10 Types of CDs (And Who They’re Best for)

Certificates of deposit (CDs) come in many shapes and sizes, each one best suited for a different kind of investor. The best one for you depends on your needs and circumstances.

Here are the 10 most common types of CDs, how each works, and the key considerations to think about before buying.

1. Traditional CD

A traditional CD is a financial deposit account offered by banks and other financial institutions. They’re known for providing stable and predictable returns.

With a traditional CD, you deposit a fixed sum of money in a financial institution for a specified term. During that term, the money accrues interest at a predetermined rate. Traditional CDs are federally insured, typically up to $250,000, adding a layer of security to your investment.

This type of CD is particularly suitable for conservative investors seeking a low-risk option. It offers a safe place to store your money while earning steady — but not spectacular — returns.

Key Considerations:

• Fixed rate. The interest rate on traditional CDs remains constant throughout the term, making them immune to market risk.
• Term length. Terms can range from as short as a few months to several years. Longer terms usually offer higher interest rates but require a longer commitment.
• Minimum deposit. Most traditional CDs come with a minimum deposit requirement, which can vary significantly between institutions.
• Early withdrawal penalties. Withdrawing funds from a CD before its maturity date usually results in a penalty, which can significantly reduce earnings and even eat into your principal.

Learn more: Annuities vs. Certificates of Deposit

2. High-Yield CD

Like traditional CDs, High-yield CDs come with a fixed term and rate, but the rates are often much higher. They give you a balance of safety with a higher return.

High-yield CDs are ideal for savers looking for a low-risk investment but want to earn more interest than what's typically offered by standard CDs or savings accounts.

Key Considerations:

• Higher interest rates. The defining feature of High-Yield CDs is their elevated interest rates, which can significantly boost earnings over the term of the CD.
• Minimum deposit. High-yield CDs may require a higher minimum deposit compared to traditional CDs, which could be a barrier for some investors.
• Offered by online banks. High-yield CDs are often offered by online banks. These institutions typically have lower overhead costs compared to traditional brick-and-mortar banks, enabling them to offer more competitive rates.

Remember, even high-yield CDs typically don’t offer rates as good as the best fixed annuity rates.

3. Jumbo CD

Jumbo CDs are like traditional CDs, just with a much higher minimum deposit. Minimum deposits for jumbo CDs can start as high as $100,000. In exchange for this substantial initial investment, jumbo CDs generally offer slightly higher interest rates.

Jumbo CDs are best suited for high-net-worth individuals or institutional investors who have a substantial amount of cash they can afford to tie up for a fixed period.

Key Considerations:

• Higher minimum deposit requirements. The defining characteristic of a Jumbo CD is its high minimum deposit, usually starting at $100,000. This higher entry barrier limits its accessibility to only investors with significant capital.
• Slightly better rates. While Jumbo CDs typically offer higher interest rates than standard CDs, the increase in rate is often marginal. Investors should weigh whether the extra earnings justify the larger deposit.
• Safety and insurance. Like other CDs, Jumbo CDs are generally insured by the FDIC or NCUA up to the legal limit, providing a level of security for your investment. However, because the deposit is large, make sure you know how much of your deposit is covered.
• Liquidity considerations. Be prepared to commit your funds for the entire term because early withdrawal can result in significant penalties.

4. No-Penalty (Liquid) CD

The key feature of no-penalty CDs, also known as liquid CDs, is the ability to withdraw funds before the maturity date without incurring any penalties. While they offer similar security and fixed-term elements as standard CDs, the absence of early withdrawal penalties is a significant advantage for those who might need access to their funds on short notice.

This type of CD is ideal for individuals who seek the stability and fixed interest rates that CDs offer but also want the flexibility to access their money without penalty if their financial situation changes.

Key Considerations:

• No early withdrawal penalties. The defining characteristic is the ability to withdraw your deposit before the maturity date without any penalties, offering greater flexibility than other CD types.
• Lower interest rates. To offset the risk of early withdrawals, no-penalty CDs typically offer lower interest rates compared to traditional or high-yield CDs.
• Term lengths. Like other CDs, no-penalty CDs come in various term lengths. However, the terms might be shorter than those offered for traditional CDs.

5. IRA CD

IRA CDs combine the features of a CD with the tax advantages of an Individual Retirement Account (IRA). You hold your CDs within an IRA, which gives you the secure, fixed-rate returns of a CD with the tax benefits of retirement accounts.

This type of CD is useful for those nearing retirement age who want to reduce risk in their retirement portfolio.

Key Considerations:

• Risk and return. It's a low-risk investment with guaranteed returns, albeit usually with lower yields compared to more aggressive investments.
• Tax benefits. Contributions may be tax-deductible (depending on the type of IRA), and the interest earned grows tax-deferred.
• Liquidity. There are penalties for early withdrawal, both from the CD and potentially additional IRA-specific penalties for early distribution.

