Types of CDs

Certificates of deposit (CD) are financial accounts used to deposit money for a certain amount of time to earn a predetermined return. Like a savings account, they are a low-to-no-risk investment option. But unlike a savings account, you typically can’t withdraw your money before the maturity date without a penalty. Even though they share these characteristics, not all CDs are the same.

Various types of CDs have been created to suit different preferences, from standard to market-linked and jumbo. Learn all you need to know about the various types of CDs and how to choose the right one for you.

How Does a Certificate of Deposit (CD) Work?

A standard CD is a low-risk type of investment account offered by a financial institution like a bank or credit union, where money is deposited for a certain amount of time in exchange for interest earnings. Terms can range from one month up to 10 years.

When the account reaches its maturity date, the account holder is guaranteed to get back their principal amount plus the earnings from a predetermined interest rate. However, if you withdraw your money from a CD early, you’ll often have to pay a penalty that can reduce or negate your interest earnings.

Banks and credit unions offer CDs as a way to gain access to more capital for a specified amount of time so they can lend it to others and earn interest.

Types of CDs

While the standard CD is pretty straightforward, many types have branched off from it. Here’s an overview of the other types of CDs you may find, how they work, and the pros and cons of each.

High-Yield CDs

High-yield CDs carry very competitive interest rates that are well above the national average. For example, while the national average rate for a conventional one-year CD in May 2022 was 0.21%, the best rates for high-yield CDs offered more than 2%.

You can find high-yield CDs from online banks and credit unions. Why? Online banks often have lower overhead costs, which enable them to offer higher returns, and credit unions are nonprofit organizations that offer high returns instead of pocketing the profits.

Choosing a high-yield CD is advantageous because you can earn more for the same investment. Just be sure to read the fine print to understand any limitations on your earnings, such as the CD being callable (more about this below).

Market-Linked (or Equity-Linked) CDs

A market- or equity-linked CD is a type of account where, instead of being fixed, your rate of return is linked to the performance of a benchmark stock index such as the S&P 500. These CDs typically have longer terms (typically around five years), and the rate of return is calculated on the maturity date.

The downside to market-linked CDs is there is often no guarantee that payment above the principal amount will be made. Additionally, the principal may not be guaranteed if it’s not kept in the account until maturity. However, on the upside, you could potentially earn more than you would with other fixed-coupon CDs.

Jumbo CDs

Jumbo CDs are for those who want to make sizable deposits—think $100,000 or more. By making a large deposit, you can earn more in return because interest is calculated as a percentage of your total deposit. That said, jumbo CDs often have lower annual percentage yields (APYs) than non-jumbo CDs and come with stricter terms.

For instance, at Wells Fargo, if you sell your jumbo CD before its maturity date, you’ll often get less-favorable pricing than you’d get from selling a smaller-denomination CD early because the jumbo is less liquid.

Liquid/No-Penalty CDs

A liquid CD allows you to access the money in your CD account before the maturity date without paying a penalty. However, the amount and frequency of withdrawals without penalties may be limited.

The main advantage of a liquid CD is that you can withdraw your money if you need to without a penalty. The downside is that you’ll often earn less interest with a liquid CD than a traditional CD. Further, the early withdrawal can negate the benefit of having a CD in the first place.

Step-up and Bump-up CDs

Step-up and bump-up CDs enable you to take advantage of higher APYs throughout your term.

In the case of a bump-up CD, if APYs increase, you have the option to bump up your rate. For example, TIAA Bank offers a bump-rate CD that allows account holders to increase their interest rate and APY one time during their CD term.

Step-up CDs work a bit differently, as they offer predetermined rate increases throughout your term. While your rate might start lower than the rate for a standard CD, it rises over time to end up higher.

A bump-up CD can be helpful if you sign up for a CD at one rate, then rates increase. The downside, however, is that the account may have a higher minimum deposit and longer required term than traditional CDs. In this case, TIAA requires a 3.5-year term and at least a $1,500 minimum deposit for their bump rate CD, while a basic CD there only requires a $1,000 minimum deposit and a three-month minimum term. 

