Types of Specialty CDs: Choosing the Perfect Fit for You
A certificate of deposit (CD) is an account used to save money for earning fixed or variable rates or annual percentage yield (APY) over a specific period of time known as a term, offered by banks, credit unions, and brokerage firms, providing a business opportunity for savers to invest with CDs.
Online banking has revolutionized the traditional concept of CD. Now, it is more than merely a standard CD and comes with different choices: avoiding early withdrawal penalty fees, adding contributions to the CD account after the initial deposit, and asking the financial institutions (the CD issuers) to increase rates according to the economic wind.
You may need to shop around the other banks as your bank might hold a different fit CD than you chose.
We need to understand the other types of specialty CDs and how they work. It will help you choose the perfect fit for achieving financial freedom over time horizon. Here is how 12 types of CDs would work for you.
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| Types of Certificate of Deposits (CDs) |
Editor’s Note: Annual Percentage Yields or Interest Rates listed in this article are up-to-date as of the time of publication. They may fluctuate (up or down) as the Fed rate changes. FinanceMonies will update as changes are made public.
Key Takeaways on Types of Specialty CDs:
- A certificate of deposit (CD) is a savings account that sets the seal on the risk-free, guaranteed rates through the CD's maturity period.
- CDs differ in terms, rates, and inherent features. Each one has its own benefits and restrictions.
- Financial Institutions that issue CDs split the CDs into different slices to find the perfect slice for you to grow your savings.
- Types of specialty CDs include a bump-up, step-up, jumbo, adds-on, no-penalty CD, or more.
- All CDs are federally insured by the Federal Deposit Insurance Corp. (FDIC), up to $250,000, across all eligible deposits with an institution.
Fixed-Term CDs
Fixed-term CDs are low-risk saving products that pay a fixed interest rate higher than a savings account for a predetermined period. It offers a reliable way to grow your money reliably with minimal risk. Fixed CDs have term lengths ranging from a few months to several years (usually, from 3 months to 10 years).
Funds lock in the CD account and incur penalties on withdrawal funds before the CD's maturity date. Currently, online banks are offering the best high-yield CDs with rates around 5.00% APY.
Characteristics of fixed-term CDs are as follows:
- The interest rate is locked in for the entire term of the CD. It is a non-liquid investment.
- There are early withdrawal penalties on funds withdrawal before the CD matures.
- Fixed-term CDs are considered safe investments and are federally insured by the Federal Deposit Insurance Corp. (FDIC). up to the legal limit of $250,000.[5]
Who Will Benefit the More
Fixed-term CDs are the perfect fit for conservative savers and risk-averse individuals who prefer a safe investment earning guaranteed returns and don't need any liquidity before the CD maturity.
Variable-Rate CDs
Variable-rate CDs are a dynamic investment tool, with fixed term lengths and tied-benchmark interest rates. You'll earn a flexible interest rate fluctuating based on defined benchmarks such as prime rate, treasury bill rate, or the performance of underlying indices such as the S&P 500.
Interest rate increases and decreases according to the benchmark or indices performance. It makes sure of market-linked earnings. It allows the account holder to benefit from the future rate increase.
For instance, John invests $10,000 in a variable-rate CD linked to the 6-month Treasury bill rate. At the time of purchase, the CD's initial interest rate is set at 2%. Six months later, the Treasury bill rate rises, and the interest on John's CD adjusts to 2.3%, providing him with increased interest income.
Who Will Benefit the More
Variable-rate CDs are a perfect fit for market-savvy investors who are interest rate optimists and closely follow the market's trends. A diversified saver looking for a diversified portfolio can use variable-rate CDs to balance the risk and potential risk.
Bump-Up CDs
Bump-up CDs allow you to take advantage of interest increases in the future. CD lets you play around with the interest rates and honor the one bump-up or rate increase request per term.[1]. It means you need to file the request for the rate increase.
For long-term CDs, 2 bump-up requests may be allowed to the account holder. Typically, CD is offered in longer terms, such as 3 years, 5 years, or more.
The issuing institutions typically entertain the account holder with a rate increase opportunity for the remainder term, if they increase the rates for the same term CDs during the maturity period.
Without opening a new CD account, a saver can take advantage of the rate increase. The lower interest rate at initial is the drawback of bump-up CD. Here you need to compare the initial rate with the fixed-term CD.
Who Will Benefit the More
Bump-up CDs are the perfect fit for growth-oriented investors who believe in rate increases during the CD's term.
Step-Up CDs
Like bump-up CDs, step-up CDs also allow you to benefit from future rate increases. With the step-up CD, you don't have to ask the bank to move you to a higher yield; it automatically increases the rate to a fixed-rate increase at certain intervals regardless of the financial environment.
Who Will Benefit the More
Step-up CDs are uncommon and are the perfect fit for savers who prefer set interest rate increases during the CD term. U.S. Bank offers step-up CDs.[2]
No-Penalty CDs
Liquidating CDs or no-penalty CDs come with the account flexibility of early withdrawal of funds without incurring financial penalties.
