When you're exploring options for saving your money, certificates of deposit can stand out because of their more appealing interest rates versus standard savings accounts as well as various account terms that can fit short- to long-term savings needs. However, CDs come in plenty of varieties that vary based on factors like deposit requirements, fixed vs. variable interest rates, risk level and even the currency that the account is in. To choose the best CD for your needs, you'll want to learn about the most common types of CDs along with their pros, cons and typical uses.
1.Traditional Certificates of Deposit
The traditional CD is the basic version of this savings account where you'll choose an amount to deposit upfront – often $500 or higher, though a bank or credit union may have no minimum – and earn a flat rate of interest over the term you select. This type usually works best for short- to medium-term savings since terms typically range from a few months to five years. During that time, you usually can't add money to the account. If you need to take money out before the maturity date arrives, you'll face an early withdrawal fee that can take away from interest earned.
Like many other types of CDs, you don't have to worry about much risk since your investment is covered up to $250,000 per owner per account by the Federal Deposit Insurance Corporation. You also get the benefit of predictability with a fixed interest rate that usually will surpass that of a standard savings account. However, the early withdrawal fee is a downside if you need to take your money out for an emergency. So, this CD may suit you if you want a small, stable return for a savings goal and don't expect to need to take money out early.
Read More: Certificate of Deposit Pros & Cons
2. Jumbo Certificates of Deposit
If you plan to deposit a very large amount, such as $50,000 to $100,000 or more, then a jumbo CD can offer a higher interest rate than the traditional option. Otherwise, this account works similarly where you usually can't add money after the initial deposit, and you'll need to hold the funds in the account until your maturity date arrives. This option has similar term lengths, too, and can work well to put aside money for a large purchase taking place within the next five years.
The main benefit is that you can often find higher CD rates for jumbo accounts, and they can run even higher if you shop around at online banks. However, this type of CD is less accessible for people without a lot of money to invest due to the high deposit requirements. You'll also need to consider limits of FDIC insurance if you want to invest more than $250,000 in the CD, so splitting up your savings can provide more security.
3. Zero-Coupon Certificates of Deposit
While most CDs have you deposit an amount and will accrue interest on that balance on a regular basis over the term, a zero-coupon CD works differently. Instead, you buy the CD upfront at a lower price than it will be worth at the end of the term. The bank will use expected interest rates to set the price, and you'll get the higher face value as a lump sum upon maturity. You can find these through banks as well as brokerages.
Along with having FDIC coverage, these accounts can offer a better return than standard CDs, and you don't have to worry about reinvestment risk like with regular CDs. However, you may face broker fees and annual taxes, and there's the risk the issuer may call back the CD if your account terms mention this. So, this type of CD can work if you're comfortable with these risks and won't need an early withdrawal.
4. IRA Certificates of Deposit
Along with investing in stocks and bonds to save up for retirement, you can put money into CD accounts and create an IRA CD. Often having longer terms since they're designed for a long-term goal, these savings accounts may allow you to add money during the term or have you wait until the term ends to do so. In any case, you'll have to follow the annual contribution limits for IRAs that the Internal Revenue Service has set or else risk a tax penalty.
As long as the bank where you open the IRA CD has FDIC insurance, this kind of account can offer you more security for your retirement savings compared to stocks and bonds as you'll have stable interest. However, you can miss out on possibly larger returns on bonds and stocks and may need to adjust your retirement contributions and strategy to meet your goal. You'll also need to consider the management fees and high minimum investment that can come with this type of CD.
Read More: Why Is it Important to Invest Money for Retirement?
5. No-Penalty Certificates of Deposit
No-penalty CDs, sometimes called liquid CDs, offer flexibility to take funds out of the account without needing to give up interest already earned or facing other penalties before maturity arrives. Usually, the bank terms mention you have to hold the entire balance for up to one week, and then you can freely withdraw money if you need it. However, you don't get to put any cash back in even if you take some out.
You get the advantage of not having your money tied up with a penalty in case you experience an emergency or decide to invest the money elsewhere, and the account is FDIC insured. However, these accounts tend to pay you a lower interest rate. Also, keep in mind that money withdrawn won't accrue interest further, so you'll need to consider how urgently you need the cash.
6. Bump-Up Certificates of Deposit
Unlike other CDs, where your interest rate won't change during your term, bump-up CDs provide an opportunity to request to adjust your interest rate at some time if rates increase. Usually, you'll open your account with a lower interest rate than a fixed-rate CD and then get to make a one-time change when rates increase. Such CDs can meet your needs if you don't want to miss out on a potential interest rate increase and don't want to wait either to open your account.
