Jumbo CDs: What are they, and how do they work?

Smiling woman with cellphone sitting on sofa at home, looking up jumbo cdsImage: Smiling woman with cellphone sitting on sofa at home, looking up jumbo cds

In a Nutshell

Jumbo CDs often require much higher initial opening deposits than traditional CDs. In return, this type of CD generally pays a higher interest rate than traditional ones do.
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While there are very few guarantees in life, CDs do offer a guaranteed return on your investment.

Sounds too good to be true? Luckily, CDs live up to their reputation. There are many options for growing your money, and CDs are a secure way to do so with very low risks.

Jumbo CDs can promise even bigger returns for larger investments. Want to know more about how a jumbo CD works and if it’s a good fit for you? Keep reading to learn more.



What is a jumbo CD?

A certificate of deposit, or CD, is a type of deposit account that generally pays a higher interest rate than a traditional savings account. You deposit money in the account and agree to leave it there for a set amount of time — the CD’s “term.”

At the end of the term, when the CD matures, you can redeem the CD for all the money you originally invested, as well as the guaranteed amount of interest the CD earned. Withdrawing some or all of the money before the maturity date could mean you face an early-withdrawal penalty.

And just like deposits made to your checking and savings account, the Federal Deposit Insurance Corporation (or the NCUA, for credit unions) guarantees up to $250,000 of your deposits per covered account, making your CD a low-risk investment.

A jumbo certificate of deposit has a higher opening deposit requirement — generally $100,000 — with interest rates and annual percentage yields that are typically higher than those you’d get with a regular CD. You’ll still need to keep your money in the CD for a set period of time and may face penalties if you take your money out early.

With both regular and jumbo CDs, you’ll get higher interest rates and annual percentage yields with longer terms.

How do jumbo CDs work?

Jumbo CDs work the same way regular CDs do: Deposit your money, leave it there for the term, reap the interest at the end of the term.

You can generally find jumbo CDs at banks and credit unions. Some brokerage firms and independent salespeople also offer them. CD terms and interest rates can vary depending on where you get one, how much you deposit and how long the term is. As of March 15, 2021, the average rate for a 12-month $100,000 jumbo CD was 0.15%.

What are early-withdrawal penalties on jumbo CDs?

Early-withdrawal penalties vary by financial institution, so it’s worth reviewing the terms of your specific CD before opening it so that you understand what the early-withdrawal penalties will look like. Some banks and credit unions may waive that fee if you held their money in the CD for a minimum period of time.

Penalty amounts vary by account and banking institution. Federal law sets a minimum penalty of at least seven days’ worth of simple interest if you withdraw money in the first six days after opening the CD. But there’s no federal maximum penalty amount, so confirm what early-withdrawal penalties you may face for your specific CD.

Early-withdrawal penalties can come in the form of paying a fee or forgoing a portion of the interest earned.

What if I need to withdraw money for COVID expenses?

It’s worth noting that if you need to withdraw funds from your CD to pay for expenses related to COVID-19, you may be able to avoid early withdrawal penalties by speaking with your bank or credit union. The federal Office of the Comptroller of the Currency is encouraging these institutions to help ease financial strain for consumers. While financial institutions aren’t required to waive fees, they may be more understanding and willing to consider doing so right now.

What are advantages and disadvantages of jumbo CDs?

Like any type of financial product, jumbo CDs have advantages and disadvantages worth considering.

Advantages

  • You can find higher interest rates. CDs generally pay higher rates of interest than regular savings accounts. And jumbo CDs tend to pay higher rates than regular CDs.
  • CDs are FDIC or NCUA insured. If you open a CD at a federally insured bank, it will be insured up to the FDIC insurance limit. CDs opened at a credit union will be insured through the National Credit Union Administration.
  • It’s a low-risk investment. Unlike most investment opportunities, CDs have little risk associated with them. When you open a CD, the interest rate is locked in and the return is guaranteed, which makes CDs a safe savings opportunity.

Disadvantages

  • You’re not supposed to touch your money. CDs ­­generally aren’t as liquid as savings accounts. Depending on your chosen CD term, you may be committing to locking up your deposit for as long as 20 years. Withdrawing money before the maturity date could result in early-withdrawal penalties.
  • There are high opening balance requirements. Jumbo CDs can have very high opening minimum deposit requirements.
  • Jumbo CDs can be a bigger commitment. You may need to tie your money up for a longer term in order to get the best jumbo CD rates.
  • You may miss out on some interest opportunities. When it comes to CDs, there’s a risk that inflation will actually increase faster than the interest rate you receive on your CD, which can reduce your real returns over the life of your CD.
  • Insurance is limited. While the $250,000 FDIC insurance is a great start, this amount can apply to multiple accounts in your name at one bank. This means that each CD doesn’t have insurance for $250,000 — all your financial holdings at that institution do. You may need to work with multiple banking institutions to fully cover all your savings.

When might I consider a jumbo CD?

Whether or not a jumbo CD is a good fit for you depends on a variety of factors. Consider a jumbo CD if the following descriptions sound like you.

  • You have a lot of money in savings. If you want to earn some extra interest with your money, then a CD or jumbo CD might be a good fit. They’re secure and could pay a higher interest rate than a traditional savings account.
  • You won’t be tempted to withdraw early. If you can afford to leave that money untouched for a set period of time — and therefore can avoid any early-withdrawal fees — a CD may suit you. It’s best to select a CD with a maturity date that takes your expected needs into account. For example, if you intend to buy a home in two years, you won’t want to put all your down payment money into a CD with a five-year maturity date.
  • You’re risk-intolerant. If you’re at a place in your life where risky investments aren’t for you (such as those who are planning to retire soon), then this is a low-risk way to pursue growth and peace of mind at the same time.

Jumbo CD rates and how they can change over time

CD interest rates ebb and flow over time, and it can be tricky to know if you’re locking in a good rate when you open a CD. For example, the average rate for a 12-month, $100,000 jumbo CD on March 15, 2021, was 0.15%. But if you jump back about two years to March 11, 2019, the rate was much higher at 0.72%.

Here’s what the average rate on jumbo CDs looked like as of March 29, 2021, according to the FDIC. You can get weekly data on CD rates on the FDIC website.

Deposit products National rate Rate cap
1-month CD 0.05 0.80
3-month CD 0.07 0.82
6-month CD 0.10 0.85
12-month CD 0.15 0.90
24-month CD 0.19 0.94
36-month CD 0.23 0.98
48-month CD 0.26 1.01
60-month CD 0.31 1.06

Next steps: Consider CD alternatives when you have extra money to invest

If you don’t feel like a CD or a jumbo CD is a good financial fit for you, there are alternatives for growing your money that you may find more appealing.

CDs can be a good option if you’re saving for a specific short-term goal or if you want a low-risk investment for a larger amount of money. But if you have enough money to open a jumbo CD, it may be worth looking at investment options that could have a higher rate of return, like a brokerage account. If you haven’t yet maxed out your retirement savings accounts, you may want to consider doing so instead of opening a jumbo CD. Contributing to a 401(k), IRA or other type of retirement account can also help you achieve long-term growth.

As always, when considering any financial product, do your research and think about consulting a financial advisor if you have questions.


About the author: Jacqueline DeMarco is a freelance writer based in southern California who graduated from the University of California Irvine with a degree in literary journalism. She writes about a wide range of topics, including fin… Read more.