What is a Jumbo CD?
A jumbo CD is similar to a conventional CD although the former generally requires a higher deposit and accrues interest at a higher rate. A CD is a certificate of deposit that is offered by banks for money deposited into a specific account that offers an interest rate in exchange for investments held for a fixed term. The terms can be monthly or even yearly.
Often, credit unions and banks will compete with each other’s interest rates, so investors can sometimes negotiate rate increases in order to retain business and be granted more competitive rates. Brokers and independent salespersons usually negotiate the competitive rates, but any purchaser of a Jumbo CD can negotiate the rate at which they are paid out.
Jumbo CDs can be used as part of collateralized loan deals, specifically by companies taking out large loans and looking to accrue interest on the cash collateral they keep at the bank.
- Jumbo CDs are similar to conventional CDs although they generally require a higher deposit and accrue interest at a higher rate.
- A certificate of deposit (CD) is offered by banks for money deposited into a specific account that offers an interest rate in exchange for investments held for a fixed term.
- Jumbo CDs can be used as part of collateralized loan agreements for companies to secure collateral and keep earning interest on them.
Jumbo CD vs. Regular CD
Some of differences between a jumbo CD and a regular CD are given below:
- Account balance – Generally, a jumbo CD requires a minimum account balance of $100,000 USD, but the amount can vary based on the type of CD and issuing institution.
- Stronger penalties – Penalties for breaking deposit terms sometimes apply to jumbo CDs. One such penalty can be three months of interest for a 1-year CD.
- Higher annual percentage yield (APY) with jumbo CDs
Jumbo CDs and their Tax Implications
Without adequately understanding the tax implications and the potential impact of interest rates on a jumbo CD, one may find themselves with a larger than anticipated tax bill. When comparing a jumbo CD to other forms of investments, one must understand that other investments may only incur taxation at the appropriate capital gains tax rate; however, jumbo CDs are taxed in the same manner as all other forms of income.
Certificates of deposits are generally non-negotiable and cannot be resold and must be held by the account holder. However, negotiable CDs can be sold and traded on a secondary open market. CDs that are generally purchased through brokers can be sold on the secondary market.
Risks in Jumbo CDs
Jumbo CDs carry with them minimal risk, as they are insured by the Federal Deposit Insurance Corp (FDIC). The largest risk the individual purchasing the jumbo CD carries is that their investment does not accrue enough interest to keep up with inflation. If inflation rises faster than the rate of interest earned on a jumbo CD over the course of three years, the opportunity cost will have made your CD investment not the most strategic choice.
Further, should an investor need to liquidate the CD if they find themselves in financial distress, they may incur penalties and early withdrawal fees. In some instances, it may cause the investor to lose some of the principal, a potentially devastating scenario for those that end up in financial distress.
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