Banking » Guides » 10 Types of Certificates of Deposits (CDs): Which Is Best?
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10 Types of Certificates of Deposits (CDs): Which Is Best?

As long as the FED rates go higher, CDs become more popular. Here's a review of the most common types of CDs - which one is best for you?
Author: Baruch Mann (Silvermann)
Baruch Mann (Silvermann)

Writer, Contributor

Experience

Baruch Silvermann is a financial expert, experienced analyst, and founder of The Smart Investor.  Silvermann has contributed to Yahoo Finance and cited as an authoritative source in financial outlets like Forbes, Business Insider, CNBC Select, CNET, Bankrate, Fox Business, The Street, and more.
Interest Rates Last Update: January 1, 2024
The banking product interest rates, including savings, CDs, and money market, are accurate as of this date.
Author: Baruch Mann (Silvermann)
Baruch Mann (Silvermann)

Writer, Contributor

Experience

Baruch Silvermann is a financial expert, experienced analyst, and founder of The Smart Investor.  Silvermann has contributed to Yahoo Finance and cited as an authoritative source in financial outlets like Forbes, Business Insider, CNBC Select, CNET, Bankrate, Fox Business, The Street, and more.
Interest Rates Last Update: January 1, 2024

The banking product interest rates, including savings, CDs, and money market, are accurate as of this date.

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Table Of Content

How Does A Traditional CD Work?

Traditional CDs are a type of investment product offered by banks and other financial institutions. When an investor purchases a CD, they agree to deposit a specific amount of money with the institution for a fixed period of time, typically ranging from several months to several years. 

During the term of the CD, you cannot withdraw their funds without incurring a penalty. However, at the end of the term, the investor receives their original deposit plus the interest earned on the deposit, which is typically paid out as a lump sum. The interest rate and term of the CD are set at the time of purchase, and the interest rate is fixed for the entire term of the CD.

Traditional CDs are typically FDIC-insured up to $250,000 per depositor, per institution, which provides added security for the investor's funds. They can be a good option for investors who want a relatively low-risk investment option with a guaranteed return, but who do not need immediate access to their funds.

different types of CDs to save money over time
Traditional CDs offers relatively low-risk investment option with a guaranteed return (Photo by William Potter/Shutterstock)

1. Jumbo CD

Jumbo CDs, also known as negotiable certificates of deposit, are similar to regular CDs, but they typically require a larger minimum deposit of $100,000 or more. They are issued by banks and other financial institutions, and typically offer higher interest rates than regular CDs in exchange for the larger deposit.

The main advantage of investing in jumbo CDs is the higher interest rate, which can provide a relatively low-risk investment with a guaranteed return. The main drawback is the high minimum deposit requirement, which may be prohibitive for some investors.

2. Bump-up CD

Bump-up CDs are a type of certificate of deposit that offers investors the option to “bump up” their interest rate to a higher rate during the term of the CD. Typically, the investor is allowed to exercise the bump-up option once during the term of the CD, usually to the prevailing interest rate at that time.

The main advantage of investing in bump-up CDs is the potential to earn a higher interest rate than a traditional CD if interest rates rise during the term of the CD.

One potential downside of bump-up CDs is that the initial interest rate offered may be lower than that of a traditional CD, since the bank is providing the option to increase the rate later.

Investors should carefully consider the likelihood of interest rates rising before investing in a bump-up CD, as the option may not be exercised if interest rates remain stagnant or decrease during the term of the CD.

3. No-Penalty CD

No penalty CDs, also known as liquid CDs, are a type of certificate of deposit that allows investors to withdraw their funds before the end of the CD term without incurring a penalty fee.

Unlike traditional CDs, which typically charge a penalty for early withdrawal, no penalty CDs provide more flexibility to investors who may need access to their funds before the end of the term.

One potential downside of no penalty CDs is that they typically offer lower interest rates than traditional CDs due to the added flexibility they provide.

If you're looking for a no penalty CD, carefully read the terms and conditions of the CD to ensure that the withdrawal process is straightforward and there are no hidden fees or restrictions. While it's not very common, there are banks such as Ally, Citi, CIT and Marcus (not a bank) that offer this type of CD.

Bank / Financial Institution
CD Term
APY
Citi Bank
12 Months
4.25% – 4.75%
Marcus
13 Months
4.35%
CIT Bank
11 Months
4.90%
Ally Bank
11 Months
4.55%

4. Zero-coupon CD

Zero-coupon CDs, also known as discount CDs, are a type of certificate of deposit that do not pay regular interest payments like traditional CDs. Instead, they are sold at a discount to their face value and the investor receives the full face value of the CD at maturity. The difference between the face value and the purchase price is the investor's return on investment.

The main advantage of investing in zero-coupon CDs is the potential for a higher return than a traditional CD of the same maturity.

One potential downside of zero-coupon CDs is that they do not provide regular interest payments, which can be a drawback for investors who need income from their investments. Additionally, the investor may be subject to taxes on the “phantom income” that is generated by the increase in value of the CD over time, even though the investor has not yet received the funds.

5. Callable CD

Callable CDs are a type of certificate of deposit that can be redeemed or “called” by the issuing bank before the end of the CD's term. Callable CDs typically offer higher interest rates than traditional CDs, but the issuing bank has the option to call the CD if interest rates decline, which allows the bank to reissue the CD at a lower interest rate.

