Better Yields: Jumbo CD Rates


20 July,2011

Sometimes, as you look for the best CD rates, you might find that you have better luck when the CD in question has a higher minimum deposit. The more money you are willing to lock away for a set period of time, the better your interest yield. For institutions, and for high net worth individuals, one way to get a better rate, is to turn to jumbo CDs.

What is a Jumbo CD?

The reason that Jumbo certificate of deposit rates are often better than what you would get with a “regular” CD is due to the large amount of capital you are putting into the account. A jumbo CD is usually any CD with a minimum requirement of at least $100,000.

Just like CDs with smaller amounts of money, rates of jumbo CDs are also dependent on how long you plan to leave the money in the account. The longer you are willing to tie your money up, the higher your yield is likely to be. And, because the limit on FDIC insured deposits is at $250,000 now, it is likely to be protected. (You can get two at the same bank and have them protected.)

Who Uses these type of CDs?

Because these CDs are so large, not anyone can afford to take advantage of these rates. For the most part, they are used by institutional investors. Banks like to use them, as do pension funds. This is because they offer stable, safe returns. While the returns may not be huge, they can be a good place for institutional investors to park their cash for some time, without worrying about losing money.

Individuals with high net worth also sometimes like to make use of them. In some cases, the rates can help individuals keep pace with inflation, preserving their capital safely. If you are someone who has a lot of cash, and wants to see it protected as a safety net, jumbo CDs are an option to consider.

However, if you do decide on a jumbo CD, you have to realize that you won’t have easy access to your money. Anytime you decide to get any CD, you are making a commitment. If you try to withdraw money before the maturity date, you will be subject to a healthy penalty.

It is also important to understand that you will have to pay taxes on interest gains from your jumbo CD investment. Unless you have your jumbo CD in a tax-advantaged retirement account, like an IRA, you may even have to pay taxes on the interest earned in that year — even if your financial institution rolls the interest back into the CD, rather than sending you a check. Make sure you understand how this works, and the reporting process, or you could find yourself in trouble.

Bottom Line

Most “regular” folks aren’t going to be getting IRAs. Instead, jumbo CDs are often best suited for those with very large amounts of capital. You can still get a decent yield on a CD with a lower denomination.