12 types of CDs: Which one is best for you?

The traditional certificate of deposit (CD) is far from being the only CD product available to savers. Financial institutions offer a variety of CDs, giving savers more flexibility to manage their money. 

The type of CD you choose depends on your specific financial situation and your goals. For example, if you think you might need to withdraw money from your CD before it matures, a no-penalty CD may be worth considering. If you want an opportunity to increase your CD rate during the term, you might want to explore a bump-up CD. 

Learn the various types of CDs and what features make each different:

1. Traditional CD

With a traditional CD, you make a one-time deposit that meets or exceeds the bank’s minimum opening deposit requirement.

Characteristics of a traditional CD include:

• The money stays with your bank for a specific term and earns a fixed APY.
• You have the option of cashing out at the end of the term or rolling over the CD for another term.
• Penalties for early withdrawal will erode your earnings, and possibly your principal. Those fees must be disclosed when the account is opened.
• Before you open a fixed-rate CD, you can calculate how much interest you would earn by the end of its term.

“A standard, fixed-rate CD can provide predictable interest for savers who are planning for an expense at a set date in the future,” says Greg McBride, CFA, Bankrate chief financial analyst. What savers should avoid, however, is “being locked in for a long, multi-year maturity at a very low rate, especially if rates are poised to rise,” McBride says.

2. Bump-up CD

A bump-up CD, commonly also referred to as a raise-your-rate CD, helps you benefit from a rising-rate environment. Suppose you open a two-year CD at a given APY, and six months into the term, your bank raises the APY on its newly issued two-year CDs.

A bump-up CD allows you to tell your bank you want the higher rate for the remainder of the term. Institutions that offer bump-up CDs commonly allow only one bump-up per term.

The drawback is that a bump-up CD typically has a lower APY than a traditional CD, so when rates rise, you’ll be catching up. It’s important to understand the interest rate environment before opening a bump-up CD. For instance, if you believe CD rates will decrease during the CD’s term, you might decide it’s not a good time for this type of CD. Compare how bump-up CD rates stack up against traditional CD rates.

At the time of this writing, financial institutions that offer bump-up CDs include First Tech Federal Credit Union and Rising Bank.

3. Step-up CD

Like a bump-up CD, a step-up CD lets you move to a higher yield. But unlike a bump-up CD, you don’t have to ask the bank for the higher rate; a step-up CD rate rises automatically by a predetermined amount at certain intervals during the term.

Not all banks offer step-up CDs, and there’s no guarantee that they’ll earn a higher APY than that of a traditional CD. Like bump-up CDs, step-up CDs may start with an APY that’s lower than you could receive with a traditional CD of the same or a similar term length. With that in mind, you’ll want to evaluate the initial APY, as well as how much the rate can increase, before choosing this product.

U.S. Bank and Citibank are banks that offer step-up CDs at the time of this writing.

4. Liquid (or no-penalty) CD

Liquid CDs, or no-penalty CDs, allow you to withdraw money before the CD term ends — generally after approximately the first week — without incurring a penalty. The APY tied to a liquid CD may be higher than that of a high-yield savings account or money market account, but it will likely be lower than the rate on a traditional CD of the same term.

You’ll have to weigh the convenience of liquidity against whatever return you’re sacrificing. A key consideration with a liquid CD is how soon you can make a withdrawal after opening the account. Most banks require that the money stay in the account for at least around seven days before it can be withdrawn without penalty. But financial institutions can set their own penalty-free withdrawal rules, so read the fine print before opening a liquid CD.

At the time of this writing, you can find no-penalty CDs from banks such as Marcus by Goldman Sachs and Ally.

5. Zero-coupon CD

With zero-coupon CDs, you buy the CD at a discount to its par value, which is its value at maturity. “Coupon” refers to a periodic interest payment, so zero-coupon means there are no interest payments during the CD’s term. For example, if you bought a 10-year, $100,000 CD for $85,000, you wouldn’t receive interest payments during the CD term. Instead, you’d receive the $100,000 face value and the accrued interest when the CD matures.

Potential drawbacks of zero-coupon CDs are they’re usually long-term investments, they can be callable (in which case the bank can take back the CD early) and you don’t get the interest until the CD matures.

A bigger drawback can be that you must declare the accruing interest as income each year and pay taxes on it, even though you can’t pocket the interest until the CD matures. Each year, you’ll have a higher base than the year before — and a bigger tax bill.

