With our uncertain economy and tepid interest rates, many
consumers are seeking low-risk investments that offer a higher
return. Jumbo CDs fall into this investment category. But what
exactly is a jumbo CD? And is this type of investment right for
Understanding CDs and jumbo CDs
CDs, or certificates of deposit, are accounts in which money is
invested for a set amount of time, generally in return for a
fixed interest rate. Most CDs have terms of a few months to five
years, although some are available with much longer or shorter
maturities. But the longer the CD term, the better the interest
rate should be. If you withdraw money before your CD matures,
however, be aware that stiff penalties apply.
CDs are insured for up to $250,000. The FDIC covers this
insurance if you purchase your CD through an FDIC-insured bank,
and the NCUA insures your investment if the CD is with a credit
union. Because your investment is insured, CDs generally offer a
lower interest rate than riskier investments, but they yield more
than you'd get in interest from a standard savings or checking
So how does a jumbo CD fit in to all of this? A jumbo CD is
simply a CD that requires a larger investment than a traditional
CD -- generally a minimum of $100,000. In return for tying up
such a large sum of money for a fixed period, the interest rate
for a jumbo CD is somewhat higher than that of traditional CDs.
Some jumbo CDs are negotiable, which means they have interest
rates that fluctuate with the market. In these cases, the
principal amount is still insured, and a certain minimum rate of
interest is always guaranteed.
Jumbo CD advantages
If you have a large sum of money to invest, jumbo certificates of
deposit offer a number of distinct benefits:
For investors with low risk tolerance, a jumbo CD brings peace
of mind by guaranteeing that the initial deposit is protected,
no matter what happens in the economy.
: Investors enjoy a higher return on jumbo CDs than they would
with traditional CDs, insured bank accounts, and many other
Some banks offer jumbo CDs with terms as short as seven days,
so one could "rest" large liquid assets for a week or two and
make some quick, effortless cash.
: If you need to borrow money, many lenders will accept a jumbo
CD as collateral.
Before investing in a jumbo CD, consider these possible
: All interest earned through a jumbo CD is fully taxable.
Those who are looking to reduce what they pay in taxes might
want to investigate tax-advantaged investments.
Large sum needed
: Not everyone has $100,000 of liquid capital ready to
: To get the best rates, you'll have to choose longer-term
jumbo CDs. If you then need that cash in an emergency, you
won't be able to withdraw it without heavy penalties. In
addition, if market rates spike, your huge investment will
remain tied up at a lower rate of return and you could miss out
on better opportunities.
The bottom line
Jumbo CDs aren't for everyone. They're best suited for investors
with a large amount of ready cash coupled with a low risk
tolerance. CD interest rates right now have just about nowhere to
go but up, and investing in a jumbo CD may offer the best current
return for a low-risk investment. However, in another year or
two, rising interest rates may make jumbo CDs a much more
attractive prospect than they are today.
If you decide to purchase a jumbo CD, consider a shorter-term
certificate and then keep an eye out for better deals that may
accompany rising interest rates.
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