What's a Jumbo CD, and Do You Need One?

CDs aren't terribly attractive in our low-interest-rate environment, but if you want a low-risk investment, going "jumbo" can net you a little more than a standard CD.

Jun 8, 2014 at 10:30AM

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 you?

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 account.

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:

  • Safety: 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.
  • Returns: Investors enjoy a higher return on jumbo CDs than they would with traditional CDs, insured bank accounts, and many other low-risk investments.
  • Quick earnings: 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.
  • Collateral: If you need to borrow money, many lenders will accept a jumbo CD as collateral.

Possible drawbacks
Before investing in a jumbo CD, consider these possible drawbacks:

  • Taxability: 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 invest.
  • Heavy commitment: 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.

Take advantage of this little-known tax "loophole"
Recent tax increases have affected nearly every American taxpayer. But with the right planning, you can take steps to take control of your taxes and potentially even lower your tax bill. In our brand-new special report "The IRS Is Daring You to Make This Investment Now!," you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers