Which CD should you choose? Here are 8 types of CDs to consider

But there are many types of CDs with special features that can be used for just about any financial situation. 

8 types of CDs to consider for your savings

CDs offer various features to help you reach your financial goals. Here are eight types of CDs that you could use to supercharge your savings.

Traditional or standard CD 

You’re likely most familiar with a traditional or standard CD.  Customers make a one-time deposit and agree to keep their money in the CD for a set period, generally anywhere from one month to 10 years. In exchange, they earn a fixed interest rate—known as the annual percentage yield (APY)—that’s guaranteed for that entire term. 

Interest rates are currently high due to the Fed’s rate hikes, so if you shop around you can get a competitive return on your investment. These banks and credit unions are currently offering some of the best CDs on the market:

The main catch is that withdrawing your money before the CD term is up comes with a cost. This is known as an early withdrawal penalty, and it’s usually worth a few months’ interest or even the entire amount of interest accrued. Longer-term CDs typically have a larger penalty. 

Best CDs by term length

Jumbo CD

A jumbo CD works just like a traditional one, but it has a higher minimum investment requirement and higher interest rate. You typically need to invest at least $100,000 in a jumbo CD.

“Jumbo CDs are great for the conservative part of your portfolio, if you have over $100,000 to invest,” says Eric Negron, CEPA, AWMA, CEO at Forefront Wealth Partners in Austin. “Let’s say you have money that you don't need for the next two years, but you don't want to put into the market, it's a fantastic place to put your money to get a higher interest rate than money market accounts.”

Bump-up or bump-rate CD

A bump-up CD gives you the ability to capitalize on rising interest rates by allowing you to request an increase in your CD’s APY if the bank has raised the interest rate it pays for CDs with a similar term and amount.

You can typically request one or two rate increases during your CD term, depending on the length of the CD, which can be a great hedge if you’re worried about locking your money into a CD when rates might rise. The downside is that your initial interest rate is often lower than what you can earn on a traditional CD that doesn’t allow an increase.

No-penalty or liquid CD

Most CDs charge a penalty if you withdraw your money for the term expires. But with a no-penalty or liquid CD, you can withdraw your money penalty-free any time after a short lock-up period of six to seven days. This can provide some flexibility if you’re unsure whether you’ll need the money, but you’ll likely get a lower interest rate and it may not be a better deal than a high-yield savings account, especially when it comes to accessing your money.

“Typically, a no-penalty or liquid CD is going to pay a higher interest rate than a savings or money market account,” says Kelli A. Hill, CFP®, managing director and senior director of advice at Wells Fargo Wealth and Investment Management in Minneapolis. “However, there can be a limit on partial withdrawals so you would have to take the whole thing out. With a savings account or money market, you can withdraw at your leisure.”

Callable CD

A callable CD might offer a higher interest rate to start, but the bank can decide to “call”—or terminate—the CD after a certain period of time. For example, you might be able to get a two-year CD with a three-month lock period, meaning your interest rate is guaranteed for three months. But after those three months are up, the bank can decide to terminate your CD at any time before the two-year term is complete.

If your CD is called, you will still receive your initial investment plus the interest earned up until the termination date. But banks typically call CDs if interest rates have dropped, meaning you may have to reinvest your money at a lower rate. This is known as reinvestment risk, and callable CDs typically command a higher APY than traditional CDs because of this added risk.

Step-up CD

A step-up CD is like a bump-up CD, except that the interest rate increases happen at set times and in set amounts. For example, you may start with an interest rate of 0.05%, with an increase to 0.25% after 7 months, 0.45% after 14 months, and 0.65% after 21 months.

That rising interest rate could benefit you if interest rates overall decline. But the starting rate may be lower, so you’ll have to weigh the increase against the fixed rate you could get from other CDs.

“Step-up CDs are not common, so you're not going to see as many different rates and options,” says Hill. “We know that more options typically leads to more competitive rates, and they just may not be out there.”

Add-on CD

Most CDs only allow a single contribution right when you open the account. But with an add-on CD, you can continue to contribute money to the CD throughout the term.

“This could be helpful for someone that's saving for a concrete goal, like a down payment on a house or a major trip,” says Negron. “Especially for someone who knows that if the money is too accessible, they might grab it and spend it. But if they know that there’s a penalty to take the money out, this gives them the flexibility to continue to add money to this account with that barrier in place.”

IRA CD

An IRA CD is simply a CD that’s held inside of an IRA. It combines the safety and certainty of a CD with the tax advantages of the IRA.

CDs can be held in traditional, Roth, or SEP IRAs, and they still get the protection of FDIC insurance. But the amount you can invest is limited by the annual IRA contribution limits, and you’re also subject to IRA early withdrawal penalties in addition to any early withdrawal penalties associated with the CD.

Matching types of CDs to your savings goals

With so many different types of CDs, how can you choose the right one for your needs?

It all comes down to understanding your goals and needs. If you’d like to lock in a competitive interest rate today, it’s probably best to go for a traditional CD over a bump-up CD because interest rates are unlikely to climb. If you have a lot of money you’d like to set aside for a couple of years, such as savings for a down payment on a house, you might use a Jumbo CD to earn more interest.

If you simply have a specific need with a particular deadline, CDs can provide a predictable way for you to get there.

“Many of us who were children of the '80s can recall our parents and grandparents buying CDs for us as a way to save for college,” says Hill. “That's a good example where you know the timing of when you need it, so you can invest the funds you have and you know the money is going to be there when your child goes to college. And since there are four years, you can ladder it out and time the proceeds for each year.”

Alternatives to CDs

Of course, a CD isn’t always the right solution—the lack of liquidity may be a dealbreaker for some. In that case, you may be better off sticking with a simple high-yield savings account.

And note that CDs typically do not outpace inflation, so if you’re planning to invest for the long haul, you’re probably better off investing in the stock market. CDs are also subject to ordinary income tax, so the 5% APY you get on a 1-year CD could be far less than that, depending on your tax bracket.

Frequently asked questions

What type of account is a CD?

CDs are FDIC-insured savings accounts.

Are there different types of certificates of deposit?

Yes, there are many different types of CDs offering different types of interest rates, minimum deposits, and early withdrawal penalties.

How do I find high-rate CDs?

Online banks often offer the best rates. You may also be able to find competitive rates through a local bank or credit union. 

Can you add money to a CD?

Most CDs do not allow you to add money after the initial deposit, but with an add-on CD you can continue to make contributions.