Posts tagged early withdrawal penalty
CD Early Withdrawal Penalties
Jun 16th
Not all CD early withdrawal penalties are created equal. I’ve long assumed that the standard penalty schedule of 3-months and 6-months was ubiquitous but with recent news that Ally Bank charges a mere 60 days has thrown by world view into disarray! Fortunately, early withdrawal penalties are disclosed in the Truth in Savings document a bank must publish about its bank products. Understanding them is crucial in our economic times and they often take a back seat to the headline interest rate.
I like to draw this analogy – The interest rate is the flash, it’s like the horsepower of the engine in a car, but knowing the early withdrawal penalty is like knowing the state of your spare tire. Tou don’t want to be surprised at a time of crisis.
I’ve long used ING Direct for our CD ladder because of it’s great interface and, formerly, great interest rates. At ING Direct, the early withdrawal penalty was the standard schedule I outline below.
As it turns out, there is far more variance than there is agreement and the variances can be significant.
Standard Early Withdrawal Penalty Schedule
For long time readers, this will be old news but this is your standard schedule for an early termination penalty:
- CD term of 12 months or fewer – 3 months or 90 days interest penalty
- CD term of greater than 12 months – 6 months or 180 days interest penalty
Banks will vary from this basic schedule, adding in another tier (or two) for longer maturity periods (Discover Bank charges 9 months of interest for CD terms greater than 5 years), or excluding 12 month CDs in the lower 3-month penalty tier. Regardless of their twists, the basic penalty schedule is similar to the one above.
Ally Bank 60 Day Penalty
As you may remember from earlier this week, Ally Bank has a 60 day early withdrawal interest penalty regardless of the CD’s term. When the early withdrawal penalty is so light, it makes a lot of sense to start opening 60-month CDs if your penalty is only 60 days.
Bank of Internet Early Withdrawal Penalty Schedule
How will a bank try to discourage this? Look at Bank of Internet’s early withdrawal penalty schedule (credit to – Ken at Deposit Accounts, which is a fantastic site for banking news, for unearthing this from Bank of Internet’s Truth in Savings document):
- CD term of 3 thru 5 months, one and a half month loss of interest, accrued or not;
- CD term of 6 thru 11 months, three months loss of interest, accrued or not;
- CD term of 12 thru 23 months, six months loss of interest, accrued or not;
- CD term of 24 thru 35 months, twelve months loss of interest, accrued or not;
- CD term of 36 thru 47 months, eighteen months loss of interest, accrued or not;
- CD term of 48 months or greater, twenty four months loss of interest, accrued or not
Bank of Internet will penalize you 2 years of interest on a 5-year CD whereas Ally Bank will only penalize you 60 days on the same CD. At the time of this writing, Ally Bank’s yield on their 5-year CDs is better than Bank of Internet but if the two were the same or similar, I’d be much more inclined to go with the less punitive early withdrawal penalty.
EverBank Early Withdrawal Penalty Schedule
Everbank has a pretty simple early withdrawal penalty (from their Terms):
3.1.5.6. Early Withdrawal Penalties: We will impose an early withdrawal penalty on withdrawals made before the maturity date of the CD. This penalty will be equal to one-fourth of the total interest that would have been earned on the principal balance of the account if funds had not been withdrawn prior to the maturity date. Early withdrawal penalties may be waived, at our discretion, in the event of death or legal incompetence of any of the account holders, as shown on our records.
You would lose 25% of the interest that you would’ve earned had you not closed out the CD. So on a 12 month CD, you’d lose 3 months of interest. On a 2 year CD, you’d lose 6 months of interest. The schedule isn’t as nice as the standard one, once you exceed 2 year maturity periods, but it’s certainly better than Bank of Internet’s.
The takeaway from this is that you should review CD early withdrawal penalties in addition to interest rates.
(Photo: eklektikos)
CD Early Withdrawal Penalties from personal finance blog Bargaineering.com.
Ally Bank CD 60-Day Early Withdrawal Penalty
Jun 14th
At most banks, if you close a CD before it’s maturity period you pay a penalty of 90 or 180 days. 90 days, or three months, is the penalty for shorter CDs, generally less than 12-months. The 180 day penalty is reserved for CDs with maturity periods of 12-months or more. What makes Ally Bank rare isn’t the clever advertisements or the great customer service (I’ve used their online chat features 3-4 times in the last few days, it’s absolutely wonderful), but higher rates and one of the most generous CD termination penalties on the planet.
