In the last few years, banks have been offering variations on the traditional “plain vanilla” CD – such as bump-up CDs, callable CDs, and liquid CDs. Some non-traditional CDs forgo a fixed rate in favor of being tied to an index such as the stock market. For the investor who finds the array of options dizzying and actually enjoys plain vanilla, there is, of course, the plain old traditional CD.
What is a traditional CD? Generally, it’s a CD with a fixed interest rate for a fixed term – for instance, three months, six months, one year, or five years. Like a savings account, a CD is insured by the FDIC, which makes the certificate of deposit one of the least risky investments out there. However, unlike a savings account, a CD is a type of time deposit, which means that it has a specific, fixed term. When you put money in a CD, you do so with the expectation that it will be held there for the entire term. The longer term CDs generally offer the best CD rates.
Traditional CDs are not tied to market indices, which protects your investment from the fluctuations of the stock market. This stability is considered one of the more attractive features of the traditional CD. However, there are generally stiff penalties for early withdrawal from a traditional CD account.
A minimum deposit is typically required for a CD, and some banks may offer the best CD rates on larger deposits. “Jumbo CDs,” with a minimum deposit of $95,000 to $100,000, usually offer the best certificate of deposit rates. However, some institutions will offer lower rates on the Jumbo CDs and off a high yield certificate of deposit with a smaller deposit requirement. Check with your financial institution to see what types of deposit certificates they offer. Some may require a minimum deposit, and may offer higher rates for larger deposits.