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Meeting Your Goals with Different Types of Certificates of Deposit

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April 25th, 2024

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If you want to grow your money without extra risk, certificates of deposit (CDs) can be a great option. Thanks to their guaranteed returns and the fact that they’re an FDIC-insured account option, CDs are one of the safest and most straightforward ways to earn interest and grow your nest egg.

Once you're ready to take the plunge and open a CD, it's time to decide on the best type. Depending on your financial goals — saving for a down payment on a home, protecting your money against inflation, buying a car—there's a CD that can help.

Here's everything you need to know about the different types of certificates of deposit and how to choose one that’s right for you.

Traditional CDs

Traditional certificates of deposit are the most common type of CD. They offer a fixed interest rate, which are typically higher than a savings account, for a fixed term, or length of time. While term lengths can vary, they typically range from as short as six months up to five years, and while you can technically withdraw money before the term is up, you may have to pay a penalty if you do so.

A traditional CD can be a great option if you:

  • Are new to investing in CDs or want a straightforward setup that requires no oversight
  • Want the stability of a guaranteed return
  • Know that you won’t need access to the funds you set aside

Liquid or no penalty CD: Best for flexibility

CDs offer a lot of perks like guaranteed returns and easy-to-understand terms. But there's one potential downside — early withdrawal penalties. Usually, if you withdraw money before a CD matures you will have to pay a penalty which can offset potential earnings. But a liquid CD, sometimes called “no penalty CD,” allows for additional flexibility—and can be a great option if you think you might need access to the funds you’ve set aside before the term is over.

With a liquid or no penalty CD, you can withdraw money without paying a penalty, once certain requirements are met. Most commonly, you’ll be required to wait until after half the term is complete before you’ll be eligible to withdraw funds without a penalty or fee. For example, if you have a 2-year CD, you can remove funds penalty-free after the first year. This additional flexibility, however, may come with a “cost”—liquid CDs often have lower interest rates than traditional certificates of deposit and require higher minimum deposit amounts.

A no penalty CD is a great option if you want to keep your money flexible but still earn more interest than a typical savings account and earn a guaranteed amount of interest (as long as you don’t withdraw early).

“Bump-up” or “Step-up” CDs

Bump-up and step-up certificates of deposit give you the opportunity to lock in a great starting rate, but also give you the opportunity to increase your interest rate throughout the term.

Bump-up CDs

Bump-up CDs allow your rate to change as the market rate changes. For example, say you open a bump-up CD at a starting rate of 4.00% but the market rate increases to 4.5%. With a bump-up CD, you can (usually) increase your rate to the new market rate without opening a new account, increasing your term length, or depositing additional funds. Bump-up CDs are a great option if you want to take advantage of a rate today but are expecting rates to continue to rise. When opening a bump-up CD, make sure you understand if you have to physically request the increase (which will require you to monitor the market) or if the increase will be automatically applied to your account.

Bump-up CDs usually require higher minimum deposits than traditional CDs and don’t have the flexibility of no penalty CDs, so if you’re hoping to take advantage of rising rates while keeping your funds accessible, consider creating a CD ladder with traditional CDs.

Step-up CDs

Unlike a bump-up CD, a step-up CD doesn’t necessarily align to market rate increases. If you have a step-up CD, the interest rate increases are part of the initial agreement and occur at predetermined intervals, such as every 6 months that the CD remains untouched.

Brokered CDs

With a brokered CD, instead of opening the CD with your bank, you’ll work with a brokerage firm or broker who buys the CDs on your behalf. In addition to having an expert walk you through the process and make recommendations that fit your financial goals, the broker will purchase them on the secondary market, allowing for CDs to be bought and sold without penalty before maturity.

But, there are risks and additional expenses with brokered CDs that aren’t present with other options. Although there might not be a penalty to pay if you sell the CD before the maturity date, you could receive less than your original purchase price which means you could lose money either way. Additionally, brokers usually charge fees which would further reduce your net gains.

Jumbo CDs

A jumbo CD is typically a traditional certificate that requires a large minimum deposit.  While it varies from bank to bank, Jumbo CDs usually require deposits of at least $100,000 to qualify. The interest rates for jumbo CDs are usually slightly higher than other CD types, but not by much.

Jumbo CDs are a great option if you’re comfortable locking in the full amount on a single term, and aren’t expecting to need any access to any part of the funds for the duration of the term—such as if you’re saving for a down payment on a house. The sizeable minimum deposit isn't the right fit for everyone, but it can make sense in certain situations. This is another case where CD laddering may be a better fit if you have the funds to set aside but want to maintain some level of flexibility.

Add-on CDs

An add-on CD allows you to add to your balance throughout the term—similar to a savings account. For example, if you have a $5,000 CD but receive a work bonus of $2,000 one year after opening the account, you can add $2,000 to your balance.

Unlike a savings account, you still can't withdraw from the account without penalty. But if you expect to have more funds to set aside and want to earn more interest during your term, an add-on CD is a great option. Some banks limit how many deposits you can make, or the frequency with which you make them, so it's a good idea to review the conditions and requirements when you open the account.

Callable CDs

Like traditional CDs, callable CDs have a fixed term that you will not be able to access the money during without paying a penalty. The difference? Banks can choose to close the account before the term ends. Callable CDs typically provide higher interest rates as compensation for potential account closures, but there is the risk that you might not get your full term worth of interest.

If the bank closes or recalls the CD, you will still receive your original deposit and the interest it earned during the time it was in the CD, so there’s no risk of losing your investment. Additionally, while it depends on the terms, the bank usually can't close the account until some agreed-upon time has passed. Make sure to read all of the terms and conditions during the account opening process before committing your funds.

The bottom line

Regardless of your financial goals are— a down payment for a house, a new car or a dream wedding — certificate of deposit accounts can help you reach them. Ready to take the next step? Our specialists can walk you through our current CD specials to help you choose one that’s right for your goals.  

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