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: 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 a 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
Sun East Federal Credit Union offers a competitive yield for balances of $100,000 or more. Here are its penalties, as an example:
- Less than 6 months: Penalty is equal to 45 days’ dividends.
- CDs with terms of 6 to 11 months: Penalty is 90 days’ dividends.
- CDs with terms of 12 to 60 months: Penalty is 180 days’ dividends.
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.
|CommonWealth One Federal Credit Union||3.21%||$100,000|
|Signature Federal Credit Union||3.20%||$100,000|
|US Senate Federal Credit Union**||3.11%||$100,000|
|Blue Federal Credit Union||3.00%||$100,000|
|Premier America Credit Union||3.00%||$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 1.25 percent APY, according to Bankrate’s most recent national survey of banks and thrifts.
Today’s top nationally available jumbo CDs pay at least 3.21 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.
Best jumbo CD rates details
- CommonWealth One Federal Credit Union: The credit union is based in Alexandria, Virginia and was chartered in 1944 as Army Air Force Annex #1 Credit Union. Back then, there were only 94 members. Today, there are more than 32,600 members and anyone can join by becoming a lifetime member of the Virginia Consumer Council. In the latest review of its financial health, the credit union earned four out of five stars.
- Signature Federal Credit Union: The 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.
- US Senate Federal Credit Union: The credit union was founded in 1935. Formerly known as the United States Senate Employees Federal Credit Union, it currently serves employees of several government bodies, select employer groups and anyone who donates $8 to the American Consumer Council, Virginia Chapter, or $50 to the U.S. Capitol Historical Society when opening an account. The credit union earned five out of five stars in Bankrate’s review of its financial health.
- Blue Federal Credit Union: The credit union was founded in 2016, the result of a merger between Warren Federal Credit Union, chartered in 1951 and based in Wyoming, and Community Financial Credit Union, chartered in 1956 and based in Colorado. Blue serves more than 85,000 members globally, and is currently building its headquarters in Cheyenne, Wyoming, slated to open by the end of 2020.
- Premier America Credit Union: The credit union was founded in 1957 and is headquartered in Chatsworth, California. Membership is open to anyone who joins the Thousand Oaks Alliance for the Arts.
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.