Accessing the funds locked in at the time of need provides flexibility on funds withdrawals, and bears the price tag: lower the interest rates on no-penalty CDs than you would be able to earn on traditional CDs, but may be higher yield than the yield earned on high-yield savings accounts or money market accounts.
But, don't be confused, there are still rules on withdrawals. You can't withdraw funds within the first 6 days after funding the CD account, and many banks allow full-amount withdrawal and close the CD account.[3].
Important Tip: Each financial institution has its own rules and timelines for funds withdrawal from a no-penalty CD.
Who Will Benefit the More
Liquidating CDs are the perfect fit for savers who prefer liquidity without sacrificing much yield.
Add-On CDs
Most CDs don't allow further deposits in a standard CD account, but Add-on CDs allow contributions after the initial deposit during the CD maturity. Like a savings account, you deposit more money without incurring financial penalties.
Usually, the numbers of additional deposits are amount and time-specific and vary by financial institutions that issue add-on CDs. Many banks limit add-ons up to 1 or 2 during the CD maturity.
Who Will Benefit the More
These CDs work like a savings account and are the perfect fit for those who want to grow their savings in the existing CD without opening multiple accounts.
Jumbo CDs
CDs can be a useful savings vehicle for savers. Jumbo CDs require a large minimum deposit requirement of $100,000 with a commitment to a longer CD term. Some financial institutions set this threshold up to $50,000. [4].
Usually, large deposits claim earnings higher, but this might not always be true for jumbo CDs. So, it is important to compare the available rates and choose the perfect fit for you.
Putting large amounts locked in for 1 year or more puts you at risk, your deposits are insured up to $250,000 per depositor, per FDIC-insured bank, per ownership category, by guidelines of the Federal Deposit Insurance Corp (FDIC), or the National Credit Union Administration (NCUA). [5].
Who Will Benefit the More
Jumbo CDs are the best choice for savers who own plenty of cash or are institutional and want to lock in CDs. However, building CD laddering with portfolio diversification could generate better-earning potential.
Zero-coupon CD
Coupon refers to periodic interest payments. A zero-coupon CD means that there won't be interest payable during the CD term and the CD is purchased at a discount value of face value. The purchaser is compensated at the time of CD maturity by paying the CD's full face value which is more than the purchase price. It provides protection of a guaranteed principal amount of CD.[6].
Who Will Benefit the More
Zero-coupon CDs are considered an optimal choice if you're not interested in generating cashflows during the CD term.
Brokered CD
Besides the standard brokered CD, there are other two types: "Callable CD and Non-callable CD." A CD issued by banks or credit unions but purchased or sold through a brokerage firm rather than a bank or credit union is called a brokered CD. [7].
Brokered CDs are federally insured up to the legal limit of $250,000, per depositor, per ownership category. It requires a brokerage account instead of opening a bank account to operate a brokered CD.
These CDs are more liquid than bank CDs, you can easily access the funds before the maturity dates by selling brokered CDs in the online marketplace.
A callable CD has the potential to earn higher returns but comes with the risk of "buyback" by the CD issuer before the CD maturity. The repurchase option depends upon the issuer's discretion and you may lose the returns for the callable CD's remainder term. However, you'll receive the principal amount plus interest earned through the term. You need to buy the CD from a reputable brokerage firm.
Who Will Benefit the More
Brokered CDs are the best for those who are not interested in shopping for the best rates, and want to trade the CD in the secondary market.
IRA CDs
An IRA CD account is a tax-advantaged individual retirement account that provides guaranteed returns on retirement funds. It is an IRA account that holds IRA CDs and other investments such as stocks, bonds, and money market deposit accounts. IRA CDs are federally insured by the FDIC and NCUA and you can't withdraw funds before retirement age-the maturity date.[8]. If you withdraw funds before the maturity date, you'll have to pay a tax penalty.
Who Will Benefit the More
IRA CDs are not considered the best savings vehicle for young investors who have other possible investing opportunities. It is suitable for an individual near their retirement age, seeking predictably a guaranteed rate of returns.
Foreign Currency CD
A foreign currency CD is an interest-bearing account that is denominated in other than the U.S. dollar such as the British pound, euro, or other foreign currency.[9]. These are the CDs available outside the U.S.'s boundary.
Investing in foreign currency CDs is complicated and risky, and requires a deep understanding of the foreign currency market's dynamics. It offers higher interest rates, as your APY depends upon the currency rate fluctuation. You can purchase it in the U.S. dollar and receive total funds in the U.S. dollar when it reaches maturity. A strong dollar rate can wipe out any gains and losses in your investment.
Important Tip: Foreign currency CDs might not be federally insured, make sure it is from the issuing financial institutions, before making any investment.