The penalty is only 60 days of interest, regardless of the maturity of the CD.
The 60 day penalty is based on the APY and your starting balance. In other words, you don’t lose the “last 60 days of accrued interest,” you lose 60 days of interest as calculated by the APY on your initial deposit. I don’t know if every bank calculates the penalty this way but an Ally Bank CSR said that’s how they do it.
Such a short penalty means you can get an effective APY of 2.1387% on a CD of only 7 months right now. If you wait a year, you get close to 2.50% APY (2.4987%), which is a fantastic rate right now. Compare these to the best CD rates and almost nothing compares.
Get the Spreadsheet
I created a spreadsheet to help you calculate this yourself. What I’m hoping to get from you all is a double check of my math to ensure what I’ve done is correct!
How to Use the Ally CD Spreadsheet
Set the values highlighted in yellow:
- For Rate and APY, go to Ally Bank and get their current 60-month CD rate. At the time of this writing, the APY was 2.99% (APR 2.95%).
- Starting balance refers to how much you will deposit into the CD.
- Penalty refers to the number of days of the CD penalty. In Ally’s case, it’s 60 days. You can change this to compare the rate against other banks with different penalty periods.
The number in the APY value is your effective APY if you close the CD at the start of that month. So if you close a CD at the start of month 7, you’d get an effective APY of 2.1387% over the last 7 months.
About the Ally CD Spreadsheet
The bold labeled columns are self-explanatory but the unlabeled ones are intermediate mathematical steps to convert the dollar yield into a annual percentage yield figure you can use to compare against other CD rates.
“TIP” stands for total interest percentage. I take the total interest earned and divide it by the principal, giving you a percentage yield over the period. So the value in the Month 3 column is the yield over 3 months. “MR” stands for monthly rate, which is a calculation of the interest earned each month over that period of time. APY is then calculated using the MR figure (MR^12).
The penalty value is calculated from this equation, provided by an Ally Bank CSR:
(Account Balance) x (Interest Rate) / (365 days in one year or 366 days in a leap year) x (# of days at that balance)
For simplicity I just assumed 365 days. The account balance refers to your starting account balance, the interest rate is your APY, and the # of days at that balance is 60 because it’s a 60 day penalty.
One caveat – this spreadsheet calculates interest on a monthly basis, whereas Ally Bank accrues interest daily. This means actual yields are going to be slightly higher than what’s calculated in our spreadsheet but not so much higher it’ll noticeably affect any decisions.
CD Renewals
What makes this offer especially juicy is that if you have a CD maturing soon, you can renew it and take advantage of Ally banks’ 0.25% interest rate increase. When you renew a CD, you can change the maturity period and the amount in the CD. I have a 12 month CD renewing soon and I increased the balance and made it a 60-month CD.
Is the spreadsheet accurate? What do you think of this offer?
Ally Bank CD 60-Day Early Withdrawal Penalty from personal finance blog Bargaineering.com.
Considering A Roth IRA Early Withdrawal? Read This First
May 19th
Many people are proud owners of a Roth Individual Retirement Account, also commonly referred to as a Roth IRA. This type of retirement account was established in 1997 by the Taxpayer Relief Act. People who open a Roth IRA can invest in stocks, mutual funds, certificates of deposit, real estate, and other acceptable investments. There are certain eligibility requirements that must be met before an individual may open a Roth IRA, and this type of retirement account also offers the owner certain tax advantages.
For those individuals who have a Roth IRA, it can be very tempting to want to withdrawal the funds. However, in some instances, a person who withdrawals his or her funds from a Roth IRA before a certain age can incur hefty early withdrawal penalties. These penalties are in the form of fees that must be paid upon withdrawal of the funds, and can be rather expensive, adding up to ten percent or more of the withdrawal amount. The account owner will also be forced to pay income taxes on any earnings that are withdrawn from the account. After an individual withdraws funds and the early withdrawal penalty fees are subtracted, the amount of money left is often much less than anticipated.
On the other hand, there are a few situations where an individual can withdrawal funds from a Roth IRA and incur no Roth IRA early withdrawal penalty. In general, the account owner will not have to pay any penalty fees as long as he or she is over 59 ½ years old and the funds have been in the account for a period of time longer than five years. These withdrawals are known as qualified distributions. Another time when a Roth IRA owner can withdraw funds with no penalty is when the funds are used for a down payment on the owner’s first home purchase. As much as 10,000 can be withdrawn for this purpose. Roth IRA owners who become disabled are also able to withdraw funds before they are 59 ½ without incurring any penalties. Other circumstances warranting a Roth IRA early withdrawal without penalty include secondary educational expenses, a significant economic loss, and substantial medical expenses.
