I was in Citibank the other day asking about their best CD rates. One thing that caught my attention is that they don’t pay higher rates on a jumbo CD. For example, on a 5 year CD, the APY is 1.25% (as of 11/1/2010) regardless of whether you invest $1,000 or $100,000. In years past, a jumbo CD offered the best rates. Today, that’s not always the case. So let’s take a quick look at jumbo CD’s and see if they make much sense with today’s interest rates.
What is a Jumbo CD
While there is no official definition of a jumbo CD, the term generally is understood to mean a certificate of deposit of at least $100,000. This was a significant amount when the FDIC insurance limit was also $100,000. But today, that limit is $250,000.
Other than the amount invested in the CD and perhaps the interest rate, a jumbo CD is like most any traditional CD. It is a timed deposit, with the term of the CD typically ranging anywhere from one month to 5 or more years. If the money is withdrawn before the end of the term, there is a penalty charged. And the money invested in a jumbo CD is typically FDIC insured up to the insurance limits.
The big question with high dollar CDs, however, is the interest rate. Can you earn more interest by investing in a jumbo CD?
Interest Rates on Jumbo CDs
In the past, jumbo CDs paid higher interest than CDs with less than $100,000. Today, in part due to the historically low interest rates, that’s no longer the case. In fact, the CD rates we looked at paid the exact same interest rate regardless of how much you invested. When banks are in need of cash, they will pay higher rates on large deposits to attract the capital. In today’s interest rate environment, however, banks aren’t in need of cash. And with savings rates already much higher than just a few short years ago, banks don’t need to raise rates on large CDs.
But if you are looking to insure your money and still get a reasonable interest rate, a jumbo CD is an easy way to accomplish these goals. That said, with today’s interest rates, you are just as well off with a high interest savings account. The interest rates are about the same as CDs, and you can withdraw your money any time you want.
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