You can inquire about zero-coupon CDs at your bank, but you may have to go through a brokerage firm to get one.

6. Callable CD

With a callable CD, there’s an opportunity to earn higher interest, but it comes with a risk: The issuer of a callable CD has the option to “call” back the CD after a set time, before it matures. Whether the issuer uses that option depends on the interest rate environment.

Let’s say you take out a five-year CD at a top rate, and the bank has the option to call back the CD in one year. During that year, prevailing rates drop, so your bank also drops its rate on new five-year CDs. The bank can call back your CD and return your principal, plus the interest you’ve earned up to that point. But then you’re stuck with having to reinvest the money after rates have fallen.

7. Brokered CD

A brokered CD is sold through a brokerage firm. To get one, you need a brokerage account. Buying CDs through a brokerage can be convenient because you don’t have to open CDs at a variety of banks to get the best yields.

Don’t assume all brokered CDs are backed by the Federal Deposit Insurance Corp. (FDIC) because not all brokerage firms partner with federally insured banks. Also, watch out for brokered CDs that are callable. Read the fine print before you invest, and check on fees and early withdrawal penalties and policies.

8. High-yield CD

Banks compete for deposits by offering better-than-average rates. High-yield CDs are generally traditional CDs that pay better returns. Take time to compare the best CD rates and calculate your potential earnings.

Banks that commonly offer high-yield CDs include Ally Bank and Marcus by Goldman Sachs.

Check out some of the top rates for popular CD terms, including:

• Best 6-month CD rates
• Best 1-year CD rates
• Best 2-year CD rates
• Best 5-year CD rates

9. Jumbo CD

Just as its name implies, a jumbo CD requires a larger deposit than a traditional CD — typically, around $100,000. In some instances, the deposit requirement is somewhat lower. Jumbo CDs may or may not pay more than a traditional CD.

If you’re considering putting a large amount of money into a CD, it’s important to make sure your money is safe, within the guidelines of the FDIC or the National Credit Union Association (NCUA). This means that should your financial institution fail, your funds are protected up to a limit of $250,000 per depositor, per FDIC-insured bank, per ownership category.

Institutions that offer jumbo CDs, as of this writing, include Credit One Bank and Suncoast Credit Union.

10. IRA CD

An IRA CD is a CD that is held in a tax-advantaged individual retirement account. IRA CDs may appeal to the risk-averse who want to build their retirement savings with guaranteed returns. The trade-off is that you won’t earn high returns compared to what you could earn in stocks, but you also don’t have the risk of losing money like you do when investing in the stock market.

Your funds in an IRA CD with a federally insured financial institution are protected within the FDIC or NCUA guidelines.

Though they can help you diversify your portfolio, IRA CDs generally aren’t viewed as smart retirement strategies for younger investors who are well positioned to take on more risk. To get the most out of an IRA CD, fund one with money you won’t need until age 59½, so you don’t have to pay a tax on early distributions.

Currently, you can find IRA CDs at financial institutions such as Navy Federal Credit Union and Discover Bank.

11. Add-on CD

With most CDs, you make the initial opening deposit and can’t add money to it during the term. But add-on CDs let you deposit more money into the account during the CD term, like a savings account. The number of additional deposits you can make with an add-on CD varies, so be sure you read the fine print.

While most banks don’t offer add-on CDs, Bank5 Connect offers such a CD as of this writing.

12. Foreign currency CD

Foreign currency CDs can be complicated, and they aren’t the best choice for novices or risk-averse investors. They can be issued in euros, British pounds and other foreign currencies. They’re bought with U.S. dollars and are converted back to dollars when they mature. There’s no guaranteed APY because the interest is based on a foreign currency or a basket of foreign currencies.

Investing in foreign currency CDs may yield higher returns, but currencies and global economic conditions fluctuate, creating risk. There are also risks when you convert the foreign currency CD back to U.S. dollars. A strengthening dollar can wipe out your return or result in you losing money.

Bottom Line

There are many types of CDs. You can choose from a traditional fixed-rate option to flexible choices. Each type has unique features that can help you balance security and access to your money. The right CD for you depends on your goals. By comparing terms and penalties carefully, you can choose the CD that best fits your financial strategy. Choose a CD at a federally-insured financial institution to protect your funds.