What Constitutes a Jumbo CD?

Jumbo CDs typically have higher rates.

When you inquire about a certificate of deposit at a bank, the bank representative may ask you if you are interested in a traditional or a jumbo CD. As the name implies, a jumbo CD is a large investment, and one that not every depositor is able to make.

Over $100,000

The term jumbo is typically used to refer to a certificate of deposit with a balance above $100,000. These CDs are used by investors who have a large amount of money they need to keep safe, while still earning a competitive rate of interest. For instance, someone saving up to buy a home for cash might open a jumbo CD with $150,000 and keep saving. When the CD matures, he can head out, cash in hand, to buy that dream home.

FDIC Limits

No matter what the size of your jumbo CD, determine whether the entire amount falls within the current limits of FDIC insurance. As of 2011, the FDIC insures the deposits of individuals at member banks up to $250,000 per account, but in 2013 it is scheduled to fall back to $100,000, according to Bankrate.com. If your jumbo CD exceeds these limits, you could lose that excess amount if the bank were to fail or be taken over by another financial institution. Keep in mind that this $250,000 insurance limit applies to both principal and interest, so your interest payments would not be protected on a jumbo CD with a principal amount of $250,000.

Better Rates

While opening a jumbo CD is a big commitment, there are potential rewards. One of those rewards is a higher rate of interest. Because of their size, jumbo CDs typically carry a higher rate of interest than traditional CDs with lower minimum balance requirements. If you are planning to buy a jumbo CD, you should shop around for the best rate. With so much money at stake, even a small difference in the interest rate could add up to a lot of money.

IRA Accounts

You can use a jumbo CD for part of your retirement savings, especially if you are making the transition from earning a steady paycheck to living off your assets. For example, a worker with an IRA worth $300,000 might choose to move $150,000 from stocks and mutual funds to a jumbo CD with a solid rate of interest. A move like this produces a balanced portfolio, helping to keep the money the new retiree needs right away safe while still keeping money in the stock market for future growth.

References

• Bankrate.com; What is a Jumbo CD?; Jeff Wuorio; April 2002
• CNN Money: Take an Interest in Interest