Advantages of jumbo CDs
Any investment has pros and cons. Here are some reasons you may want to invest in a jumbo CD:
Guaranteed returns
With a jumbo CD or a regular CD, your APY is guaranteed as long as you don't withdraw your money before the maturity date. You could earn better returns on your $100,000 if you invested it in the stock market, but you'd also risk losing your money. Jumbo CDs often pay slightly higher APYs than regular CDs.
Safety
The investment is covered by the Federal Deposit Insurance Corporation (FDIC). The maximum amount per depositor and ownership category is $250,000.
Jumbo CD disadvantages
Here are some potential drawbacks to consider before you invest in a jumbo CD.
Potential for better returns
Other investments, like stocks, mutual funds, or real estate, have the potential to produce significantly higher returns than a jumbo CD. The $100,000 (or more) required to open a jumbo CD might be better used elsewhere.
Even for people with high budgets, $100,000 is a lot of money to devote to a single investment rather than a diversified set of assets -- no matter how secure that single investment might be.
Related: Can You Lose Money in a CD Account?
Time commitment
There's always a time commitment with a CD. As a general rule of thumb, the longer the money stays in the account, the higher the APY. To get the top rates for both standard and jumbo CDs, you need to commit to a maximum term, which is typically (but not always) five years. Half a decade is a long time to be putting a six-figure pile of money under lock and key.
CD laddering could be a better strategy
If you put all of your funds into one CD, you lose the chance to take advantage of the CD ladder strategy. CD laddering lets you allocate your investment across several CDs so you have at least one account maturing at the end of every year. This ensures an annual income from your CD investment.
How to invest in a jumbo CD
Here are 4 steps to investing in a jumbo CD account.
1. Make sure you want to invest in a CD
CDs are one of the most solid financial commitments in banking. But remember that the penalties for even modest withdrawals are steep.
Once you park your money into a CD, it needs to stay there. If you need money for daily expenses, a checking account is a better choice. If you want to save money and earn interest but you don't want to lock up your money for an extended period, consider a high-yield savings account.
2. Decide which bank is right for you
If you've decided you want to open a jumbo CD, the next step is to figure out which bank is right for you.
Start by shopping around to find the best CD rates. Online banks tend to offer higher rates since they don't have the overhead costs of a brick-and-mortar-bank. Although they don't necessarily have a separate jumbo CD category, their higher rates in general help make up for this.
3. Determine the term you can invest for
Next, you'll want to nail down the term. You need to strike a balance between the return you'll be getting and the length of time you can go without access to the money.
4. Invest!
Once you've found the right jumbo CD for you, sit back and wait for your investment to mature.