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Vault’s Viewpoint on Types of CDs

• Certificates of deposit typically offer higher interest rates than traditional savings accounts since you must lock your money away for a fixed period.
• There are several types of CDs, including traditional, no-penalty, bump-up and high-yield CDs.
• If CDs aren’t for you, consider alternatives such as high-yield savings accounts, money market accounts or other long-term investment strategies.

What Are The Different Types of CDs?

If you’re interested in parking your savings in a certificate of deposit, consider these 10 most common types of CDs:

Traditional CDs

Traditional CDs are standard CD accounts with fixed term periods that typically range from three months to five years or longer. Once you deposit money into a traditional CD account, your money is tied up. If you try to pull money out before the term ends, you could incur penalties or lose out on potential earnings. In exchange for leaving your money in your account for a fixed period, traditional CDs typically offer higher interest rates than traditional savings accounts.

No-Penalty CDs

Also known as liquid CDs, no-penalty CDs allow you to withdraw money from the account before the term ends without paying an early withdrawal penalty. This makes them much more flexible than traditional CDs. Though some no-penalty CDs let you make a partial withdrawal of your funds, most only allow complete withdrawals. And once you take money out of a no-penalty CD, you typically can’t redeposit it.

Bump-Up CDs

Bump-up CDs allow you to increase your interest rate at least once during the CD’s term should interest rates rise. Unlike traditional CDs that don’t feature rate adjustments, bump-up CDs let you take advantage of rising interest rates. But before putting your money in a bump-up CD, know that you may be offered lower initial rates compared to traditional CDs since the bank is taking on the risk that it may have to pay you higher rates in the future.

High-Yield CDs

High-yield CDs typically offer a higher interest rate than traditional CDs. And like high-yield savings accounts, high-yield CDs are usually offered by online banks that don’t have the overhead expenses of a traditional brick-and-mortar institution.

Step-Up CDs

Step-up CDs are similar to bump-up CDs since they both allow for rate increases during a CD term. The main difference between the two is that with a step-up CD, the interest rate will rise according to a predetermined schedule set by the financial institution. For example, if you have a step-up CD with a 24-month term, the interest rate may automatically increase by a fixed percentage every six months. On the other hand, a bump-up CD lets you choose when to request a raise in the interest rate.

Brokered CDs

You can only buy brokered CDs through a broker or brokerage firm and not a bank or credit union. Unlike other types of CDs, brokered CDs typically earn simple interest instead of daily or monthly compounded interest, which means your money may grow slower. Since brokered CDs allow you to sell the CD on the secondary market without a penalty, you can access your money before your brokered CD matures.

Jumbo CDs

Jumbo CDs are like traditional CDs, but they require large minimum deposits, typically of at least $100,000. In exchange, jumbo CDs pay a higher interest rate. Today, some of the best jumbo CD rates offer up to 5.45% APY.

IRA CDs

An IRA CD is a CD within an individual retirement account. Like traditional CDs, IRA CDs come with fixed rates and early withdrawal penalties. The difference is that you’ll also incur a tax penalty if you take money out of your IRA CD before reaching retirement age. Another thing to be aware of before opening an IRA CD is that they’re subject to yearly contribution limits. In 2024, the maximum amount you can deposit in an IRA CD is $7,000.

Add-On CDs

Add-on CDs allow you to make additional deposits during the term of the CD, and any additional deposits will earn the same interest rate as when you opened the account. While these CDs are more flexible than traditional CDs, they typically come with similar early withdrawal penalties.

Callable CDs

Callable CDs are certificates of deposit that allow the bank to redeem the CD before it matures.

When redeemed, you’ll get paid the principal and any accrued interest in full, but your account will be closed, causing you to miss out on future interest earnings. To compensate for the risk of your account terminating, you can typically earn a higher interest rate with callable CDs than some other types of CD accounts.

Which Type of CD Is Best For You?

Picking the best CD type for you can be tricky, especially with so many options out there to choose from. Typically, you’ll want to look for ones that offer the best rates, but you should also take into account your savings timeline, financial goals and available funds when making a decision.

For example, if you’re looking to achieve a short-term savings goal like saving for a down payment on a house, you may want to explore a liquid or no-penalty CD that allows you to access your funds early without penalties. But if you’re fine with not touching your money for a few years, a traditional CD may be a better fit

Alternatives to CDs

While CDs offer many benefits, they’re not for everyone. Consider these alternatives if you don’t want to park your money in a certificate of deposit.

High-Yield Savings Accounts

CDs and high-yield savings accounts are both excellent choices for building your savings. Like CDs, the best high-yield savings accounts offer APYs that are multiple times higher than traditional savings accounts. But high-yield savings accounts make it easier to access your money.

Unless you open a no-penalty CD, you’ll generally incur hefty early withdrawal penalties with a CD. But that’s not something you have to worry about with high-yield savings accounts since most banks allow you to make at least six withdrawals a month.

Money Market Accounts

Money market accounts earn interest like a standard savings account but include features of a checking account, such as the ability to write checks and make debit card transactions. You can find money market accounts at almost any bank or credit union, though many will require you to meet the minimum opening deposit and minimum balance requirement to avoid fees.

Unlike CDs that pay a fixed interest rate, money market accounts typically pay a variable interest rate, so the rate you can earn on your savings may fluctuate over time. According to FDIC data, money market account rates averaged 0.67% as of March 2024, though some of the top money market accounts offer rates between 4.65% and 5.25%.

Long-Term Investment Strategies

CDs aren’t the only way to save for the future and build long-term wealth. To make the most of your money, you’ll want to create a diversified investment portfolio that best fits your financial and emotional risk tolerance level.

Besides maxing out your 401(k) plan or other tax-advantaged accounts offered by your employer, also look into investing in individual stocks, ETFs, mutual funds, bonds, dividend stocks and real estate. Consider working with a certified financial planner to help you build a long-term investment strategy catered to your circ*mstances