6. Step-Up or Bump-Up CDs

Step-up and bump-up CDs are unique types of CDs that allow for an increase in interest rates over the term of the CD. Step-up CDs have predetermined rate increases at specific intervals during the CD term, whereas bump-up CDs allow you to opt for a higher rate if market rates increase, usually once during the term.

These CDs are ideal for investors who anticipate rising interest rates and wish to benefit from them without committing to long-term, fixed-rate CDs.

Key Considerations:

• Rate increase structure. Make sure you understand the specific terms of rate increases for step-up and bump-up CDs, as they can vary significantly.
• Lower initial rates. These CDs often start with lower interest rates compared to traditional CDs, as the potential for rate increases is factored into the initial offering.
• Rarity. These CDs are less common than other types of CDs.

7. Add-On CD

Add-on CDs distinguish themselves by allowing investors to make additional deposits into the CD after the initial investment. This feature can be particularly useful when interest rates are favorable.

These CDs are ideal for individuals who may not have a large sum to invest initially but anticipate having additional funds to invest over time.

Key Considerations:

• Flexibility. The ability to make additional deposits is the primary advantage, offering more flexibility compared to standard CDs.
• Initial interest rates. Add-on CDs might start with slightly lower interest rates than traditional CDs to compensate for the additional deposit flexibility.
• Rarity. These CDs are less common than other types of CDs.

8. Brokered CD

Brokered CDs are unique in that they are purchased through brokerage firms rather than directly from banks, and they can be bought or sold on a secondary market before their maturity date. This feature offers greater flexibility compared to traditional CDs, which are typically locked in until maturity.

Brokered CDs are well-suited for investors looking for more flexibility in terms of buying and selling their CDs, as well as those seeking potentially higher rates available through different banks via a brokerage.

Key Considerations:

• Secondary market trading. You can trade these on the secondary market, so you can sell your CD before maturity, but it also introduces market risk — the value of your CD can fluctuate depending on interest rate movements.
• Diverse options and rates. Brokerage firms offer CDs from various banks, often with competitive rates, providing a broader selection compared to a single bank.
• Fees and accessibility. Brokerage fees may apply, and investors should also consider the accessibility and terms of service of the brokerage firm.

9. Zero-Coupon CD

Zero-coupon CDs are where you purchase the CD at a significant discount to its face value, and instead of receiving periodic interest payments, you receive the full face value at maturity. “Zero-coupon” refers to the fact that there are no regular interest payments — instead, the interest accrues and is compounded until the CD matures.

These CDs are ideal for investors who don’t need periodic income and want to invest a lump sum for a longer period.

Key Considerations:

• Discount. The main appeal is purchasing the CD at a lower price than its face value, offering a lump-sum payout at maturity.
• No periodic interest payments. Unlike traditional CDs, there aren’t any periodic interest payments, which might not suit those who need regular income.
• Long-term commitment. Zero-coupon CDs typically have longer terms, making them a more long-term investment.

10. Callable CD

Callable CDs are a type of certificate of deposit that gives the issuer (usually a bank) the right to "call" or redeem the CD before its maturity date. This typically happens when interest rates fall, allowing the bank to refinance the CD at a lower rate.

Callable CDs are best suited for investors who are willing to take a bit more risk for a potentially higher return.

Key Considerations:

• Returns vs. risk. While they often offer higher initial interest rates compared to traditional CDs, there's a risk of the CD being called back, usually after a set initial period.
• Reinvestment risk. If the CD is called back, you might have to reinvest the principal at a lower rate, depending on the current market conditions.

CDs Versus Annuities

Both CDs and annuities could be appropriate financial products for you, depending on your circumstances. To decide which might be a better fit, it’s useful to understand how they’re different.

CDs are low-risk because they have fixed interest rates and terms. They’re often FDIC-insured, which adds an extra layer of security. They are better suited for short- to medium-term savings goals and for investors looking for a little income while they keep their money safe.

Fixed annuities also offer a very safe way to grow your money. But annuities are quite different from CDs — for one thing, they’re insurance products. For another, they typically offer higher interest rates than CDs.

But the biggest difference is in their structure. Annuities are designed to provide income for life, addressing longevity risk — the risk of outliving your savings. CDs cannot offer that.

Choosing CDs: If you are looking for a short-term, low-risk investment or if you need a specific amount of money at a known date in the future, a CD might be the better choice.

Choosing Annuities: For individuals nearing or in retirement, annuities often become more appealing. The primary reason is the guaranteed income stream that annuities can provide, which is particularly valuable for covering essential expenses in retirement.

Annuities can help manage the risk of outliving your assets, a significant concern for many retirees.

The Best Financial Instrument for You

There are many types of CDs, and each one is designed for a different type of person. The best way to choose between them is to understand your needs and then find the one that is best suited for you.

Annuities can be a great alternative to CDs for anyone looking for a safe place to put their retirement money. Like CDs, they’re very low-risk. But they also have better rates and can give you a lifetime income.

Curious to learn more? Talk to our licensed reps to understand how an Annuity can help you feel more financially secure as you approach retirement.