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Jumbo CDs

Dear Money Matters,
What are jumbo CDs?
Jeanne

Dear Jeanne,
My kids would hope this term means extra-large recorded discs that contain even more tin-eared, annoying music than the ones they already have, but, sadly for them, this is not the case. Jumbo CDs refer to certificates of deposit that mandate particularly large deposits -- usually $100,000 or more.

That may seem like a rather hefty sum to commit and, for many of us, it certainly is. The payback comes in slightly higher rates of return than those offered by CDs with less weighty deposit minimums.

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For instance, the best rate I could find on a five-year jumbo CD was 5.67 percent; a one-year jumbo was paying 3.3 percent. By comparison, a conventional one-year CD checked in at only 2.72 percent. Make your own comparison using Bankrate's CD search engine, which includes both jumbo and regular CDs.

One of the biggest concerns connected with jumbo CDs is federal insurance. The Federal Deposit Insurance Corporation limits per account coverage to $100,000 and $250,000 for retirement accounts. In that case, if you bought a jumbo CD for $100,000, your principal would be insured but any accrued interest would not be.

Depending on your confidence in the savings institution in question, that lack of coverage could be of genuine concern. In fact, some banks and other institutions have attempted to address this area by offering "mini jumbos" whose minimums are considerably less than the usual $100,000.

FDIC coverage notwithstanding, like any other CD, jumbo CDs can be attractive because of their guaranteed returns. That, in turn, dictates how suitable they may be for individual investors. If you don't mind tying up a significant cache of cash for a certain period, the returns can be attractive.

But the downside to bear in mind is liquidity -- should you need the money sooner than you expected, you can be hit with significant penalties for early withdrawal. If that's within the realm of possibility, you would do well to opt for a money market fund that functions more like a checking account. Money market rates can vary, but you can access your funds any time you may need to.

-- Posted: April 8, 2002

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See Also
CD tips from the SEC
What to do when your CD is due

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