How much money you should keep in a CD depends on your individual circumstances:
- You should save enough money to meet the CD’s minimum requirement to open the account.
- If you’re saving for a shorter-term goal, such as a down payment on a home, deposit enough money to reach that goal, or to even hit the goal from interest earned on the CD.
- If you’re saving for a longer-term goal, such as retirement, you may want to save a smaller portion of your money in CDs and instead consider other investments that have the potential to earn much higher returns over time.
Your financial goals and time horizon will help you determine how much money to put in a CD.
Jumbo CDs vs. traditional CDs
If you’re looking to deposit a large amount of money into a CD, you may need a jumbo CD.
Jumbo CDs generally require at least a $95,000 deposit. Meanwhile, some traditional CDs might not even have a minimum balance requirement. The typical minimum balance required to open a traditional CD usually ranges from $0 to around $10,000 at an online bank.
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.
Jumbo CDs aren’t that common, but you’ll be able to find them at some banks and credit unions. You’ll either see them called a jumbo CD or see a rate tier of $95,000 or more with a higher yield.
Just because they’re called jumbo CDs doesn’t mean the yield will be “jumbo” as well. Many banks pay the same yield on their jumbo CDs as they do with their traditional CDs with the same terms. If you’re looking for a jumbo CD, compare CD rates to make sure you’re getting a better rate for depositing a larger amount.
Be careful not to lock up too much money
CDs offer a guaranteed rate of return and an opportunity to boost your savings if you keep the account until it matures. Since it’s difficult to predict what the interest rate environment will be in the future, you wouldn’t want to put too much money in a long-term CD in case rates increase. Not keeping up with inflation is also a potential concern when you have money locked in at a certain yield.
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 losing money if their bank fails.
Interest attained by investing in 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, certified financial planner and managing director for Palm Capital Management in Westlake, California.
What’s more, once you tie up your money in a 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.