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What Type of CD Is Right for You?

First Republic Bank
June 30, 2022

  • Certificates of Deposits (CDs) offer a way to earn interest on your cash and potentially help you earn more than with traditional savings accounts. 
  • Different types of CDs come with different term lengths and interest rates. 
  • You can use a CD ladder to help maximize earnings from your savings. 

Certificates of Deposit (CDs) provide a smart way to save and potentially earn more interest on your savings, compared to other savings tools. But not all types of CDs work the same way. Each offers different term lengths and related interest rates. 

Dive into this article to learn how different CD accounts work. Once you know the different strategies for investing in CDs, you’ll have a better understanding of which ones make sense for your financial needs and goals. 

CD Ladders
A CD ladder isn't a type of CD. It’s a strategy where savers put their cash into multiple CDs with varying term lengths. The multiple CDs mature sequentially over time, allowing savers to reinvest in additional CDs or use their money elsewhere.

CD account comparison

Of the multiple types of CDs, each comes with different terms and CD rates. 

CD Type Fixed or Variable Interest Rate Early Withdrawal Penalty Features
Traditional CDs Fixed Yes Offer a fixed term and a fixed interest rate
Bump-up CDs Variable Yes Enable you to bump up to a higher interest rate if the bank’s annual percentage yield changes during the CD’s term
High-Yield CDs Fixed Yes Provide a higher interest rate, usually in exchange for a longer-term
Jumbo CDs Fixed Yes Have a larger minimum deposit, usually at least $100,000 
Brokered CDs Varies Varies Sold via a brokerage firm
Add-on CDs Fixed Yes Enable you to make additional deposits over the CD’s term
Liquid CDs Fixed No Provide access to your money for a certain time period
IRA CDs Fixed Yes Another way to save within an individual retirement account (IRA)

 

Traditional CDs

Traditional CDs generally work in the same way but offer different term lengths and interest rates. You deposit your money for a set period of time, ranging from a few months to a few years or more. 

Historically, the interest rates are higher for the longer-term CDs. Depending on your timeline, you can maximize how much you're earning on your savings by being strategic about the term lengths and interest rates that CDs provide. A CD calculator can help inform your savings decisions. 

Short- and long-term CDs

Short- and long-term CDs offer different term lengths and different interest rates. Short-term CDs have terms of less than 12 months. Meanwhile, long-term CDs have one- to five-year terms. 

The type of CD that makes sense for you depends on your timeline and your need to access your cash. For instance, short-term CDs are ideal if you want to explore the benefits of a CD but don't want your money tied up for a long time. 

Long-term CDs work well if you have excess funds that you won't need for a year or more. You can deposit your cash and put it to work for longer. 

Bump-up CDs

A bump-up CD is a type of CD account that enables you to increase the annual percentage yield (APY) during the term of the CD at no additional cost. For example, if you opened a three-year CD and your bank increased its APY one year later, you could ask your bank if they accommodate a bump up to your CD rate to the new interest rate.  

However, there may be limits to how many times you can change your rate. Bump-up CDs work best if you're looking to take advantage of a rising interest-rate environment. 

High-yield CDs

High-yield CDs provide higher interest rates than traditional CDs and are mainly offered by online banks. 

High-yield CDs are ideal if you're comfortable making an online investment and don't need to visit a bank branch. As with other CD products, the term lengths and interest rates will vary by CD and the financial institution. 

Jumbo CDs

Jumbo CDs reflect their name in that they require a large minimum deposit, usually $100,000 or more. In return for the large deposit amount, banks often provide interest rates higher than you'd receive with traditional CDs. 

A jumbo CD is a good option if you have significant savings and are looking for a consistent, safe return without the volatility risk you might experience when investing in stocks and bonds. However, investigate all the terms, as jumbo CDs may come with withdrawal penalties for taking your money out early. 

Brokered CDs

A brokered CD is a CD opened through a brokerage firm. The term lengths and interest rates vary by product and firm. Brokered CDs are unique in that you can buy or sell them on the secondary market at any time without penalty. 

As a result, they're more liquid than other types of CD accounts because you can sell your CD if you need your money back. However, you could lose money on the CD if you sell it for below face value. It's also important to note that not all brokered CDs are FDIC insured (covered for loss by the Federal Deposit Insurance Corporation).

Add-on CDs

Add-on CDs allow you to add money to your CD during the CD's term. The rules for additional deposits will vary by financial institution. Add-on CDs may come with a lower interest rate than standard CDs because of their flexibility. 

This type of CD works best if you're looking for a CD to function more like a traditional savings account but offer a higher yield. 

Liquid CDs

Liquid CDs — also known as no-penalty CDs — let account holders withdraw money without a penalty. Similar to add-on CDs, liquid CDs often have lower interest rates. 

They are a good option if you want to take advantage of CDs but want continued access to your funds. Liquid CDs still have minimum balance requirements, and there's often a cap on the number of withdrawals you can make from the account. 

IRA CDs

An IRA CD is a CD within an individual retirement account (IRA) that focuses on deposits rather than investments in the stock market. Financial institutions usually let you choose the type of CD you want within your IRA. You may even have access to retirement-specific CDs that have longer time horizons and potentially higher interest rates. 

These CDs are designed for retirement savers. To that end, they work well if you have 10 or more years until retirement and are looking for guaranteed returns outside the stock market's volatility. 

Choosing the right CD

Compared to a traditional savings account, CDs provide an easy way to earn a higher interest rate on money that you're saving. By educating yourself on the different types of available CD accounts, you'll be able to determine which type of CD fits best with your financial needs and goals. As always, please don’t forget to consult a tax advisor to learn more about any tax implications associated with interest-bearing products such as a CD.

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