Certificates of deposit (CDs) are generally simple financial products. You invest a lump sum of money for a fixed period of time, and, in return, you receive a guaranteed fixed interest rate in return. And the best part? CDs are FDIC insured up to $250,000 per depositor, per FDIC-insured bank, per ownership category according to the FDIC. So they’re a safe and easy way to save for your short and medium-term goals.
But there are many types of CDs with special features that can be used for just about any financial situation.
8 types of CDs to consider for your savings
CDs are offered with a variety of different features to help you reach your financial goals. Here are eight types of CDs that you could use to supercharge your savings.
Traditional or standard CD
A traditional or standard CD is the type you’re likely most familiar with. As mentioned before, you make a one-time deposit and agree to keep your money in the CD for a set period of time, generally anywhere from 1 month to 10 years. In return, you earn a fixed interest rate——known as the APY—that’s guaranteed for that entire term. Interest rates are currently high, so if you shop around you can get a competitive return on your investment.
The main catch is that there’s a cost to withdrawing your money before the CD term is up. In addition to losing the interest you would have earned if you had held it to maturity, you will likely have to pay 2–24 months worth of interest as an early withdrawal penalty. Longer CDs typically have a larger penalty.
Jumbo CD
A Jumbo CD is just like a traditional CD, but with a higher minimum investment requirement. You typically need to invest at least $100,000 into a Jumbo CD, and in return you can earn a higher interest rate.
“Jumbo CDs are great for the conservative part of your portfolio, if you have over $100,000 to invest,” says Eric Negron, CEPA, AWMA, CEO at Forefront Wealth Partners in Austin, TX. “Let’s say you have money that you don't need for the next two years, but you don't want to put into the market, it's a fantastic place to put your money to get a higher interest rate than money market accounts.”
Bump-up or bump-rate CD
A bump-up CD gives you the ability to capitalize on rising interest rates by allowing you to request an increase in your CD’s APY if the bank has raised the interest rate it pays for CDs with a similar term and amount.
You can typically request one or two rate increases during your CD term, depending on the length of the CD, which can be a great hedge if you’re worried about locking your money into a CD when rates might rise. The downside is that your initial interest rate is often lower than what you can earn on a traditional CD that doesn’t allow an increase.
No-penalty or liquid CD
Most CDs charge a penalty if you withdraw your money for the term expires. But with a no-penalty or liquid CD, you can withdraw your money penalty-free any time after a short lock-up period of 6–7 days. This can provide some flexibility if you’re unsure whether you’ll need the money, but you’ll likely get a lower interest rate and it may not be a better deal than a high-yield savings account, especially when it comes to accessing your money.
“Typically, a no-penalty or liquid cd is going to pay a higher interest rate than a savings or money market account,” says Kelli A. Hill, CFP®, Managing Director and Senior Director of Advice at Wells Fargo Wealth and Investment Management in Minneapolis, MN. “However, there can be a limit on partial withdrawals so you would have to take the whole thing out. With a savings account or money market, you can withdraw at your leisure.”
Callable CD
A callable CD might offer a higher interest rate to start, but the bank can decide to “call”—or terminate—the CD after a certain period of time. For example, you might be able to get a two-year CD with a three-month lock period, meaning your interest rate is guaranteed for three months. But once those three months are up, the bank can decide to terminate your CD at any time before the two-year term is complete.
If your CD is called, you will still receive your initial investment plus the interest earned up until the termination date. But banks typically call CDs if interest rates have dropped, meaning you may have to reinvest your money at a lower rate.
Step-up CD
A step-up CD is like a bump-up CD, except that the interest rate increases happen at set times and in set amounts. For example, you may start with an interest rate of 0.05%, with an increase to 0.25% after 7 months, 0.45% after 14 months, and 0.65% after 21 months.
That rising interest rate could benefit you if interest rates overall decline. But the starting rate may be lower, so you’ll have to weigh the increase against the fixed rate you could get from other CDs.
“Step-up CDs are not common, so you're not going to see as many different rates and options,” says Hill. “We know that more options typically leads to more competitive rates, and they just may not be out there.”
Add-on CD
Most CDs only allow a single contribution right when you open the account. But with an add-on CD, you can continue to contribute money to the CD throughout the term.
“This could be helpful for someone that's saving for a concrete goal, like a down payment on a house or a major trip,” says Negron. “Especially for someone who knows that if the money is too accessible, they might grab it and spend it. But if they know that there’s a penalty to take the money out, this gives them the flexibility to continue to add money to this account with that barrier in place.”
IRA CD
An IRA CD is simply a CD that’s held inside of an IRA. It combines the safety and certainty of a CD with the tax advantages of the IRA.
CDs can be held in Traditional, Roth, or SEP IRAs, and they still get the protection of FDIC insurance. But the amount you can invest is limited by the annual IRA contribution limits, and you’re also subject to IRA early withdrawal penalties in addition to any early withdrawal penalties attributable to the CD.
Matching types of CDs to your savings goals
With so many different types of CDs, how can you choose the right one for your needs?
It all comes down to understanding your goals and needs. If you’d like to lock in a competitive interest rate today, but you’re also worried that rates might go even higher, a bump-up CD could be a good choice. If you have a lot of money that you’d like to set aside for a couple of years, such as savings for a down payment on a house, you might use a Jumbo CD to earn a little more interest.
And if you simply have a specific need with a specific deadline, CDs can provide a predictable way for you to get there.
“Many of us who were children of the 80s can recall our parents and grandparents buying CDs for us as a way to save for college,” says Hill. “That's a good example where you know the timing of when you need it, so you can invest the funds you have and you know the money is going to be there when your child goes to college. And since there are four years, you can ladder it out and time the proceeds for each year.”
Of course, a CD isn’t always the right solution. In many cases, you may be better off sticking with a simple high-yield savings account.
“Given where we are in the environment right now, there's not much of a premium going with a CD instead of a high-yield savings account,” says Negron. “If you think that interest rates are going to increase in the near term, which a lot of us think, I would not be locking in CDs longer than six to nine months now. Once we get to the end of the Federal Reserve’s interest rate hikes, I would lock in CDs for as long as possible for the conservative part of my portfolio, especially because you don't risk principal loss.”
CDs are one of the safest and most predictable investment options available to you, but they can also be customized to meet your specific needs. There’s a different type of CD for just about every financial need, giving you a lot of freedom to choose the right product for your specific goals.
Frequently asked questions
What type of account is a CD?
CDs are FDIC-insured savings accounts.
Are there different types of certificates of deposit?
Yes, there are many different types of CDs offering different types of interest rates, minimum deposits, and early withdrawal penalties.
How do I find high-rate CDs?
Online banks often offer the best rates. You may also be able to find competitive rates through a local bank or credit union.
Can you add money to a CD?
Most CDs do not allow you to add money after the initial deposit, but with an add-on CD you can continue to make contributions.