While this type of CD can help you earn a better return as market rates change, keep in mind the risks and limitations. The lower starting rate means lower earnings earlier on, and you can never guarantee that rates will actually rise during your term. Further, you'll need to take care when exercising the bump-up option since you could act too early and miss out on an even bigger increase later. You'll also want to clarify with the bank on what they base the CD rates.
7. Callable Certificates of Deposit
If you're familiar with callable bonds where the issuer can redeem them earlier than you expected, you can get a similar feature with callable CDs. Like regular CDs, the issuer offers you a set interest rate for a period of time, but the rate may be a bit higher than traditional CDs. The reason is that these accounts have a call option where the bank will redeem your CD early if it finds it beneficial for its interests, so there's added risk. However, usually there's a set period during which you're protected from a call.
These CDs can work out to your benefit if you get to keep the higher interest rate to maturity, but you can also miss out on interest if the bank issues a call since rates decrease. Even if no call occurs, keep in mind you won't get to benefit from higher rates during the term should the market conditions change. So, beware when using these CDs for medium- to long-term savings goals.
8. Stepped-Rate Certificates of Deposit
As an alternative to fixed-rate and bump-up CD options, you can find types of CDs where your rates go up or down based on a schedule the bank sets. For example, a step-up CD will usually start you at a lower rate but offer boosts to your interest rate every so many months. On the other hand, a step-down CD has a higher rate to start out and then decreases the rate at set intervals. These CDs tend to be less widely available than other options.
If you're worried about not choosing the CD with the best rates or missing out on positive changes to the market rates, then a step-up CD can offer you the potential for a higher return over time and the security that CDs provide in general. But keep in mind that while step-down CDs can offer you a better return early on, you'll need to feel comfortable with the lower interest earned later as you can't withdraw the money without penalty to avoid a rate drop.
Read More: 7 Kinds of Interest Rates
9. Brokered Certificates of Deposit
If you're willing to take on some more risk and fees for more flexibility and a potentially higher return, then brokered CDs are another option to consider. Rather than looking up a specific bank and opening a CD, you work with a brokerage that can provide access to numerous banking products with plenty of options for interest rates, term lengths and payment periods. For example, a brokerage can shop around for the best products for you on the secondary market with your needs in mind.
Along with flexibility and higher returns, brokered CDs come with the option to sell your investments before maturity so you can put your money somewhere that may offer a better return in current market conditions. However, while this means no early withdrawal fee, you can expect brokerage and transaction fees. You'll also need to consider that some products in brokered CDs may not have FDIC protection.
Because of their complexity and risks, these CDs are often used as part of a sophisticated savings strategy for long-term goals and require close management. So, they may not fit an inexperienced investor who just wants to save a little extra cash for an upcoming expense.
10. Foreign Currency Certificates of Deposit
Known as a particularly risky option, a foreign currency CD involves exchanging your dollars for funds in some other currency like euros, with the goal of exchanging that foreign currency to U.S. dollars when the account matures. Due to how currencies fluctuate, you could potentially earn a much higher rate than other CDs. However, you will have to deal with whatever exchange rates prevail at the time when you convert those funds back to dollars. You can find these at both domestic and international banks.
The idea of a high return can tempt savers to choose this kind of CD when the U.S. dollar falls in value, but a rising dollar or high account fees can do the opposite and easily take away those gains. Because of that, investing in foreign currency CDs requires having a thorough understanding of the currency and money policies of the country you're investing in. You'll need to consider your risk tolerance and make sure the bank has FDIC insurance, as you generally you won't get it foreign banks.
- First Merchants: Traditional CDs
- Federal Deposit Insurance Corporation: Insured or Not Insured?
- NerdWallet: What Is a Jumbo CD?
- Ally: No Penalty Certificate of Deposit (CD)
- Investopedia: Zero-Coupon Certificate of Deposit (CD)
- The Motley Fool: Is a Bump-Up CD Account Right for You?
- SmartAsset: What Is an IRA CD?
- My BankTracker: Putting Your Money in a Callable CD: How Wise Is It?
- U.S. Bank: Step Up CD
- Marc J. Lane: Characteristics and Risk of Investing in Brokered Certificates of Deposits
- TD Ameritrade: Bank CDs vs. Brokered CDs: What’s the Big Difference?
- Bankrate: Foreign-Currency CDs: Tempting but Risky
Ashley Donohoe has written about business and technology topics since 2010. Having a Master of Business Administration degree, bookkeeping certification and experience running a small business and doing tax returns, she is knowledgeable about the tax issues individuals and businesses face. Other places featuring her business writing include Zacks, JobHero, LoveToKnow, Bizfluent, Chron and Study.com.