What are the Pros and Cons of Jumbo CDs?
A CD is a certificate of deposit, and this investment option is considered to be very low risk, as opposed to other investments such as stocks. Jumbo CDs are certificates of deposit for large sums of money, usually more than $100,000 (USD), though that number can change depending on the financial institution and the country in which the deposit is being made. Jumbo CDs are considered good options for people making large deposits who want a safe, secure, low-risk investment option for their money while still accruing interest on the investment, though the yield on such deposits will be considerably lower than other investment options.
Jumbo CDs are considered a safe investment for several reasons, the most important of which is the fact that it is an insured investment. Regardless of the financial stability of the institution or the current markets, an investor who has invested in jumbo CDs is going to get his initial investment back at the end of a set period of time. Another advantage of jumbo CDs is the interest rate over a regular CD: the interest earned on jumbo CDs is generally a higher rate than interest earned on a normal CD, and the investor is guaranteed an interest rate that is predetermined before the deposit occurs.
Several disadvantages are associated with jumbo CDs as well. The first and most obvious disadvantage is the large amount of money necessary to make the deposit. The investor will need to commit a large amount of money to one investment, and that money cannot be used or withdrawn during the set maturation period, which usually lasts anywhere from six months to several years. If the investor runs into financial trouble, for example, he or she will not be able to access that money in most cases. In some cases in which the investor is allowed to pull the money out before maturation, he or she is likely to incur significant penalty costs.
Another disadvantage to a jumbo CD is the taxing of that CD. Once the CD has matured, any interest accrued will be taxable, which can mean an investor who is looking to avoid or lower taxes at the end of a year may not want to choose this investment option. Despite the disadvantages, jumbo CDs are a safe option for large amounts of money, and the money invested in the CD can even be used as collateral when applying for a loan at a financial institution, unlike many other types of investments.
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