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What is a Jumbo CD?

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A certificate of deposit (CD) is a deposit account (similar to a savings account) offered by banks and other financial institutions. It offers guaranteed earnings over time. But exactly what is a jumbo CD?

Quite simply, a jumbo CD is a CD opened with at least a $100,000 deposit. The term "jumbo" is used in finance to describe larger-sized products, like a very large mortgage loan, for example. 

Even for people with sizable nest eggs, $100,000 (or more) is a significant chunk of change. Here’s a look at the pros and cons of a jumbo CD and what to consider when opening one.

The advantages of jumbo CDs

CDs tend to have the highest annual percentage yields (APYs) compared with other account types. (APY is the amount of money you can earn in interest on an account -- the higher the APY, the more you'll earn.) CD account holders who pull funds before the maturity date could face a hefty early withdrawal penalty. And that's the reason CDs have high APYs -- banks know the bulk of these balances aren't going anywhere for a long time. Knowing that, banks can use your funds to invest in longer-term, higher-yielding assets, then pass some of those profits on to you.

Contrast that with a checking account. Money comes and goes out of most checking accounts almost daily. As a result, banks can't really rely on checking account balances to stay the same over time, so they can't invest the money in a checking account. That's a major reason most checking accounts don't pay their holders any interest.

If banks are willing to offer a relatively high rate on that "safe" money parked in CDs, you can bet at least some of them are willing to sweeten the pot on jumbo CDs. Even for a mid-sized bank, $100,000 deposited all at once and locked up for a designated term is a real boon to its finances.

Another plus for the jumbo CD is that, in the low six-figure range, the investment is covered by the Federal Deposit Insurance Corporation (FDIC). The maximum amount per depositor and ownership category is $250,000.

Why you might not want a jumbo CD

Earning a high APY is great. But it's a "what you see is what you get" investment. You put your money in, and you collect the agreed upon interest.

Other investments, like stocks, mutual funds, or real estate, all have the potential to rise -- perhaps significantly -- in the right circumstances. The $100,000 (or more) required to open a jumbo CD might be better used elsewhere.

And even for people with high budgets, $100,000 is a lot of money to devote to a single investment rather than a diversified set of assets -- no matter how secure that single investment might be.

Also keep in mind that there's always a time commitment with a CD. As a general rule of thumb, the longer the money stays in the account, the higher the APY.

To get the top rates for both standard and jumbo CDs, you need to commit to a maximum term, which is typically (but not always) five years. Half a decade is a long time to be putting a six-figure pile of money under lock and key.

It's also worth noting that if you put all of your funds into one CD, you lose the chance to take advantage of the CD ladder strategy. CD laddering lets you allocate your investment across several CDs so you have at least one account maturing at the end of every year. This ensures an annual income from your CD investment.

How to invest in a jumbo CD

CDs are one of the most solid financial commitments in banking. But remember that the penalties for even modest withdrawals are steep. Once you park your money into a CD, it needs to stay there.

If you've decided you want to open a jumbo CD, the next step is to figure out which bank is right for you. Most banks would love to take in hundreds of thousands of dollars, so jumbo CDs are common across the financial services industry.

Start by shopping around to find the best CD rates. Online banks tend to offer higher rates since they don’t have the overhead costs of a brick-and-mortar-bank. Although they don't necessarily have a separate jumbo CD category, their higher rates in general help make up for this.

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Next, you'll want to nail down the term. You need to strike a balance between the return you'll be getting and the length of time you can go without access to the money.

Once you've found the right jumbo CD for you, sit back and wait for your investment to mature.

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