A step-up CD can help you to earn more over the full term of your CD. However, if you withdraw your principal before the maturity date, you risk earning less than you would with a standard CD due to the lower starting APY.

Foreign Currency CDs

Foreign currency CDs involve depositing money into a CD that is converted into a foreign currency for the CD’s term. Like a traditional CD, the money stays in the account until the maturity date. You then receive your principal amount plus your interest earnings, which are converted back to U.S. dollars.

When investing in foreign CDs, the currency exchange becomes part of the equation, which can help or hurt your investment. If you foresee a foreign currency gaining value against the U.S. dollar, you could increase your return. However, you also risk the currency losing value and reducing your returns. Currency exchange fees will also play a role in the returns you receive, so be sure to investigate the costs.

Additionally, foreign CDs often require a sizable minimum deposit. In one case, TIAA requires at least $10,000.

Add-on CDs

An add-on CD is one that enables you to add money into your account as you go, instead of needing to deposit it all at once when the account’s opened.

For example, First Horizon offers this type of CD. It automatically renews every six months and requires a $500 minimum opening deposit. From there, you can add payments of as little as $25. You also can withdraw from the account without a penalty one time every six months. As of publication time, if your balance was less than $25,000, you would earn a 0.02% APY; if it was more than $25,000, you would earn 0.03%.

An add-on CD like this can be a good option if you can’t deposit as much as you’d like at the outset, but want to earn more interest as you go by making more deposits over time.

Zero-Coupon CDs

Like a zero-coupon bond, zero-coupon CDs let you purchase a CD for less than its face value, then collect the full value at the end of the term. You don’t collect periodic payment interest (known as a coupon), hence the name “zero-coupon.”

Instead, your return is the difference between what you pay for the CD and what you get at the end. For example, you could buy a $100,000 CD for $80,000 and receive $100,000 after the 10-year term ends. The potential downside to this type of CD is it’s often a long-term investment.

Brokered CDs

Brokered CDs are CDs sold by brokerage firms and independent salespeople (known as deposit brokers) instead of banks or credit unions. These deposit brokers work to negotiate higher APYs from financial institutions in exchange for bringing them more deposits.

The upside to buying a brokered CD is that you could get a higher APY than you can find directly from the financial institution. The downside is that deposit brokers don’t have to undergo certification or licensing, so you’ll need to do your due diligence to ensure they are reputable.

Callable CDs

Callable CDs enable the issuer to cancel them after a set period but before the maturity dates. Typically, an institution might want to cancel a CD if it offered you a high APY and then rates fell. It may reach a point where the bank would lose money if it couldn’t call it.

Callable CDs often come with competitive APYs. However, you’re at a disadvantage as the account holder because you can’t call the CD before your maturity date without a penalty—but the issuer can. Further, you risk not being able to earn all the interest you planned to earn.

How To Choose the Best CD

When deciding on the best CD for your situation, a good first step is understanding all your options. From there, you can make a shortlist of the CDs that sound like the best for your situation. Some will be easy to include or discard. For example, do you want to invest $100,000? If not, you can rule out a jumbo CD. Do you want to sacrifice the best return to retain access to your funds? If so, a liquid CD is a good idea.

Once you have a few contenders, analyze the overall return you can expect to receive from each of the CDs, then weigh the benefits and drawbacks such as bump-up opportunities and early withdrawal penalties. Along with finding the right CD type, it’s important to shop around with various institutions (and possibly brokers) to find the best rates and terms.

The Bottom Line

A CD is a fairly straightforward, low-risk type of investment account that offers modest returns. That said, financial institutions have gotten creative with the nuances of this account type. As you get further into CD investing, you can explore various types of CDs that may offer you more bang for your buck. However, be sure you fully understand the fine print, as higher returns almost always come with higher risk.

Frequently Asked Questions (FAQs)