A certificate of deposit is like a regular savings account with extra benefits such as a higher interest rate and a government-backed guarantee. You won’t lose money on a CD as long as the amount you deposit is within the Federal Deposit Insurance Corporation’s limit, currently $250,000. Most banks and credit unions offer CDs, but their requirements are often very different. While jumbo CDs require a minimum deposit of $100,000, many banks will let you open a regular CD with no minimum or maximum amount.
Jumbo Versus Regular CDs
There are 12 different types of CDs in which you can put your money. These range from a simple CD, where you lock your money away for a fixed amount of time and receive a fixed interest rate, to complex products where you can bump up your rate in certain circumstances.
Of these 12 types, only one will always require a minimum investment. That's the jumbo CD, and you typically will need around $100,000 to open this account. Jumbo CDs historically have paid higher rates than conventional CDs, but in the low interest-rate environment of 2020, that may not currently be the case.
At the time of publication, rates are coming in between 0.3 percent and 1.2 percent annual percentage yield (APY) for jumbo CDs with terms between three months and two years.
Minimum Investment Amounts
For conventional CDs, many banks will let you open an account with a small deposit. As of September 2020, for instance, Marcus by Goldman Sachs is offering a 12-month CD at 0.85 percent interest with a minimum deposit of $500. The minimum deposit at Synchrony is $2,000, but in return you’ll get a better rate of 0.9 percent. Some banks set their minimum deposit at zero, although obviously, you’d have to invest some money!
Generally, you’ll find a great range of CD products available from all the major banks, but they differ in important ways. Rates are not standard and usually depend on the amount of deposit and the length of the term. You’ll want to shop around to find the best vehicle for your money – you can check out this list of the best CD rates for an overview of what's out there.
Maximum Investment Amounts
Technically, banks can impose a ceiling on how much you can deposit into a CD, although most do not. However, if you invest more than $250,000, then anything over that limit is not going to be guaranteed by the FDIC.
Generally, while there aren’t any huge negatives of CD investments, those with a large sum to invest should think about diversification. This is the act of putting your eggs into many different baskets, with the aim of securing the best balance of risk and reward. For instance, if you had $10,000 to invest, you could put $5,000 into a risk-free CD and the rest into potentially more lucrative investments like stocks and bonds.
Watch Out for Penalties
The major snag with CDs is that you typically have to pay a penalty if you take money out of your CD before the end of the fixed period. The penalty might be $50 or so, or it could run to many hundreds of dollars in lost interest. If the penalty exceeds the amount of interest you’ve earned on the CD, you will be losing money.
If penalty-free access is important to you, shop around for no-penalty CDs that don’t hit you with withdrawal penalties if you take your money out early. These accounts tend to require a minimum deposit of between $500 and $5,000, though zero-deposit CDs are sometimes available. Rules vary from institution to institution, so be sure to read the fine print before opening any type of CD.
- Federal Deposit Insurance Corporation: Understanding Deposit Insurance
- Bankrate: 12 Types of CDs: Which One Is Best for You?
- Bankrate: Best Jumbo CD rates — September 2020
- Bankrate: Fed Expects to Hold Rates Near Zero Until Economy has Weathered ‘Severe’ Virus Effects
- Business Insider: The Best CD Rates of September 2020
- Marcus by Goldman Sachs: High Yield Certificate of Deposit
- Synchrony Bank: Compare Products
- Marcus by Goldman Sachs: No Penalty CD
Jayne Thompson earned an LLB in Law and Business Administration from the University of Birmingham and an LLM in International Law from the University of East London. She practiced in various “big law” firms before launching a career as a commercial writer specializing in finance and tech. Her work has appeared on numerous financial blogs including Wealth Soup and Synchrony. Find her at www.whiterosecopywriting.com.