Different Types of CDs Explained for Savvy Investors

Certificates of deposit (CDs) offer a secure way to earn interest on savings. Banks and credit unions provide various types, each tailored to different financial goals. Understanding these options helps investors maximize returns while maintaining flexibility.

Traditional CDs

A traditional CD is a time deposit account with a fixed interest rate for a set term, typically ranging from a few months to several years. Longer terms usually offer higher rates. Unlike a savings account, a CD requires funds to remain untouched until maturity to avoid penalties.

Interest rates fluctuate based on economic conditions and Federal Reserve policy. As of 2024, a one-year CD at an online bank averages 5.00% APY, while traditional banks often offer lower yields.

Early withdrawal penalties vary but generally cost several months’ interest. A 12-month CD might have a three-month interest penalty, while a five-year CD could forfeit six months’ interest or more. Choosing a term that aligns with financial needs is essential to avoid these penalties.

Jumbo CDs

Jumbo CDs require a minimum deposit of $100,000 and may offer slightly higher interest rates than standard CDs, though the difference is often minimal.

For example, in 2024, a one-year jumbo CD at an online bank might yield 5.10% APY compared to 5.00% for a standard CD. Businesses and high-net-worth individuals use jumbo CDs to securely park large sums.

FDIC and NCUA insurance cover up to $250,000 per depositor per institution, so those investing more may need to spread funds across multiple banks for full protection. Some institutions offer programs like IntraFi’s CDARS, which distributes deposits among partner banks to extend FDIC coverage.

IRA CDs

IRA CDs combine the security of a CD with the tax benefits of an individual retirement account (IRA). These appeal to conservative investors focused on capital preservation.

Traditional IRA CDs allow tax-deductible contributions, reducing taxable income, but withdrawals in retirement are taxed as ordinary income. Roth IRA CDs require after-tax contributions but enable tax-free withdrawals after age 59½, provided the five-year rule is met.

Unlike stocks or mutual funds, IRA CDs offer stable returns but may not keep pace with inflation. Some investors use CD laddering—staggering maturity dates—to maintain liquidity and capture higher rates.

Bump-Up CDs

A bump-up CD allows depositors to increase their interest rate once during the term if the bank raises rates on similar CDs. This helps offset the risk of locking in a lower rate when interest rates rise.

However, bump-up CDs typically start with lower initial rates than standard CDs. For instance, if a three-year traditional CD offers 4.75% APY, a bump-up CD might begin at 4.50% APY. Some banks allow only one rate adjustment per term, while others permit multiple increases depending on the CD’s length.

Step-Up CDs

Step-up CDs automatically raise interest rates at predetermined intervals. Unlike bump-up CDs, which require account holders to request a rate adjustment, step-up CDs increase rates on a fixed schedule.

For example, a five-year step-up CD might start at 4.00% APY, rise to 4.25% in the second year, and continue increasing until maturity. While this structure provides some protection against low initial rates, the starting yield is usually lower than that of a traditional CD with the same term. If rates rise faster than the scheduled increases, depositors may miss out on better returns.

Add-On CDs

Add-on CDs let account holders make additional deposits after opening the account. Unlike traditional CDs, which require a lump sum deposit, these accounts allow savers to contribute more funds over time.

Banks set rules on additional contributions, such as minimum or maximum deposit amounts and frequency limits. Some allow unlimited add-ons, while others restrict the number of contributions per year. The interest rate remains fixed from the original deposit date, meaning new contributions earn the same rate regardless of market changes.

This option benefits those who anticipate having extra funds to invest but want to lock in a rate before potential declines. However, if interest rates rise significantly, depositors may earn less than they would with a new CD offering a higher yield.

No-Penalty CDs

No-penalty CDs allow early withdrawals without fees, offering a balance between earning interest and maintaining liquidity.

These CDs typically have lower interest rates than comparable fixed-term CDs. For example, while a standard 12-month CD might offer 5.00% APY, a no-penalty version could yield closer to 4.50% APY. Some banks impose restrictions, such as requiring a waiting period of seven days after opening before withdrawals are allowed.

No-penalty CDs suit those who want a higher return than a savings account while keeping access to their money without penalty.

Callable CDs

Callable CDs allow banks to terminate the CD before maturity, usually when interest rates decline. This benefits banks by letting them reissue CDs at lower rates.

To compensate for this risk, callable CDs often offer higher initial yields. However, investors must be prepared for the possibility that their CD may not last the full term.

Most callable CDs have a lock-in period—typically the first six months to a few years—during which the bank cannot call the CD. After this period, the institution can redeem the CD at predetermined intervals. If rates drop significantly, investors may have to reinvest at lower yields. Callable CDs best suit those comfortable with potential early termination and reinvestment risk.

Brokered CDs

Brokered CDs are purchased through brokerage firms rather than directly from banks. These CDs are issued by multiple financial institutions and made available through brokerage platforms, offering a broader selection of terms and rates.

One advantage is access to competitive rates, as brokerages aggregate offerings from various banks. Additionally, brokered CDs can be traded in the secondary market, allowing investors to sell before maturity without early withdrawal penalties.

However, selling a brokered CD before maturity carries risks. Its market value fluctuates based on interest rate movements, meaning it could be sold at a loss. While FDIC insurance applies up to $250,000 per institution, investors must ensure they do not exceed coverage limits across multiple brokered CDs from the same bank.

Brokered CDs are best for those who want liquidity options and are comfortable navigating the secondary market.