What Is a Jumbo Certificate of Deposit (CD)?

What Is a Jumbo Certificate of Deposit (CD)?
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When you have a large amount of money saved, opening a jumbo certificate of deposit can allow you to easily earn a more competitive rate of interest and have peace of mind about your investment. Aside from the larger deposit that such certificates of deposit require, this option has much in common with traditional CDs of any balance in that you choose an amount of time for the bank to hold the money and pay you a fixed return. But before stashing away such a large amount, you have to look closely at the pros and cons to make sure you choose an appropriate amount and term for your needs and comfort. Read on to learn more about what jumbo CDs can offer you.

Jumbo Certificate of Deposit Basics

As with any CD, the idea of using a jumbo CD is to safely get some kind of return for letting the bank hold your money for the selected time period. Rather than seeing your interest rate fluctuate based on the market conditions, a jumbo CD comes with a fixed interest rate that usually is slightly more competitive than the traditional CD rate due to the minimum investment needed. But unlike traditional CDs that may have maximum terms of five or six years, you can find jumbo CDs with 10-year terms for longer-term investments. Further, you can expect to stash away at least $50,000 to $100,000 to open this account.

Once you deposit the funds in your jumbo CD, you don't really have to do anything during the rest of the term. The interest gets credited regularly, typically every month or quarter, and the bank may give you control over how you receive it. For example, just letting the interest get added to your jumbo CD balance each time lets you earn interest on top of that interest. However, you may get to request that the bank writes you a check for the interest or puts it in another bank account, but not all places allow this.

During your jumbo CD term, you could remove all the money if you wanted, but the bank will penalize you for doing so before maturity. If you wait until the term ends, you get several choices for how to move forward but will need to act within your bank's grace period for the most options. Along with simply closing out the account and taking your money, you could renew the jumbo CD for another term of the same length, and your bank might actually make this an automatic feature. Other possible actions may include extending the jumbo CD term or putting more cash into the account.

Benefits of a Jumbo CD

When choosing to use a jumbo CD for your savings, you can enjoy the following benefits:

  • Short to long terms: With a jumbo CD, you can find a selection of terms that fit various savings needs ranging from just around one week all the way to 10 years. This also means you can assess your own risk to decide how long you're comfortable having money locked up in the account. So, if you worry that interest rates will rise shortly, you can opt for a shorter term and have options to close the account or renew it at the end.
  • Higher interest rate: Since you're willing to invest a significant amount of money in the jumbo CD, banks are willing to pay you a higher interest rate than they do for traditional CDs and possibly much higher than for typical savings accounts. You can rate shop at different institutions since rates can vary by bank, CD term, deposit amount and even your city. You may also find better deals if you already have an account at the place where you choose for your jumbo CD.
  • Guaranteed and predictable return: If you don't want to have to worry about keeping up with interest rate changes or market news, then a jumbo CD can simply provide you with a guaranteed and predictable return at the rate set upon account opening. You don't have to worry if market rates decline since your money continues to earn the agreed rate. Overall, you get a lot less stress and complexity than you would investing in the stock market.
  • Simple to open and manage: Compared with managing a portfolio where you trade investments often, a jumbo CD is much simpler. You can quickly fill out an application and deposit funds to open your jumbo CD and leave the money there until maturity with no other action needed. Of course, you can keep an eye on interest over time, but you don't have to worry about any complex management tasks.
  • FDIC protection: Each owner of your jumbo CD account gets $250,000 of protection through the Federal Deposit Insurance Corporation. So, you can worry less about the bank disappearing or going out of business as long as you check that the institution has this coverage.
  • Diverse investment strategies: Depending on the type of investor you are, a jumbo CD can fit into simple to complex strategies. As a typical saver, you could open a single jumbo CD where you put a future down payment for a house. Seasoned investors may use a jumbo CD along with a stock and bond portfolio or implement a CD ladder strategy to take advantage of higher interest rates over a period of time.

