different types of interest penalties on withdrawal of CD. Which is better?

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arcticpineapplecorp.
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different types of interest penalties on withdrawal of CD. Which is better?

Post by arcticpineapplecorp. » Wed Aug 08, 2018 6:53 am

I'm looking at CD rates and are comparing two (one at capone 360 and the other at penfed credit union). The pen fed are slightly higher than cap360 (on all terms I believe). I looked at how their early withdrawal penalties are calculated (just in case) and found penfed calculates one term slightly different than what I've seen traditionally. I'm wondering if how the pen fed calculates is better or worse and can't wrap my head around the math (it's the one below that talks about "30%..." and "all dividends will be forfeited"). Wondering if you could offer some thoughts. Here's the details between the two:

cap one 360:
3-11 month CDs have a 90 interest penalty
12 month CDs have an 180 day (6 month) interest penalty
13-60 month CDs have a 12 months interest penalty

pen fed:

1) Six-month Money Market Certificates.
a) If redeemed within 90 days of the issue date or any renewal date, all dividends will be forfeited.
b) If redeemed thereafter, but prior to the maturity date, dividends for 90 days will be forfeited.

2) Certificates Having a Term Greater Than Six Months.
a) If redeemed within the first year, all dividends will be forfeited.
b) If redeemed thereafter, but prior to the maturity date, the early withdrawal penalty will equal 30% of what would have been earned if the certificate had been held to maturity, not to exceed total dividends earned


Thanks for your time and thoughts!
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

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Sandtrap
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Re: different types of interest penalties on withdrawal of CD. Which is better?

Post by Sandtrap » Wed Aug 08, 2018 8:48 am

arcticpineapplecorp. wrote:
Wed Aug 08, 2018 6:53 am
I'm looking at CD rates and are comparing two (one at capone 360 and the other at penfed credit union). The pen fed are slightly higher than cap360 (on all terms I believe). I looked at how their early withdrawal penalties are calculated (just in case) and found penfed calculates one term slightly different than what I've seen traditionally. I'm wondering if how the pen fed calculates is better or worse and can't wrap my head around the math (it's the one below that talks about "30%..." and "all dividends will be forfeited"). Wondering if you could offer some thoughts. Here's the details between the two:

cap one 360:
3-11 month CDs have a 90 interest penalty
12 month CDs have an 180 day (6 month) interest penalty
13-60 month CDs have a 12 months interest penalty

pen fed:

1) Six-month Money Market Certificates.
a) If redeemed within 90 days of the issue date or any renewal date, all dividends will be forfeited.
b) If redeemed thereafter, but prior to the maturity date, dividends for 90 days will be forfeited.

2) Certificates Having a Term Greater Than Six Months.
a) If redeemed within the first year, all dividends will be forfeited.
b) If redeemed thereafter, but prior to the maturity date, the early withdrawal penalty will equal 30% of what would have been earned if the certificate had been held to maturity, not to exceed total dividends earned


Thanks for your time and thoughts!
Is it something like this?
(error disclaimer: back of old wrinkled envelope calculation with dull pencil)

No Pen Fed equiv. for < 6 mos.

Cap One 360 6 mo. CD vs Pen Fed 6 mo. MM > 90 day penalty or 50% interest vs 100% interest in 90 day t0 50% interest post 90

Pen Fed: vs Cap One 12 mos CD > 109.5 day (30% of 1 year) penalty vs 180 day penalty.

Cap One 360: 13-60 month CD vs Pen Fed 13+ mo. MM > 360 day (max) penalty vs 118.5 to 547.5 day penalty.

Austintatious
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Re: different types of interest penalties on withdrawal of CD. Which is better?

Post by Austintatious » Wed Aug 08, 2018 9:49 am

The math is mind-bending for me as well, considering all the possibilities, but it seems that the penalties at PenFed are substantially harsher for the longer term cd's since it could be far greater than CapOne's interest on just a 12 month period.

For example, consider a $100,000 cd at 3% for 5 years. Compounded monthly, the interest earned would be a bit over $16k. CapOne's 12 months interest penalty for a $100,000 cd at 3% for 5 years is $3,000, maybe a bit more depending on how they apply that 12 months interest thing.

That same cd withdrawn a week before maturity at PenFed would cost one around $4,500 (30% of the near $16,000 interest earned to date). And I think roughly the same penalty would be incurred if the withdrawal is made as early as 18 months into the term. By then, one would have accrued roughly $4,500 in interest (30 % of the total expected earnings for the 5 year term).

