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10 types of CDs: Which one is right for you?
A certificate of deposit, known as a CD for short, can be a solid resource if you’re looking for a safe place to store your savings. In many cases, CD rates are higher than traditional savings accounts and come with other benefits as well.
Yet it’s important to understand that traditional CDs aren’t the only option for growing your savings. Numerous types of CDs are available, with a variety of features depending on your particular savings objectives.
Below is an overview of 10 of the most popular types of CDs you might come across. If you’re considering a CD to help reach your financial goals, it’s a good idea to understand how these different options work, along with the pros and cons of each CD type before you decide where to store your savings.
Traditional CD
With a traditional certificate of deposit, you open the account by depositing a sum of money with a bank or credit union. Next, you agree not to withdraw your cash for a set amount of time, known as the CD’s term. And in exchange, your money earns a fixed interest rate during that period.
The downside is that if you withdraw your money from a traditional CD before it matures, you’ll pay an early withdrawal penalty. This fee could offset or potentially even wipe out the interest you earn on your savings.
High-yield CD
A high-yield CD is a certificate of deposit that features a competitive interest rate compared to the national average. It’s common to find these types of CDs from online banks, but some brick-and-mortar banks and credit unions may also offer high-yield CDs in an effort to attract or retain customers.
Overall, high-yield CDs tend to have many of the same characteristics as traditional CDs. For example, it’s common to come across high-yield CDs with fixed interest rates, set terms, and early withdrawal penalty clauses. Plus, if you open a high-yield CD with a federally insured financial institution, the money you deposit is protected up to $250,000 per depositor, per institution.
Learn more about high-yield CDs
Bump-up CD
The idea of locking in an interest rate on a CD for a set period of time makes some savers nervous. If interest rates rise during your CD’s term, you don’t have the option to take advantage of higher APYs without incurring an early withdrawal penalty. So, if the market is trending upward and interest rates are on the rise, some people like the idea of a bump-up CD and the freedom it provides.
With a bump-up CD, you have the option to request a higher interest rate during your CD term (if interest rates increase and your financial institution raises the available APY on its account). However, you typically can only make one request for an interest rate increase during your CD term. Further, most bump-up CDs start out with a lower interest rate compared to high-yield CDs (and sometimes even traditional CDs) as a trade-off for this flexibility.
Step-up CD
A step-up CD is another type of certificate of deposit where your rate can increase after you open the account. However, unlike a bump-up CD, a step-up CD has a pre-set schedule with rate increases that take place on specific dates.
For example, with a step-up CD, your bank or credit union might increase your APY once every quarter, bi-annually, or once a year, depending on the length of your CD term and the conditions of your account. Your financial institution decides when to increase your rate with a step-up CD rather than you as the account holder.
In general, the starting interest rates on step-up CDs tend to be lower compared to traditional and high-yield certificates of deposit. And even the ending APY may be less competitive than some of the best CD rates available. Some step-up CDs may be callable as well (more on that next).
Callable CD
A callable CD often starts with a higher APY compared to a traditional CD. But the bank or credit credit union that offers the account may only guarantee that attractive interest rate for a short period of time.
Once the guaranteed period passes, the financial institution reserves the right to close or “call” back the account — even if the CD hasn’t reached its maturity date. However, if a bank or credit union does call back your CD, you’ll receive your principal deposit plus any interest you’ve earned up to that point.
Add-on CD
When you open a traditional CD, you make a one-time deposit at the time of account opening. With an add-on CD, however, there’s more flexibility where deposits are concerned, and you have the option to add money to the CD before it reaches maturity.
This type of account could be a good option if you want to add cash to your CD with additional pay periods, bonuses, or other influxes of cash. But since add-on CDs tend to feature lower interest rates compared to other types of CDs, you might want to consider alternatives. For example, you could open a high-yield CD, and then contribute additional cash you receive in a high-yield savings account until you build up enough funds to consider whether you’re ready to fund another CD with the balance.
No-penalty CD
In general, when you open a CD, you agree to keep the money on deposit until it matures. If you take money out of the CD before the maturity date, you’ll pay an early withdrawal penalty. The exception is with a no-penalty CD, which provides the flexibility to withdraw money from your account fee-free — provided you follow the rules.
Depending on the terms of the account, a no-penalty CD may let you access cash any time after you have had your CD open for a predetermined period. Other no-penalty CDs may outline specific times when you can make withdrawals, such as once a month or once a quarter.
While the flexibility of no-penalty CDs is a solid benefit, there’s a downside to consider as well. Like many other types of specialty CDs, no-penalty CDs often come with lower APYs compared to traditional CDs.
Learn more about no-penalty CDs
Brokered CD
If you’re looking for a CD that potentially offers higher yields and longer terms (think 30 years or more), you might want to consider a brokered CD. A brokered CD isn’t the same as a traditional certificate of deposit you take out from a bank or credit union. Instead, you purchase this type of account from a brokerage firm or CD broker. As a result, brokered CDs come with more risk and tend to be more complicated compared to traditional CDs.
In general, a brokered CD comes with a fixed interest rate for a set period of time. Yet these types of CDs also tend to feature higher fees, which may chip away at your potential earnings. Further, not all brokers that sell these CDs are licensed or certified, adding to the possible risk. And brokered CDs with maturity dates over 10 years may also be callable. So, if interest rates drop, there’s a good chance the brokerage firm will close your account.
Jumbo CD
A jumbo CD, as the name suggests, is a certificate of deposit that requires a large minimum deposit to open. Depending on the financial institution, you might need to deposit anywhere between $25,000 to $100,000 to qualify for a new jumbo CD account.
When you open a jumbo CD with a large minimum deposit, you may be able to lock in a higher interest rate. But keep in mind that deposit insurance maxes out at $250,000 for the combined deposits you hold at a particular financial institution. If your total balances exceed that amount, part of your cash could be uninsured.
IRA CD
An IRA CD is a certificate of deposit that’s part of a tax-advantaged individual retirement account (IRA). If your IRA allows you to contribute your investments toward a mix of assets, you may have the option to open an IRA CD as part of your holdings.
Like traditional CDs, IRA CDs offer fixed interest rates and come in a variety of terms ranging between a few months to several years. Yet because IRA CDs are tax-advantaged accounts, they also have annual contribution limits (up to $7,000 for ages 49 and under or up to $8,000 for ages 50 and older for the 2024 tax year).
It’s also worth noting that withdrawing money early from an IRA CD could be especially problematic. Not only could you face early withdrawal penalties, but you might also have to pay penalties to the IRS for any withdrawals before the age of 59 ½.
How to choose the right type of CD
With so many types of CDs to choose from, it may feel overwhelming when you try to select the right type of CD for your specific needs. But if you believe a CD is the right choice for your savings, your best bet is to map out your priorities and search for an account that provides the features that are most important to you.
For example, if you’re most interested in finding a CD that offers competitive interest rates, you can compare offers from banks that feature the highest APYs available. On the other hand, if having the flexibility to withdraw money when you need it matters, you might want to consider a no-penalty CD, an alternative type of deposit account, or perhaps a savings strategy like a CD ladder instead.
