What is a Jumbo CD?

Sometimes, those looking for information on certificates of deposit will come across the term, “jumbo CD.” As you might imagine, a jumbo CD is one that has a rather high denomination. In the case of certificates of deposit, a jumbo CD will have a minimum denomination of $100,000. For the most part, jumbo CDs are favored by institutional investors and high net worth individuals. This is because jumbo CDs are considered quite stable and relatively safe — even though some of the higher denomination jumbo CDs are beyond the insurance amount covered by the FDIC.

Characteristics of a Jumbo CD

Other than its rather high denomination, there is little to distinguish a jumbo CD from its counterparts. Like other certificates of deposit, a jumbo CD is considered a “time deposit.” This means that you agree to keep your money locked up for a specific period of of time. The bank has access to it, able to lend it out to others. In return for your promise that you won’t tap into the money before the agreed-upon time period is up, the bank pays you a rate of return that is usually higher than what you would get for a savings account.

In some cases, jumbo CDs have rather attractive yields, since such large sums of money are being used. Some investors find that jumbo CDs can be an attractive place to preserve their capital. However, it is important to realize that there are penalties for early withdrawal. You might be able to get a better yield if you lock up your principal for longer in a jumbo CD, but if something happens and you have to withdraw the money, your returns will be eroded.

Building a CD Ladder Instead

ladder

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For most ordinary people, a jumbo CD is rarely the best CD option. Even if you happen to have enough money available to get a jumbo CD, it might not be in your best interest to lock all that money up at once. You never know what might happen. Instead of locking it all up in one jumbo CD, it might be worth it to ladder your money.

You can take that $100,000 and divide it up into five CDs of $20,000 each. This can help you set up a CD ladder that allows a CD to mature every year. You start out with one, two, three, four and five year CDs. Then, as your first CD matures, you get another five year CD that will mature on year six. Every year, you will have access to your money, and you will have the option of taking advantage of possibly higher interest rates when you renew.

If you want more regular access to that money, you can build a CD ladder using shorter maturity dates. That way, you can continue to access your money, helping you avoid the biggest pitfall of jumbo CDs: that so much of your money is practically inaccessible.

Remember, though, that any cash product shouldn’t be relied on as a way to encourage portfolio growth. Even with the most generous of jumbo CDs, you will find that the yield is rather low, and you may only be able to keep pace with inflation, rather than outstrip it.

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