The main advantage of investing in callable CDs is the potential for a higher return on investment than traditional CDs, as the higher interest rate compensates the investor for the risk of the bank calling the CD.

Naturally, the main drawback is the risk of the bank calling the CD before the end of the term, which can result in receiving a lower return than expected. Additionally, callable CDs may have longer maturities and higher minimum deposit requirements compared to traditional CDs.

6. Brokered CDs

Brokered CDs are certificates of deposit that are sold through brokerage firms rather than being issued directly by a bank. The brokered CD market offers investors access to a wide range of CDs from various banks and financial institutions, often with higher interest rates than those offered by traditional CDs.

The main advantage of investing in brokered CDs is the ability to shop around for the best rates and terms from multiple banks and financial institutions, which can provide a higher yield than a traditional CD.

One drawback of brokered CDs is that the broker may charge a commission or fee for the sale of the CD, which can reduce the overall return on investment. The most common institutions offering brokered CD include Vanguard, Charles Schwab and Fidelity.

Bank / Financial Institution
CD Term
APY
Vanguard
10-12 Months
5.15%
Fidelity
12 Months
4.55%
Schwab
10-18 Months
5.05%

7. Add-on CD

Add-on CDs are a type of certificate of deposit that allow investors to make multiple deposits into the CD during the term of the CD. The investor typically has the flexibility to make additional deposits at any time, and the interest rate is typically fixed for the entire term of the CD.

The main advantage of investing in add-on CDs is the ability to make additional deposits over time, which can help to build savings and earn a higher return on investment, especially if CD rate decreased since you opened the account.

However, add-on CDs may offer lower interest rates than traditional CDs due to the added flexibility they provide.

8. IRA CD

IRA CDs are a type of certificate of deposit that are held in an individual retirement account (IRA). The main advantage of investing in IRA CDs is the tax-deferred growth they offer, as the interest earned on the CD is not subject to income taxes until the funds are withdrawn from the IRA. 

One potential downside of investing in IRA CDs is the lack of liquidity, as the investor cannot easily withdraw the funds without incurring a penalty before reaching retirement age. Additionally, IRA CDs may offer lower interest rates than other investment options, which can limit the growth of retirement savings.

9. High Yield CD

High yield CDs are a type of certificate of deposit that typically offer higher interest rates than traditional CDs. They are issued by banks and other financial institutions and may require a higher minimum deposit than traditional CDs.

10. Step-up CDs

Step-up CDs are a type of certificate of deposit that offer investors the ability to earn a higher interest rate over the term of the CD. The interest rate typically increases in predetermined steps or “bumps” at set intervals during the term of the CD, providing the investor with the potential for higher returns.

The main drawback of step-up CDs is that they usually offer lower initial interest rates than traditional CDs, since the bank is providing the option to increase the rate later. 

What Is The Best Type Of CD For My Needs?

When choosing a CD type, there are several factors that investors should consider:

  • Goals: Investors should consider their financial goals and what they hope to achieve through CD investing. For example, are they looking for a low-risk investment with a guaranteed return or are they looking for higher returns with more risk?

  • Amount You Deposit: If you're willing to deposit a higher amount, you may have access to a higher rate on Jumbo CDs and even on other types of CDs.
  • Term: CD terms can range from several months to several years. Investors should consider how long they are willing to commit their funds and when they will need access to the funds.

  • Interest rate: CD interest rates can vary widely depending on the type of CD and the issuing institution. For example, no penalty CD offers a lower rates but more flexibility. Investors should compare rates from different institutions to find the best rate for their investment.

  • Fees and penalties: Investors should carefully read the terms and conditions of the CD to ensure that they understand any fees or penalties associated with early withdrawal or other actions that may affect their return on investment. For example, brokered CDs may require higher fees compared to other types of CDs

By considering these factors and researching the various CD types available, investors can choose a CD type that aligns with their financial goals and provides the best return on investment.

FAQs

Yes, brokered CDs are typically FDIC insured up to the same limits as traditional CDs. The funds would be insured up to $250,000 per depositor, per institution, as long as the bank is an FDIC member and the CD is eligible for FDIC insurance.

CDs can be a good option for investors who are looking for a low-risk, guaranteed return on their investment. However, CDs may not be the best option for investors who are looking for higher returns or who need more flexibility with their investments.

Investing in CDs is a relatively simple process.  Review various CDs offered by different banks and financial institutions, including the interest rate, term, and any penalties or fees.

Then, you can open an account with the issuing institution, either online or in-person, and provide the necessary information to open the account and deposit the funds.

CDs are subject to taxation on the interest earned, which is considered taxable income by the Internal Revenue Service (IRS).  Every year, you must pay taxes on the interest earned during that year.

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Baruch Mann (Silvermann)

Baruch Mann (Silvermann)

Baruch Silvermann is a financial expert, experienced analyst, and founder of The Smart Investor.  Silvermann has contributed to Yahoo Finance and cited as an authoritative source in financial outlets like Forbes, Business Insider, CNBC Select, CNET, Bankrate, Fox Business, The Street, and more.
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