Pros and cons of jumbo CDs
If you’re looking to invest a large sum of money in a certificate of deposit (CD), and want to earn a higher yield on it, a jumbo CD might be the right choice. Like a regular CD, jumbo CDs come in a variety of term options, and the money earns a guaranteed, fixed rate until the CD’s maturity date.
Typically, though, jumbo CDs require a minimum deposit of $100,000 or more. While there are some advantages of locking in such a high deposit amount, there are also some things to look out for before you commit to one of these large-deposit CDs.
Pros of jumbo CDs
Higher interest rates
One of the benefits of locking your money away for a period of time is that you’re often rewarded with a higher rate of return. Consider how CD rates compare with savings account rates: the national average savings rate, according to Bankrate data at the time of writing this article, is 0.16 percent, while the national average rate for a one-year CD is 1.03 percent.
That average is even higher for 1-year jumbo CDs, at 1.07 percent, meaning you could get a higher rate for locking in more money than you would with a regular CD.
Guaranteed rate of return
As with most other types of CDs, jumbo CDs come with a fixed interest rate. That means the rate you get when you first open the CD is the rate that money will continue to grow at for the entire term.
A guaranteed rate can be advantageous when rates are dropping. While banks may lower the rates on other accounts, such as savings or money market accounts, the money in a CD will continue to earn the same rate until it matures.
Wide range of terms
The range of terms available for jumbo CDs varies by institution, but most commonly they range from three months to five years. It’s possible for jumbo CDs to come in rarer term lengths — some institutions offer jumbo CDs that mature after just several days.
Cons
High minimum balance requirements
Most jumbo CDs require at least $100,000 to open. A jumbo CD entails committing a larger sum of money for the term than other types of CDs.
Keep in mind that the money in a CD isn’t liquid. If you choose to withdraw the money from a jumbo CD before the term is up, you’ll likely be met with an early withdrawal penalty. The penalty usually means giving up some or all of the interest earned on the initial deposit. Make sure you’re comfortable with locking away a large amount of money before committing to a jumbo CD.
When the economy is at its most unpredictable, you may want to have more flexibility with where you keep your money, moving it around to keep up with changing rates. If it’s all kept in one CD, you won’t get to take advantage of what other accounts might have to offer.
Missing out on rising rates
In a rising rate environment, you could be missing out on the potential to earn better returns if you lock in your money at a fixed rate for several months or more. As inflation continues to rise and the Federal Reserve boosts the fed funds rate, you’re likely to also see rates rise on some savings products. But you won’t get to take advantage of rising rates if you’re already locked in to a CD.
CD rates also tend to lag somewhat behind inflation rates, which can result in loss of purchasing power for the funds you lock in. Make sure to consider the various options available to you, including CDs, savings accounts and MMAs, so you can take advantage of the best yields — not just now, but also as they fluctuate over time.
Limited insurance coverage
At all FDIC-insured banks and NCUA-insured credit unions, up to $250,000 of your deposits are protected, per depositor and per account ownership type. The nature of a jumbo CD is that it involves committing a large sum of money to the account. It’s important to make sure you don’t deposit more money than will be covered by federal insurance.
Federal insurance ensures that your money is protected in the event of a bank or credit union failure. While such closures don’t happen often, it’s still a possibility, and it’s better to have all of your money insured. If your total savings exceeds $250,000, you can split it between multiple financial institutions or account ownership types to receive full coverage.
Bottom line
Before you open a jumbo CD, compare rates and consider how much you’re willing to lock in at the fixed rate for a specified period of time. You don’t want to end up having to take out the money early and pay a resulting penalty.
CDs are a good fit for specific goals that don’t require much near-term liquidity, and jumbo CDs are no different. They’re not well suited for an emergency fund, but they may be good for something like a vacation fund. Just make sure you don’t exceed federal insurance limits.