Who Will Benefit the More
It is suitable for investors who understand the foreign currency markets.
Getting a CD: Direct vs. Brokered CDs
Getting a CD from banks is far different from getting it through brokerage firms. Bank has limited choices of CDs, but you can choose CDs from all banks in the United States [10]. Brokered CDs are also banks issued CDs but are operated through the brokers who are the bank's salespersons. There are some important differences.
- Direct bank CDs offer competitive rates than the lower rates by the brokered CDs.
- Opening a brokerage CD account is more convenient and you will acquire your desired CDs on your behalf.
- Encashment of brokered CDs is comparatively easier than direct bank CDs. Your brokerage account provides access to a secondary market where you can sell brokered CDs before the CD maturity dates.
CD Laddering As an Important Strategy
CD laddering is a technique of getting liquidity at your desire by dividing your money over several term CDs. This technique ensures the advantage of higher returns and placing your funds more where they would get a higher annual percentage yield (APY). It establishes a strategic way of getting maximum returns on your savings through the CD laddering technique.
For example, instead of investing $15,000 into one fixed-term CD, you might split that up and put $3,000 into five different CDs, such as a three-month CD, six-month CD, one-year CD, two-year CD, and three-year CD. When each CD achieves maturity term, the full amount is invited into the next CD, and this process is repeated till the last three-year CD.
Who Will Benefit the More
A CD ladder is suitable for investors who target the best rates despite the rate's rise and fall. It will eliminate the risk of missing a bump-up rate and locking all your funds in one low-rate CD.
The Bottom Line: Choosing the Right CD
Certificate of deposit provides fixed interest rates, types of specialty CDs offer attractive interest rates with bump-up choice, liquidating the locked-in funds before CD maturity, and CDs available in longer terms. A perfectly fit CD meets your financial goals.
Choosing the right CD would depend on how to make a budget, your savings patterns, and your need for liquidity.
FAQ: Types of CDs
★How many types of CDs are there?
Roughly a dozen types of CDs can be divided into two main categories: standard fixed-rate CDs and specialty CDs. Specialty CDs come with flexible terms, rates, and unique features that attract the savers.
★What are the different kinds of CDs?
Types of CDs include fixed-term CDs, variable-rate CDs, bump-up CDs, step-up CDs, no-penalty CDs, IRA CDs, brokered CDs, add-on CDs, and jumbo CDs. Each kind of CD varies the terms, rates, and minimum deposit requirement, depending on the CD's issuing financial institutions.
★What Is a Special CD?
A CD special or special CD is a promotional rate certificate of deposit. It offers these rates as bonus rates on CDs. A CD special account offers higher rates than a traditional CD, these rates are provided on specific deposits for short-period terms. US Bank offered a CD special account with competitive rates. [11] .
★Will CD Go Up in 2024?
Projections on CD rates going up in 2024 suggest no increase in rates in 2024. The Fed might decrease the reserve rate according to the CME FedWatch Tool.
Article Sources:
- Bankrate. “Bump-up CDs: What they are and how they work, https://www.bankrate.com/banking/cds/bump-up-cd/"
- Forbes. "U.S. Bank Review 2024, https://www.forbes.com/advisor/banking/us-bank-review/
- HelpWithMyBank.gov, U.S. Office of the Comptroller of the Currency. “What Are the Penalties for Withdrawing Money Early from a Certificate of Deposit (CD)? https://www.helpwithmybank.gov/help-topics/bank-accounts/certificates-of-deposit/cd-penalties.html”
- MarketWatch. "Best Jumbo CD Rates of June 2024, https://www.marketwatch.com/guides/cds/best-jumbo-cd-rates/"
- Federal Deposit Insurance Corp. “Deposit Insurance FAQs., https://www.fdic.gov/resources/deposit-insurance/faq/”
- Investopedia. "Zero-Coupon Certificate of Deposit (CD): What It is, How It Works, https://www.investopedia.com/terms/z/zero-coupon-cd.asp#:~:text=A%20zero%2Dcoupon%20CD%20is,than%20the%20instrument's%20purchase%20price."
- U.S. Securities and Exchange Commission. “Brokered CDs: Investor Bulletin. ,https://www.sec.gov/oiea/investor-alerts-and-bulletins/investor-bulletin-brokered-cds"
- Capitalize. “IRA CDs: What Is It and What You Need to Know., https://www.hicapitalize.com/resources/ira-cd/ ”
- Annuity.org " Foreign Currency CD, https://www.annuity.org/personal-finance/banking/certificate-of-deposit/types/foreign-currency/"
- Investor.gov, U.S. Securities and Exchange Commission. “Certificates of Deposit (CDs)., https://www.investor.gov/introduction-investing/investing-basics/investment-products/certificates-deposit-cds”
- USbank." Earn more, save faster with a CD Special.,https://www.usbank.com/bank-accounts/savings-accounts/certificate-of-deposit/cd-specials.html"
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