post by skepticalobserver »

Scooter57 wrote: Sat Sep 05, 2020 3:05 pm he penalty gets deducted from taxes.
Indeed, an "above the line" deduction! Don't have to itemize.
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quisp65
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Joined: Wed Apr 10, 2019 7:44 am
Location: San Diego CA

Re: Early withdrawing CDs...problems or hidden expenses?

Post by quisp65 »

Ok.... it's looking like people are saying every case is different and it just all depends. Thanks all!

I did look at MYGAs and I would be comfortable trying them out but I'm in California where the state organization only gives you 80% back if the company goes insolvent. Wonder why Cali does this? This might make people be a little more hesitant with the insurance industry in the state of California. I know it has with me.
Plan: 75/25 stock index/cash investments, one-way balance market highs, can lower expenses easily by 1/3rd
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