When you have hundreds of thousands of dollars at your disposal, your investment options can seem endless. If you’re looking to diversify your portfolio and minimize risk, consider buying a jumbo CD that is insured through a Federal Deposit Insurance Corp. (FDIC) bank or a National Credit Union Administration (NCUA) institution. Also, make sure that the CD is within insurance guidelines.
Jumbo CD vs. regular CD
A jumbo CD refers to the large account opening balance required for these types of CDs. Usually, a jumbo CD has a minimum account opening balance of $100,000, but that isn’t always the minimum amount.
“Some of those … lower minimum deposits on jumbos are a vestige of back when the FDIC insurance limit was $100,000, rather than ($250,000),” says Greg McBride, CFA, Bankrate’s chief financial analyst. “So a jumbo CD would be issued for $95,000 to leave a little headroom for the interest earnings without breaching the FDIC insurance gap.”
A regular CD may not even have a minimum deposit and could potentially have a higher APY than a jumbo CD.
The pros of a jumbo CD
Here are two benefits of jumbo CDs.
- Potential higher APY: Sometimes a jumbo CD may offer a higher APY than a regular CD. If you can get a higher APY in a jumbo CD, then you should consider this option. If you’re going to put a large amount of money in a jumbo CD, make sure it offers the best APY possible. Some banks will have tiered CDs and will reward the amount of money that you deposit, to a certain limit.
- Safety: A jumbo CD is a safe option if it’s through an FDIC bank or an NCUA credit union – as long as you follow their insurance guidelines.
Each depositor at an FDIC-insured bank is insured to at least $250,000 per FDIC-insured bank. At an NCUA institution, the standard share insurance amount is $250,000 per share owner, per insured credit union, for each ownership category.
The cons of a jumbo CD
Here are some downsides to consider.
- Inflation can be a concern: Jumbo CDs require a large minimum balance. In what’s still considered to be a low-rate environment, in some cases it might not make sense to put a jumbo deposit into a CD for a long period of time.
- Non-jumbo CDs may have a better APY: Rates may be going up in the future, so it may be worth waiting to see what happens with rates before putting a significant amount of money into a jumbo CD – especially if it’s for a long period of time. Sometimes non-jumbo CDs may actually have better APYs and lower minimum balance requirements than jumbo CDs.
What are the associated risks with jumbo CDs?
The biggest risk to a jumbo CD is if you put a large amount of money into it – for a long period of time – and that money is not keeping up with inflation. The risk is not that you will lose principal, but that you’ll lose purchasing power if inflation is ahead of the APY you’re earning on the jumbo CD. Another risk is that if an emergency occurs, you may have to pay an early withdrawal fee to access your money. Those can be severe enough to cause you to lose some of your principal.
Is a jumbo CD a good investment?
A jumbo CD is good investment if the APY and the time horizon fit your needs. It’s possible to get a CD that isn’t a jumbo CD that has both a lower minimum balance and higher APY. If this is the case, then the jumbo CD is not necessary.
Jumbo CD penalties
First Financial Northwest Bank has one of the top 5-year CD rates for balances of $100,000 or more. Here are its penalties, as an example:
- On a CD of 12 months or less: Penalty is equal to 90 days’ simple interest.
- On a CD longer than 12 months but less than 48 months: Penalty is 180 days’ worth of simple interest.
- On a 48-month or 60-month CD: Penalty is 365 days’ simple interest.
Are jumbo CDs usually short-term or long-term?
A jumbo CD can be either for short-term or long-term savings. Jumbo refers to the minimum balance needed to open the CD. Since you’re keeping a large amount of money, make sure that you get the best APY possible.
“You’d be surprised how often banks pay the same rate on a jumbo as they do on a much smaller deposit,” McBride says.
So compare jumbo CDs, minimum balance requirements to get a certain APY, the APY that you’ll earn on the CD and the CD term length to make a decision.
