Certificates of deposit (CDs) are savings products offered by banks, credit unions, and brokerages that tend to offer a fixed interest rate over a certain period of time known as the term. But there are also certain types of specialty CDs that have different features, such as the ability to add to the principal or avoid early withdrawal penalty fees.
If you need more flexibility than a standard fixed-rate, fixed-term CD offers, here are a few of your options.
Key Takeaways
- Traditional certificates of deposit (CDs) offer a fixed interest rate for a fixed term without the ability to withdraw or add to the principal.
- Specialty CDs include bump-up, add-on, no-penalty, jumbo, and individual retirement account (IRA) CDs.
- Some specialty CDs have lower interest rates, but they come with additional features, such as flexibility on terms based on the market rates or the ability to withdraw early with no penalties.
- Brokerage firms can act as the middleman for bank CDs, offering a simplified process but lower rates.
Specialty CDs: Bump-Up, Add-On, No-Penalty, Jumbo, and IRA
The most common CD type follows the standard procedure of depositing your funds, letting them sit untouched until the end of the term, and withdrawing them upon maturity. But banks and credit unions also offer a variety of specialty CDs with different structures and rules.
Bump-Up CDs
These are sometimes called raise-your-rate CDs. Bump-up CDs offer savers a chance to access a higher rate usually once during their term. So if you open a five-year CD and rates rise during that period, you’ll have one opportunity to lock in at a higher rate offered by the bank then, and that rate will apply for the duration of your term. Occasionally, bump-up CDs allow two rate increases, although only for long-term CDs.
Add-On CDs
Add-on CDs let you play around with your deposit amount instead of your interest rate. You can open the CD with one amount but make additional deposits to increase your invested principal. Some banks allow as many add-ons as you like; others stipulate a certain number of allowable add-ons per time period (e.g., per month or quarter); and a few limit the add-ons to just one or two during the full term.
Warning
Make sure you read the fine print—early withdrawal penalties can eat into your principal depending on the terms of your CD.
No-Penalty CDs
No-penalty CDs, also known as liquid CDs, allow you to withdraw your money without paying a penalty. These sound enticing, as they seem to provide the interest rate benefit of a CD, but with less risk if you need to cash out early. No-penalty CDs can indeed bridge the gap between a fully accessible savings account and a CD with an early withdrawal penalty.
But as you can guess, “no penalty” comes with a price tag: a lower interest rate than you would be able to earn with a traditional CD. So it’s important to compare the rates of no-penalty CDs with what you can earn from a top savings or money market account.
Jumbo CDs
This is another product you may encounter when shopping for CDs. Jumbo CDs are simply CDs that require a large minimum deposit. No governing body prescribes the floor for calling a CD a “jumbo,” so each bank decides for itself. The most typical threshold is a $100,000 minimum deposit, though some institutions offer jumbo CDs requiring as little as $50,000.
Generally, rates for the best jumbo CDs are higher than what standard CDs are paying. But beware that it's not always the case—sometimes you can earn a higher interest rate from a standard certificate. So it's smart to shop both CD types, and if you find you can earn more from a standard certificate, simply put a jumbo-sized deposit in it. Just be mindful that federal deposit insurance only covers up to $250,000 held at one institution.
IRA CDs
CDs can also be a useful savings vehicle for retirement funds. Many banks and credit unions offer individual retirement account (IRA) CDs. Some have a separate menu of CDs that are available as IRAs, while other institutions allow any of their standard CDs to be set up as IRA CDs. One difference, in either case, is that IRA CDs must be held in an officially designated IRA.
Getting a CD: Direct vs. Brokered CDs
If you have a brokerage account, you may have noticed CDs offered there and wondered how they differ from CDs opened directly with a bank or credit union.
The first point is that brokered CDs are bank CDs, with the brokerage firm serving as a process-simplifying middleman. That said, there are some important differences.
Lower Rates
Although brokered CDs occasionally offer rates competitive with direct bank CDs, the rates on brokered CDs are typically lower. If maximizing your CD returns is a priority, you’ll generally be better off going straight to the source.
But what brokered CDs give up in rates, they counter with convenience, especially if you hold multiple CDs. That’s because brokered CDs will be included on the same regular monthly or quarterly statements that you already get for your brokerage account, with all maturity dates and terms shown. This makes tracking what you hold, and when each will mature, much simpler.
More Convenience...
Opening a brokered CD is also a bit easier. Since you already have an account with the brokerage firm, it will acquire the CD on your behalf. This spares you the bank paperwork of directly opening a CD and the extra statements you get afterward. Termination is also simplified: When the CD matures, the funds will typically move into your cash account at the brokerage firm.
...Unless You Need to Withdraw Early
Early withdrawals are treated much differently for brokered CDs than direct bank CDs. If you need to cash out a brokered CD early, you are required to sell it on the secondary market. Although access to this marketplace is provided by your brokerage firm and is generally simple to navigate, there are no guarantees on what price you’ll be able to secure for your certificate. Key factors include whether you’re selling during a rising or decreasing interest rate environment and the time left on your certificate.
Selling on the secondary market is not necessarily a negative—it doesn’t always lead to subpar returns. But what you give up is any guarantee or predictability on how much of your proceeds you’ll retain.
Callable CDs from Your Broker
Besides the standard brokered CD, there are two kinds of specialty CDs that are generally found only through brokerage firms: callable and noncallable CDs.
A callable CD is a specialized CD that’s generally found only through brokerage firms. The issuing bank retains the right to recall the CD at any time. So while you hope to be locked into a certain interest rate for a certain number of years, the bank can decide at any time to end that arrangement and return your funds to you. This won’t result in any penalties or losses for you, but it can cause you to lose the opportunity of a favorable rate that was locked in for the future.
For this privilege, the bank generally pays a somewhat higher interest rate. If this is a risk that you want to avoid, then search your brokerage firm’s listing for “noncallable CDs.”
What certificate of deposit (CD) term should I choose?
The appropriate term depends on your intent for your money. If you want to earn a higher interest rate than a savings account with no real intention for the funds, a longer term with a higher rate might be attractive. If you’re saving the money for something specific, like a vacation or a down payment on a house, you might want to choose a shorter term.
Is my CD’s earned interest taxed?
Yes, any interest earned on a CD is taxed as income, similar to interest earned on a savings or money market account. Taxes will be assessed when the interest is deposited into your account, not when you withdraw the funds.
Are CDs insured?
Yes. CDs are insured by the Federal Deposit Insurance Corp. (FDIC) as deposit products. Your funds are insured in the event of your financial institution’s bankruptcy, up to $250,000 per depositor per institution.
The Bottom Line
Certificates of deposit (CDs) offer a stable way to earn interest on your money, and specialty CDs offer more flexible and sometimes attractive terms. With online banks offering CDs to customers regardless of location, savers can shop around for the best terms and rates for CDs.
Just be aware of the limitations of fixed-term investments in volatile markets. Their stability can be a benefit or detractor depending on how the Federal Reserve moves the federal funds rate.
Correction—April 18, 2024: This article has been corrected to state that jumbo CDs typically require a minimum balance of $100,000, and sometimes pay a higher interest rate than standard certificates.