Math ain't my strong suit but I think I've got it close. If not, hopefully someone will correct my error.

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#Cruncher
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Re: different types of interest penalties on withdrawal of CD. Which is better?

Post by #Cruncher » Wed Aug 08, 2018 10:25 am

arcticpineapplecorp. wrote:
Wed Aug 08, 2018 6:53 am
2) Certificates Having a Term Greater Than Six Months.

b) If redeemed [after first year], but prior to the maturity date, the early withdrawal penalty will equal 30% of what would have been earned if the certificate had been held to maturity, not to exceed total dividends earned
It's possible to calculate the penalty in terms of the equivalent amount of time. For example, the following shows that for a 3% 5-year CD redeemed after 2 years, the penalty is equivalent to 1.56 years of interest. If redeemed after 1.5 years all the interest would be forfeited.

Code: Select all

  1  Term in years               5.00
  2  Annual Percentage Yield    3.00%
  3  Penalty percent           30.00%
  4  Total interest per $1     0.1593
  5  Penalty per $1            0.0478
  6  Redeem after years          1.50    2.00    2.50    3.00    3.50    4.00    4.50
  7  Interest earned           0.0453  0.0609  0.0767  0.0927  0.1090  0.1255  0.1423
  8  Net of penalty           -0.0024  0.0131  0.0289  0.0449  0.0612  0.0777  0.0945
  9  Years needed to earn        0.00    0.44    0.96    1.49    2.01    2.53    3.05
 10  Penalty in years            1.50    1.56    1.54    1.51    1.49    1.47    1.45
For a 2-year CD redeemed after 1.5 years, the penalty is equivalent to 0.60 years of interest.

Code: Select all

  1  Term in years               2.00
  2  Annual Percentage Yield    3.00%
  3  Penalty percent           30.00%
  4  Total interest per $1     0.0609
  5  Penalty per $1            0.0183
  6  Redeem after years          1.50
  7  Interest earned           0.0453
  8  Net of penalty            0.0271
  9  Years needed to earn        0.90
 10  Penalty in years            0.60
For those wishing to perform this calculation for other assumptions, follow these steps:
  • Select All, Copy, and Paste the following at cell A1 of an empty spreadsheet. [ * ]

    Code: Select all

    Term in years
    Annual Percentage Yield
    Penalty percent
    Total interest per $1
    Penalty per $1
    Redeem after years
    Interest earned
    Net of penalty
    Years needed to earn
    Penalty in years
  • Select All, Copy, and Paste the following at cell B1. [ * ] (The formula in row 9 uses the Excel LN function.)

    Code: Select all

    5
    0.03
    0.3
    =(1+B2)^B1-1
    =B4*B3
    1.5
    =(1+$B2)^B6-1
    =B7-$B5
    =MAX(0,LN(1+B8)/LN(1+$B2))
    =B6-B9
  • Format if desired.
  • Enter additional early redemption years in row 6 if desired, and copy the formulas in cells B7:B10 to the right.
  • Revise assumptions in cells B1:B3 as needed.
* If you have problems pasting, try Paste Special and "Text".

Flyer24
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Re: different types of interest penalties on withdrawal of CD. Which is better?

Post by Flyer24 » Wed Aug 08, 2018 10:33 am

The penalty at Ally for up to a 2 yr CD is only 60 days of interest.

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arcticpineapplecorp.
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Joined: Tue Mar 06, 2012 9:22 pm

Re: different types of interest penalties on withdrawal of CD. Which is better?

Post by arcticpineapplecorp. » Wed Aug 08, 2018 6:24 pm

thanks to everyone who replied. You all rock! I want to delve through your posts a bit deeper and am at a lack for time tonight, but I will read through these responses over the next couple days and if I have further questions, will let you know. Thanks again.
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

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Sandtrap
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Location: Hawaii😀 Northern AZ.😳 Retired.

Re: different types of interest penalties on withdrawal of CD. Which is better?

