Dear Money Matters,
What are jumbo CDs?
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
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