Roth IRAs are excellent investing and long-term savings vehicles. They offer many tax advantages for the owners as long as the funds are not withdrawn until a certain time. For those individuals who find it necessary to withdraw their funds early, certain circumstances can prevent these people from having to pay early withdrawal penalty fees. If the withdrawal is not classified as a qualified distribution, the account owner will have to pay an early withdrawal penalty plus income tax on any earnings that are withdrawn.
4 Things to Think about when Planning on Retirement at 55
May 12th
If you are planning on retirement at 55, there are a number of things that you will need to think about. This is a big transition period in your life and you need to make sure that you consider all of the variables. Here are a few things to think about when planning on retirement at 55.
1. Early Withdrawal Penalty
If you are going to retire at the age of 55, you need to consider the fact that you cannot start to gain access to your retirement accounts until you reach the age of 59 1/2. With the 401(k), IRA, and any other type of retirement account, there will be a early withdrawal penalty that you will have to be concerned about. If you take money out of your account before the age of 59 1/2, you are going to pay a 10% early withdrawal penalty on the amount that is withdrawn. You are also going to have to pay income taxes on the money that you withdraw. This penalty could severely cut into your retirement funds.
2. Life Expectancy
You will also need to consider how long you are going to live after the age of 55. Based on this information, you will need to come up with an estimate as to how much money you are going to need to live comfortably. You do not want to cut yourself short, so you need to be generous with your estimates. You also need to take into consideration the impact of inflation over the next several years. The amount of money that you need to live now is not going to be the same amount of money that you need 20 years from now.
3. Health Insurance and Medicare
You are also going to have to give some thought as to how you are going to pay for medical insurance after retiring. Most individuals have some type of a group insurance plan that is offered through their employer. Once you retire, you may not have access to this plan anymore. Many retirees utilize Medicare as their main source of health coverage. If you plan on retiring at the age of 55, you are not going to be eligible to utilize Medicare for another 10 years. This means that you will have to get some type of health insurance that can cover you for the next 10 years at least. Even if you get Medicare, you are going to most likely need some type of supplemental health insurance to fill in the gaps. Make sure that you leave enough money from your retirement funds to pay for this expense.
4. SEPP
The Substantially Equal Periodic Payment program is a way that you can tap into your retirement funds early. With this program, you will take equal payments from your retirement plan until you reach the age of 59 1/2. If you are considering this program, make sure that you have enough money in your retirement portfolio to pay for this and your living expenses after 59 1/2.
A Guide to Equity-Linked CDs
Apr 27th
Equity linked CDs are a type of CD that is designed to provide you with some exposure to the stock market. Many people choose to invest in equity linked CDs as part of a retirement portfolio. Here are the basics of equity linked CDs and how they work.
How They Work
An equity linked CD is a product that is sold at a bank or financial institution, just like a traditional CD. You will purchase this type of CD from the financial institution for a certain amount of money. Just like a traditional CD, you will also have a certain amount of time that you will have to leave the money in the CD before you can take it out. If you take it out early, you will have to pay an early withdrawal penalty.
Where this type of CD differs from a traditional CD is that it is tied to a financial index. Where traditional CDs pay a fixed rate of interest over the life of the CD, this CDs rate of interest is determined by the performance of a financial index. For example, the CD might be tied to the performance of the S&P 500. If the S&P 500 goes up significantly in value, you will receive a proportionate rate of return with your CD.
Low Risk
This type of investment is one of the lowest risk investments available. Even though this is a different type of CD, it is still a CD. This means that it is insured by the FDIC. Anything that you put into this type of investment under $100,000 is guaranteed by the federal government. If the bank that you invest with goes under, the federal government will come in and reimburse you for your deposit. Most other investments do not offer any such guarantees, so for those that have a low risk tolerance, this makes a potentially attractive investment.
Returns
With this type of CD, you can potentially bring in a much higher return than you could with a traditional CD. If the financial index performs well, your CD is also going to perform well. If the index does well, you have essentially chosen an investment that has no risk of losing your initial investment, but you can still bring in a nice return at the same time.
On the other end of the spectrum, this type of investment may not perform very well. If the index does not move while you have the CD, you may not be able to bring in much of a return. In that case, you would be better off sticking with a traditional CD that has a guaranteed rate of return.
