11 Types Of CDs: Which One To Choose?

Certificates of deposit, or CDs, offer the unique opportunity to earn guaranteed returns and fixed interest, making them a low-risk and rewarding savings tool. If you have cash you don’t mind locking up, you can often earn more with a CD than with other savings accounts.

You might be familiar with traditional CDs, but there are many types of CDs available, each with its own benefits and restrictions. Understanding the different types of CDs and how they work can help you find the best option for your saving needs and time horizon.

What Is a CD?

A CD is a type of savings account available through banks and other financial institutions. They are time deposit accounts, meaning you earn a set interest rate in exchange for leaving your money untouched for a predetermined length of time, known as a term. When you open a CD, you choose your term and deposit all the funds you’d like to save upfront. Most CDs have minimum opening deposit requirements between $500 and $2,000.

CD rates tend to be better than other savings rates to entice consumers to park their money. Unlike other deposit accounts, CDs are meant to be left alone. You’ll typically pay an early withdrawal penalty for withdrawing money before a CD reaches the end of its term, known as its maturity date.

CD terms can range from one week to ten years. Some banks reserve the highest APYs for longer CDs, but that’s not always the case. Long-term CDs and short-term CDs have different advantages and disadvantages depending on your savings goals.

Upon reaching maturity, many CDs renew automatically at the current rate. Banks provide a grace period after maturity, usually ten days, for customers to withdraw funds, deposit more money or change their terms without penalty.

CD deposits at banks are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor, per account ownership type and per institution. Credit union CDs, sometimes called share certificates, are insured by the National Credit Union Administration (NCUA) up to $250,000 per share owner, per credit union, for each ownership category.

Types of CDs

Below are 11 types of CDs to consider, some more common than others.

Traditional CDs

A traditional CD is a standard CD account available through many banks and credit unions. It features a fixed interest rate and is usually available in various term lengths. You are not generally permitted to add more money after funding a traditional CD account.

There are no surprises with traditional CDs, making it easy to calculate how much you can earn. You’ll earn interest based on your fixed rate, term length and compounding schedule. Traditional CDs usually carry early withdrawal penalties equal to some of your interest earnings.

High-Yield CDs

High-yield CDs are identical to standard CDs, but they typically earn APYs that beat national average rates on similar accounts. They feature a variety of terms and fixed interest rates.

Generally, the best high-yield CDs are available through online banks. With fewer overhead costs than traditional banks, online banks can offer more competitive rates on deposit accounts, including CDs.

No-Penalty CDs

No-penalty CDs allow you to withdraw funds without penalty before a CD’s maturity date. A no-penalty CD is more flexible than most CDs, but with this added flexibility comes some restrictions.

Banks typically require you to withdraw your entire balance with a no-penalty CD, closing your account. Your account may also have a waiting period after opening before you can withdraw funds. You can expect no-penalty CD rates to be lower than other CD options as well.

Add-On CDs

Typically, banks don’t allow you to add funds to a CD after making your initial deposit. Add-on CDs break that rule, letting customers continue depositing money to their accounts throughout the CD term, earning the same fixed rate.

Add-on CDs are still subject to the same withdrawal restrictions as traditional CDs. You can add funds but can’t withdraw money from an add-on CD without incurring a penalty.

A few banks and credit unions that offer add-on CDs include:

• Bank5 Connect
• BECU
• First Horizon
• FNCB Bank
• Michigan State University Federal Credit Union

Bump-Up CDs

With a bump-up CD, customers can request to bump up their fixed rate to match the CD term’s current rate available for new accounts, if it goes up. Bump-up CDs are sometimes referred to as raise-your-rate or bump-rate CDs. Ally Bank offers raise-your-rate CDs.

Bump-up CDs typically only allow one rate increase per CD term and may restrict customers to one account. Opening a bump-up CD may help maximize savings when interest rates are on the rise. Bump-up CDs generally feature lower APYs than traditional CDs, so they may not be the best option for growing your savings unless you believe rates will increase during your term.

Step-Up CDs

A step-up CD is similar to a bump-up CD, except the issuing banks and credit unions determine when there’s an interest rate increase. Typically, step-up CDs follow a predetermined rate increase schedule during the CD term. Step-up CDs offer guaranteed automatic rate increases regardless of the interest rate environment. U.S. Bank offers step-up CDs.

Jumbo CDs

Jumbo CDs are like traditional CDs but carry much higher minimum deposit requirements, typically $100,000 or more. Banks may offer higher interest rates on jumbo CDs than standard CDs to reward customers for keeping a higher balance in a CD.

Brokered CDs

Brokered CDs are purchased through brokers or brokerage firms rather than banks or credit unions. This type of CD is issued by a bank or credit union in partnership with a brokerage firm. Deposits in brokered CDs are insured up to the maximum allowable limits, provided partner banks are federally insured. You usually need a brokerage account to purchase a brokered CD.

There are two key differences between standard CDs and brokered CDs. Brokered CDs earn simple interest, which doesn’t compound and is paid out on a schedule. Also, you can’t withdraw funds from a brokered CD before maturity, even for a fee. The only way to access funds early is to sell the CD on the secondary market, which may result in a loss of value. Fidelity brokered CDs are competitive with top accounts.

Callable CDs

A callable CD is a certificate of deposit that can be closed by the issuing bank before maturity. When this occurs, the bank pays the account owner the principal balance and any accrued interest and closes the CD. Callable CDs usually come with a predetermined date, called the callable date, after which the bank can redeem the CD.

Banks sometimes offer higher interest rates for callable CDs because of the potential inconvenience. Generally, a bank might call back a CD if interest rates are falling.

IRA CDs

An IRA CD is a certificate of deposit kept within an individual retirement account (IRA). IRA CDs come in two types—traditional IRA CDs and Roth IRA CDs. Deposits to traditional IRA CDs and earnings are tax-deferred. Roth IRA CD funds are taxed upfront, while earnings and qualified withdrawals are tax-free.

There are many pros and cons of IRA CDs, but one of the main benefits is that you can open multiple CDs within the same IRA. Also, IRA CDs pose less risk than other types of investments.

Zero-Coupon CDs

A zero-coupon CD is a certificate of deposit bought at a discount with deferred interest payments. When the CD matures, you receive the face value of the CD equal to your opening deposit plus interest. Zero-coupon CDs are typically available through brokers.

Generally, zero-coupon CDs feature longer CD terms and may offer higher APYs than other types of CDs. One drawback with zero-coupon CDs, however, is that you must pay taxes on interest earned annually despite not receiving interest until the CD matures.

Which Type of CD Is Right for You?

With so many options, choosing a type of CD can be tricky. Typically, you want to look for the best rates, but many other considerations are just as important—sometimes even more so. For some savers, it might make sense to accept a slightly lower rate for more flexible terms, such as the ability to add or withdraw money penalty-free. Others may want to shoot for the highest rate possible by depositing enough money to qualify for a jumbo CD.

Consider your available funds, timeline, and savings goals to determine which type of CD is best for you.