The Jumbo Certificate Of Deposit Is Back!

Certificates of deposit, commonly known as CD’s, have come back to life after years relegated to the background.  Until the recession, CD’s were commonly considered less-attractive than money market funds and high yield savings accounts for a variety of reasons.  But no more.  The average high yield CD now out-yields every comparable short term bond fund, high yield savings account, and money market fund I’m aware of.  In fact, CD’s aren’t just for small investors anymore.  Certificates of deposit that are bought for at least $100,000 are referred to as jumbo certificates of deposit.  Yes, people with that much money really do invest the same way the rest of us do.

Just like a regular certificate of deposit, jumbo CD’s can be purchased at most banks or credit unions. Each one will come with a minimum time limit for how long the owner must hold the certificate before selling it without paying a penalty. Jumbo CD’s typically have terms between 2 weeks and 7 years, while traditional CD’s have terms usually between 180 days and 10 years.  Jumbo certificates of deposit often offer better rates than traditional CD’s, which makes sense to a certain extent because borrowing a large amount of money from a single investor cuts down on the bank’s administrative costs somewhat.

Jumbo certificates of deposit tend to have shorter terms because many investors use them to earn money on investment holdings that have just been sold, but that they are not ready to reinvest. For example, many investors will sell stocks while the market is high, then place the proceeds into a jumbo CD while they wait for the market to come back down, at which point they can sell their CD and reinvest into the stock market.

Individual investors commonly use of jumbo certificates of deposit is stash the proceeds from selling a house. An individual or family who is planning to rent in a new area before buying a new home will often put the money from the sale of their old house into a jumbo CD for the same period of time that they have signed a lease for. When the family decides to buy a new home, the money has earned more interest than it would have in a traditional savings account, and they can be certain that their original principal is protected.

Like savings and checking accounts, the principal of a certificate of deposit is protected by FDIC insurance. According to the new FDIC regulations, the principal value of a CD at one banking institution is protected up to $250,000. Investors who wish to place more than this amount into a jumbo certificate of deposit are often advised to buy several jumbo CD’s at different banks.