Investment Considerations
Before choosing this type of investment, you should put some thought into what is involved with it. When using an equity linked CD, you will essentially have to time the market correctly in order to benefit. If you do not like the risk that is associated with the stock market, but do want to potentially increase your returns over a regular CD, the equity linked CD might be the way to go.
Investing 101: Certificates of Deposit (CDs)
Apr 23rd
Certificates of deposit are a type of investment that many people like to use. A certificate of deposit, or CD, is typically easy to find and is available at most banks across the country. Here are the basics of certificates of deposit.
Basics
The basic idea behind a certificate of deposit is simple. With a certificate of deposit, you are going to deposit a certain amount of money with a bank. They are going to hold onto the money for a specific amount of time. At the end of this period, you will be able to withdraw your original investment. While the money is deposited, it earns compound interest.
Interest
With certificates of deposit, you will be earning a guaranteed rate of interest. This interest rate is going to be better than you would be able to get with a traditional savings account. This is why many people choose to invest their money into certificates of deposit when they do not need it for a certain amount of time. You can earn more money than if you simply left it in your savings account.
Insured
One of the major benefits of investing in a certificate of deposit is that your money is insured. All CDs are guaranteed by the FDIC (Federal Deposit Insurance Corporation). This means that your money is just as safe as if you had left it in a savings account at your bank. If the bank goes under, the federal government will step in to repay you. This protection is offered on amounts up to $100,000. If you have more than $100,000 to invest, you can simply open multiple CDs with different banks to make sure that all your money is protected.
Penalties
When you invest in a certificate of deposit, you need to use money that you do not have any need for in the near future. The money that you invest has to stay in the certificate of deposit until the maturation date. If you cash out the CD earlier, you will have to pay an early withdrawal penalty. This will cancel out any of the interest that you have earned on the CD and will most likely eat into your principal as well. This feature discourages many individuals from getting involved with certificates of deposit.
Types of CDs
There are many different types of CDs for you to potentially invest in. Banks offer different interest rates on their certificates of deposit. Therefore, it is important that you shop around for the best deal when looking for a CD. Banks will also offer different durations for their CD products. For example, you can get a CD that lasts for as little as three months, or you can get one that lasts as long as five years. This provides you with many different options when you are searching for the perfect place to invest your money. Make sure that you understand exactly how the CD works before putting your money into one.
Roth IRA Penalties
Apr 22nd
The Roth IRA is the gold standard of retirement accounts; however, Roth IRA penalties can be pretty punishing if you aren’t careful. Note the following rules apply to withdrawing earnings from a Roth IRA. Roth contributions, of course, can be withdrawn tax-free at any time for any reason since you’ve already paid income tax on them.
If you have two or more Roth IRAs, the Internal Revenue Service (IRS) will consider them as one when it comes to making withdrawals. In addition, the IRS also stipulates that these distributions have to be made in a certain order, which applies in all cases. The law states that distributions must first be made from non-taxable yearly contributions to a Roth IRA, and then from conversion contributions, on what accountants refer to as a first-in, first-out or FIFO basis.
Roth IRA Penalities
With a few exceptions, most Roth IRA distributions before age of 59½ are subject to a 10% early withdrawal penalty. Note that this early-withdrawal penalty is in addition to and not instead-of the regular income taxes that are imposed on non-qualified distributions.
The early-withdrawal penalty is applied when conversion money from the account is distributed if:
- the event takes plans within the five-year tax period that begins with the year when the conversion was distributed from a traditional IRA, and
- to the extent that the distribution can be attributed to funds that were included in the account owner’s gross income because of that conversion.
The early-distribution penalty does not apply to any Roth IRA distribution that:
- occurs because the owner of the account dies or becomes disabled,
- is part of a series of “substantially equal periodic payments” that are made over the IRA owner’s life expectancy,
- is used for payment of unreimbursed medical expenses exceeding 7½% of the account owner’s adjusted gross income (AGI),
- is used tor payment of medical insurance premiums and the IRA owner has been receiving unemployment compensation for more than three months,
- is used to cover the expenses of a first-time home purchase, with $10,000 as the lifetime limit,
- is used to pay for the allowable expenses for higher education of the account owner and/or eligible family members., or
- is used for payment of back taxes when the IRS has placed a levy on the Roth IRA.
So if you foresee that you may need funds to put toward the non-retirement goals listed above, you can take some of it out of your Roth IRA with out incurring any Roth IRA penalties or taxes.
