If you have a large amount of savings and want it to grow – but you don’t want to chance losing any money to high-risk investments – a jumbo certificate of deposit could be the answer.
Jumbo CDs work just like any traditional CD: You agree to keep your funds on deposit for a certain period, and, in exchange, you are guaranteed your principal back, plus interest.
“Typically, the time periods range from three months to five years or more,” says Toby Walters, a chartered financial analyst and expert for RetireGuide.com. “You’re guaranteed a rate of return if you leave your money in the CD for that period.”
In general, the longer the term length, the higher the interest rate you receive. However, if you withdraw your funds early, you may be subject to an early withdrawal fee, which can cancel out any interest earnings.
So what makes it “jumbo”? The differentiating factor of a jumbo CD is not the interest rate or term length, but the deposit amount. Jumbo CDs usually require a minimum opening deposit of $100,000, though some require less.
Pros and Cons of Jumbo CDs
Putting your money in a jumbo CD can help you earn a little extra interest for a home down payment, big vacation or other goal. However, jumbo CDs are not for everyone. Before opening a jumbo CD, consider the pros and cons.
- Very low risk. One of the biggest advantages of putting your money in a CD is that you’re able to earn some interest without exposing it to any risk. You are also guaranteed the interest rate offered by the bank as long as you meet the terms of the account, says Zachary A. Bachner, a certified financial planner with Summit Financial Consulting. Funds are also protected by the U.S. government up to $250,000, as long as they’re deposited with a federally insured bank or credit union.
- Better rates. Jumbo CDs tend to offer higher interest rates than regular CDs, though you may also have to commit to a term of three to five years to secure the best rates. “For investors with large investment portfolios including stocks, jumbo CDs can provide security and comfort when the stock market is unstable,” Walters says.
- Low growth. Even though you may earn a higher rate with a jumbo CD, the interest rates on deposit accounts are quite low across the board. There’s a chance that your earnings won’t be high enough to beat inflation. Plus, though jumbo CDs tend to offer higher interest rates than traditional CDs, the difference is negligible on average. “The difference in annual percentage yields between regular and jumbo CDs is about 0.01%,” Walters says.
- Locked in. Jumbo CDs may not be a great choice for emergency savings or money you will need soon. To earn the specified rate, you have to keep your money on deposit for the full term. “There is normally a penalty or surrender charge if you try to access the money before the end of the specified term,” Bachner says.
Cautions About Jumbo CDs
Jumbo CDs offer safety and stability for your savings. In general, that’s a good thing. But depending on your goals for the money, a jumbo CD may be too safe.
If you’re planning to hold onto your savings for a few years or more, you might see better returns by investing in a low-risk bond or exchange-traded fund. “You’re tied into the interest rate offered by the jumbo CD, so if interest rates in general are rising, your money will be locked up in a jumbo CD offering a lower interest rate,” Walters says. That’s especially true if you opt for a term of three to five years. If you need access to your money earlier than expected, you may lose your modest earnings to early withdrawal fees.
Also keep in mind that because it’s a jumbo CD, a large amount of your money could be missing out on rising rates.
Finally, you should be careful about keeping too much money on deposit. The Federal Deposit Insurance Corp. insures up to $250,000 per depositor, per institution. So if you have two accounts with a combined balance that exceeds $250,000, the money could be at risk. “If the bank goes bankrupt, you may not receive further interest, and your initial investment may be at risk,” Bachner says.
Best Jumbo CDs
“For anyone seeking security and knowing that they won’t need the money for some time, then jumbo CDs may be suitable,” Walters says, adding that jumbo CDs can be used by investors who want to counterbalance the volatility of stocks in their investment portfolio.
The best jumbo CDs are offered by credit unions, where CDs are called share certificates. To join a credit union, you have to meet the qualifications for membership. Below are the top jumbo CD rates available today, plus how to become a member of the institution offering them.
Superior Choice Credit Union
Rate: 1.4% annual percentage yield
Who can join: Membership is open to people who live or work in certain counties in Minnesota and Wisconsin. Members of the American Consumer Council are also eligible to join.
Wings Financial Credit Union
Who can join: Membership is open to individuals who live or work in the following areas (or have a family member who does): eligible Minnesota or Wisconsin counties; the Seattle-Tacoma, Washington, metro area; the Detroit metro area; the Orlando, Florida, metro area; and the Atlanta metro area. You can also join if you or an immediate family member are employed by airlines, government agencies working with the aviation industry, or work at an airport directly with air freight, air courier or air transportation, or are a member of Wings or the Wings Financial Foundation.
SchoolsFirst Federal Credit Union
Who can join: Membership is open to those who are part of the California educational community, including employees of public elementary and secondary schools, private elementary and secondary schools listed in the California Department of Education School Directory, community colleges and more. You can also join if you’re retired from an eligible school and are receiving a pension or annuity from that entity’s retirement program, or you are the immediate family member of an existing SchoolsFirst FCU member.
Who can join: Anyone who lives or works in California is eligible to join. Nonresidents can also join if an immediate family member is a current Golden 1 member, or if they work for one of its 1,000 select employee groups.
Navy Federal Credit Union
Who can join: Service members and veterans from all branches of the armed forces are eligible to join, as are their family members. Department of Defense civilian employees may also join.