Disadvantages of a Jumbo CD

Before you put away a large chunk of money into a jumbo CD, keep in mind these considerations:

  • Limited return: While your jumbo CD interest rate is guaranteed and stable, this can be a downside in that you're limited in the return you agreed to. Just as your institution won't lower your rate for market downturns, they won't raise it for you even if newer account holders benefit from higher rates. Also, you have to consider the much higher return – despite the higher risk – that you could earn on the stock market.
  • Low liquidity: Since you have to invest thousands of dollars into a jumbo CD, you lose liquidity with this option and can have your money tied up for up to a decade. Even if you choose a three-month jumbo CD, you still run into issues if you need the money immediately due to an emergency since you will lose some money taking an early withdrawal. This means you have to think carefully about how much money you can safely invest and for how long.
  • Higher deposit requirement: The high minimum deposit for this type of CD means less accessibility to people unless they have already saved a large sum. It also means you'll have less money left to put in other types of savings accounts and portfolios where you could have more liquidity or even earn a higher return.
  • Early withdrawal penalty: While the early withdrawal penalty associated with most types of CDs can hurt in any case, it especially can make you lose significant money for a jumbo CD. Depending on the term and bank, you may have to give up several months or even a few years of interest earned. This means you could lose much of the return and have had your money tied up for little benefit.
  • Limitations of FDIC insurance: Since FDIC insurance only covers $250,000 per account owner of the jumbo CD, you'll need to consider other strategies if you want to invest more. If you're the sole investor and want to invest $500,000, then you could break that money down into smaller jumbo CDs at different banks. You could also put the whole amount in a single jumbo CD if you have a second account owner like a spouse.
  • Taxes on interest earned: When you go to file your next tax return, you'll have to disclose any jumbo CD interest earned and pay income taxes accordingly. Thus, you need to subtract taxes from your actual CD earnings to get a better idea of the real return. You should receive a tax statement from the bank with the account information for tax filing.

Exploring Some Jumbo CD Options

To find the right CD with the term, rate and minimum deposit you prefer, it pays to compare accounts and rates at various financial institutions online and locally. The following shows a few financial institutions and their jumbo CD products available as of September 2020:

  • CIT Bank: With jumbo CD terms of two to five years, CIT Bank requires $100,000 invested and will pay between 0.40 and 0.50 percent depending on the term chosen.
  • Veridian Credit Union: Available in terms of up to 39 months, this credit union in Nebraska and Iowa requires $100,000 for a minimum deposit. They offer promotional 12- and 21-month jumbo CDs with interest rates of 1.05 and 1.10 percent respectively, while their standard jumbo CD rates range from 0.50 to 1.10 percent.
  • KeyBank: Requiring $100,000 to open their jumbo CD, KeyBank offers terms from one week to 10 years. They offer a Relationship Rewards option to provide a higher interest for those with an existing checking account, and interest rates can vary by term and locale.

Choosing the Right CD

If you feel comfortable with a modest return and have around $100,000 ready to deposit, then moving forward with a jumbo CD can help you achieve your short- to medium-term financial goals. However, do keep in mind the limitations of FDIC insurance and low liquidity with this option. This means keeping the balance plus interest under $250,000 per depositor and avoiding depositing so much money that you may need to make early withdrawals. You should also consider calculating the potential return when making your decision.

Whether you've got less money to invest or just want more flexible options, you can also consider some of these alternative types of CDs:

  • Traditional CDs: If you're not ready to invest $50,000 to $100,000, going with a traditional CD can still offer a decent interest rate and the same security and predictability. The bank may not even have a minimum deposit requirement or will require a much smaller amount like $500 to $1,000.
  • No-penalty CDs: If you worry you may need your money before maturity, no-penalty CDs allow the flexibility to remove funds after a short holding period. However, you'll get a lower return for this benefit.
  • Add-on CDs: While you can't add cash to a jumbo CD during the term, you can open an add-on CD and get the flexibility to do so. This may suit you if you don't have much money now and want to invest more regularly like with traditional savings accounts.
  • Bump-up CDs: When it looks like interest rates will rise, fixed-rate CDs like traditional jumbo CDs don't let you benefit. This alternative features a one-time rate increase option in exchange for a lower rate to start out.
  • Brokered CDs: With the potential to get a better rate and have more liquidity, these CDs are available through brokerages and allow for selling the CD before maturity. Beware, since FDIC coverage can vary, and some CDs may allow the issuer to redeem it early so you miss out on future interest expected.