Post by Sandtrap » Wed Aug 08, 2018 6:50 pm

#Cruncher wrote:
Wed Aug 08, 2018 10:25 am
arcticpineapplecorp. wrote:
Wed Aug 08, 2018 6:53 am
2) Certificates Having a Term Greater Than Six Months.

b) If redeemed [after first year], but prior to the maturity date, the early withdrawal penalty will equal 30% of what would have been earned if the certificate had been held to maturity, not to exceed total dividends earned
It's possible to calculate the penalty in terms of the equivalent amount of time. For example, the following shows that for a 3% 5-year CD redeemed after 2 years, the penalty is equivalent to 1.56 years of interest. If redeemed after 1.5 years all the interest would be forfeited.

Code: Select all

  1  Term in years               5.00
  2  Annual Percentage Yield    3.00%
  3  Penalty percent           30.00%
  4  Total interest per $1     0.1593
  5  Penalty per $1            0.0478
  6  Redeem after years          1.50    2.00    2.50    3.00    3.50    4.00    4.50
  7  Interest earned           0.0453  0.0609  0.0767  0.0927  0.1090  0.1255  0.1423
  8  Net of penalty           -0.0024  0.0131  0.0289  0.0449  0.0612  0.0777  0.0945
  9  Years needed to earn        0.00    0.44    0.96    1.49    2.01    2.53    3.05
 10  Penalty in years            1.50    1.56    1.54    1.51    1.49    1.47    1.45
For a 2-year CD redeemed after 1.5 years, the penalty is equivalent to 0.60 years of interest.

Code: Select all

  1  Term in years               2.00
  2  Annual Percentage Yield    3.00%
  3  Penalty percent           30.00%
  4  Total interest per $1     0.0609
  5  Penalty per $1            0.0183
  6  Redeem after years          1.50
  7  Interest earned           0.0453
  8  Net of penalty            0.0271
  9  Years needed to earn        0.90
 10  Penalty in years            0.60
For those wishing to perform this calculation for other assumptions, follow these steps:
  • Select All, Copy, and Paste the following at cell A1 of an empty spreadsheet. [ * ]

    Code: Select all

    Term in years
    Annual Percentage Yield
    Penalty percent
    Total interest per $1
    Penalty per $1
    Redeem after years
    Interest earned
    Net of penalty
    Years needed to earn
    Penalty in years
  • Select All, Copy, and Paste the following at cell B1. [ * ] (The formula in row 9 uses the Excel LN function.)

    Code: Select all

    5
    0.03
    0.3
    =(1+B2)^B1-1
    =B4*B3
    1.5
    =(1+$B2)^B6-1
    =B7-$B5
    =MAX(0,LN(1+B8)/LN(1+$B2))
    =B6-B9
  • Format if desired.
  • Enter additional early redemption years in row 6 if desired, and copy the formulas in cells B7:B10 to the right.
  • Revise assumptions in cells B1:B3 as needed.
* If you have problems pasting, try Paste Special and "Text".
Impressive!
Your avatar name, "#cruncher" is formidable indeed.
j :D

User avatar
arcticpineapplecorp.
Posts: 3517
Joined: Tue Mar 06, 2012 9:22 pm

Re: different types of interest penalties on withdrawal of CD. Which is better?

Post by arcticpineapplecorp. » Wed Aug 08, 2018 8:59 pm

thanks flyer24 for the tip (regarding Ally). I will consider that. I did a search through bankrate and was surprised Ally hadn't come up in the highest tiers (they had before). More recently bankrate showed Capone360 and goldman sachs. Anyway, that penalty is less than with cap one and the same interest, so thanks!

Thanks #cruncher. It appears the takeaway is that it might work out better for a shorter term cd with penfed, but the penalties seem worse with pen fed for longer terms (if not held to maturity). Do I have that right?

Does anyone know why Pen Fed uses these ways of calculating penalties? I hadn't seen this before and was surprised it wasn't more standard like other financial institutions (like 60 day, 12 month, 180 day penalties, etc.). Any ideas why this is the case? Seems to make it harder for ordinary folks to make the apples to apples comparison between institutions (unless you have some bogleheads at your disposal)! :happy

I appreciate any other thoughts you might have.
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

User avatar
arcticpineapplecorp.
Posts: 3517
Joined: Tue Mar 06, 2012 9:22 pm

Re: different types of interest penalties on withdrawal of CD. Which is better?

Post by arcticpineapplecorp. » Thu Aug 09, 2018 8:34 pm

thanks again #cruncher. I see about copying the cells into excel and playing around with the numbers. I will take a closer look with this in excel and run the different assumptions. I really appreciate you providing the calculations for me to "crunch" the numbers myself. Much appreciated. Will post only if I have other questions.
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

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