Here are the top nationally available rates for jumbo CDs. Compare these offers, then calculate how much interest you could earn when your CD comes due.
|Michigan State University Federal Credit Union||3.36%||$100,000|
|Sun East Federal Credit Union||3.35%||$99,000|
|University Federal Credit Union||3.25%||$100,000|
|People’s Trust Federal Credit Union||3.10%||$100,000|
|Grow Financial Federal Credit Union||3.10%||$100,000|
|Signature Federal Credit Union||3.10%||$100,000|
Jumbo CDs are typically available for savers with at least $100,000 to deposit. In the past, these accounts provided a higher rate of return than traditional CDs. But with interest rates still at the low end of the spectrum, good deals on jumbo CDs can be hard to find.
The best 5-year jumbo CDs pay more than two times the national average of 1.56 percent APY, according to Bankrate’s most recent national survey of banks and thrifts.
Today’s top nationally available jumbo CDs pay at least 3.46 percent APY. This may be a good place to invest if you’re saving money for a big ticket item or a large down payment on a house. Having a jumbo CD can also be helpful if you need collateral for a loan.
Finding the best jumbo CD rates
If you only go as far as your local bank to find CDs, you could be leaving money on the table. That’s why shopping around and comparing rates is key.
Online-only banks typically offer competitive CD yields because they have no branches to maintain. Credit unions often have favorable rates for savers as well. If you focus on the institutions that are federally insured, you’ll be able to reclaim your funds (up to $250,000) even if your bank shuts its doors.
Generally, longer CD terms offer higher yields. If you’re looking for the best jumbo CD rates, start by checking out accounts that mature within five years.
Top account details
- Michigan State University Federal Credit Union was founded as the Michigan State College Employees Credit Union in 1937. Membership is open to employees of select groups and students, alumni, faculty and staff of Michigan State University and Oakland University. Anyone outside of the state can join through the Michigan United Conservation Clubs. The credit union earned five out of five stars in Bankrate’s review of its financial health.
- Sun East Federal Credit Union was established in 1949 and is based in Aston, Pennsylvania. Membership is open to anyone who donates $10 to the Sun East Charitable Foundation, which helps individuals and organizations in the greater Brandywine Valley. The credit union earned three out of five stars in Bankrate’s latest review of its financial health.
- GTE Financial was founded in 1935 and is based in Tampa, Florida. Anyone can join by funding a primary savings account, from which $5 will be automatically transferred to a Member Owner Share, signifying membership in the credit union. This is refundable when the GTE account is closed. GTE earned three out of five stars in Bankrate’s latest review of its financial health.
- University Federal Credit Union was established in 1936 to serve the faculty and staff of the University of Texas and is based in Austin, Texas. Membership is open to anyone who joins the University of Texas Longhorn Foundation, which requires a single $20 donation. The credit union earned four out of five stars in Bankrate’s latest review of its financial health.
- People’s Trust Federal Credit Union is based in Houston. It was founded in 1935 as the Shell Employees Federal Credit Union. Membership is open to anyone who joins the People’s Trust Foundation for a $5 fee. The credit union earned three out of five stars in Bankrate’s latest review of its financial health.
- Grow Financial Federal Credit Union is based in Tampa, Florida and was founded in 1955. While it caters to active and retired military and other select groups, membership is open to anyone who pays a $5 membership fee and opens a savings account with a minimum $5 deposit. The credit union earned four out of five stars in the latest review of its financial health.
- Signature Federal Credit Union was founded in 1970. Membership is open to anyone who joins the American Consumer Council. The credit union, which is based in Alexandria, Virginia, earned four out of five stars in Bankrate’s latest review of its financial health.
Consider your tax bite
Having a jumbo CD could leave you with a giant tax bill. The interest you earn will be taxed as ordinary income.
Calculate your potential tax bite and decide whether you should put part of your money elsewhere. Capital gains are taxed at a lower rate, so investing some of your savings in stocks and other securities could reduce what you owe Uncle Sam.
Are jumbo CDs negotiable?
CDs that generally need to be held by the account holder until they mature are non-negotiable. Generally, jumbo CDs you can purchase at a bank fit this description.
On the other hand, negotiable CDs can be sold to another party, who then has the option to resell the CD, according to the Richmond Federal Reserve. Negotiable CDs are traded in the secondary markets. A brokered CD is an example of a CD that you can sell on the secondary market.
Brokerages and independent salespeople are sometimes able to negotiate a higher rate. This may be possible if they can promise to deliver a specific dollar amount to the financial institution, according to the SEC.