How much money should you keep in a CD?

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Cash may have been the best-performing asset last year, but that doesn’t mean all of your money should be sitting in a CD or savings account.

Keeping your dollars in one of these savings vehicles may seem safer than investing in stocks or bonds, but there are risks that go along with keeping too much money in one place.

Still, there are products — like jumbo CDs — that require account holders to deposit a hunk of cash (typically a minimum of $100,000). At All In, a credit union in Daleville, Alabama, there are accounts with a minimum deposit of $500,000.

How much money you’re keeping in CDs should ultimately depend on your financial situation and why you’re hoping to stash a pile of money in something like a jumbo CD.

Jumbo CDs vs. traditional CDs

Bankrate studies reveal that Americans struggle to set aside even $1,000 for a rainy day. Few of us have $100,000 lying around that we could stick in a jumbo CD.

Alex Joyce, CEO and president of ReJoyce Financial in Indianapolis, says he’s had clients open jumbo CDs in the past. They tend to be wealthy individuals with too much cash. Often, their liquid assets total at least $1 million.

“Most of the time it’s that they don’t need the money and it’s better than a savings account,” Joyce says. “It’s better than a traditional CD.”

Consumers interested in jumbo CDs also tend to be older — people in their 70s or pre-retirees, Joyce says. The money can be used as collateral for someone applying for a loan. A jumbo CD can also be used as a place to park funds retirees must withdraw from their retirement accounts to avoid hefty tax penalties.

With a jumbo CD, it’s possible to earn a higher yield than you would normally attain by opening a traditional CD. At Bellco Credit Union in Greenwood Village, Colorado, for example, you can earn an extra 10 basis points (a basis point is one-hundredth of a percentage point) by opening a 12-month jumbo CD instead of a regular account with the same term length.

As is the case with other CDs, you’ll end up with more earnings if you lock up your money for a longer period of time. The top jumbo CD rates hover around 3 percent APY.

Jumbo CD rates, however, don’t always pay more interest than accounts that require a lower minimum deposit. Account holders who compare CD rates may find that the jumbo CD rate at one bank or credit union is just as high as it is elsewhere for an account that can be opened with just $500 or $1,000.

[CALCULATE: Find out how much interest is earned over time on a CD]

Be careful not to lock up too much money

Investing in CDs may seem like a good idea. There’s a guaranteed rate of return and an opportunity to boost your savings if you hold onto the account until it matures. Since it’s difficult to say what the future will bring in terms of Federal Reserve interest rate cuts, worried consumers may prefer locking up money in a fixed-rate CD as opposed to possibly seeing variable saving and money market account rates decline further.

Having a jumbo CD, however, comes with its own risks as well. Rates at the moment are keeping pace with inflation, but that could change over time, reducing the value of your money.

Another issue: Insurance provided by the Federal Deposit Insurance Corp. and the National Credit Union Association is limited to $250,000, per depositor, per insured bank, per ownership category. Someone hoping to put more than a quarter of a million dollars in a jumbo CD runs the risk of not getting some of their money back if their bank fails.

Interest attained by investing in jumbo CDs is also taxable, presenting an additional problem for savers hoping to protect their earnings. “If the jumbo CD is not held in a tax-deferred retirement account, taxes from interest will dampen the return and purchasing power even more,” says Alano Massi, CFP, managing director for Palm Capital Management in Westlake, California.

What’s more, once you tie up your money in a jumbo CD, you’re stuck until it comes due, unless you don’t mind paying an early withdrawal penalty. But let’s face it: You could lose a lot of money in the process of cashing out a CD of $100,000 or more before the end of your term.

Making the most of a jumbo CD

Jumbo CDs are best for individuals with plenty of assets and a specific short-term goal in mind, like an upcoming home purchase. Locking that money up for a year or two could be beneficial to someone who may otherwise be tempted to spend it. With a short-term jumbo CD, you also reduce your chances of losing purchasing power due to inflation.

“A jumbo CD might be a good choice in this situation, or if the investor has no tolerance for fluctuation of the principal,” Massi says. “As with any investment strategy, the investor should take careful consideration to his or her own needs and risk tolerance.”

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