Brokered CDs vs. bank CDs: What’s the difference? (2024)

FAQs

Brokered CDs vs. bank CDs: What’s the difference? ›

Purchase process: A bank CD is a deposit product, where you begin earning interest immediately upon deposit. A brokered CD is an investment purchased in a securities account similar to the way a security is purchased. With the brokered CD, you don't start earning interest until settlement date of the trade.

Brokered CDs will still allow holders to earn higher interest rates in exchange for locking up their money, like a bank CD, and they are FDIC-insured. However, they may be subject to interest rate and market-to-market risk, as brokered CDs can be bought and sold on the secondary market, unlike bank CDs.

It's possible to lose money in a brokered CD if you sell it on the secondary market for less than face value. You can also miss out on interest earnings in a brokered CD if the issuer calls it prior to maturity.

If the money you put into your brokered CD pushes your total deposits in an account ownership category at a bank over the $250,000 federal deposit insurance limit, you are at risk of having uninsured funds and may lose money if the insured bank fails.

Brokered CDs are issued by banks and sold to brokerages in bulk. Brokerages then turn around and sell those CDs to customers. Since brokerages purchase them in bulk, they can negotiate better interest rates on brokered CDs and offer higher rates than those on traditional CDs.

What happens when my brokered CD matures? Your principal and interest go into your settlement fund and become available as cash. The brokered CD will no longer appear in your accounts as a holding.

Market interest rates frequently fluctuate, which means that the market value of a CD fluctuates, too. If a CD is sold on the secondary market at a lower value than its face value, it will have lost money. But there are no losses if the CD is kept until maturity.

Understanding Liquidity: Brokered CDs may not have the same level of liquidity as traditional CDs, meaning that investors may not be able to sell their investment quickly if needed. It's important to understand the terms of the CD and any penalties or fees associated with early withdrawal.

Brokered deposits, on the other hand, are considered a riskier source of funds for a bank because they are impacted greatly by interest rate changes.

Brokered CDs offer an estate protection feature, which allows the estate or the beneficiary, upon the death of the holder(s), to redeem CDs from the issuer at par plus accrued interest without incurring a penalty, subject to limitations. Irrevocable trusts do not offer a survivor's option.

Do brokered CDs automatically roll over? ›

Also, CDs that are brokered generally don't automatically roll over into another CD, although some brokerages do allow for this option. Once they mature, the principal will be deposited into your general investing account, and you must choose what to do with it next.

You can find 6% CD rates at a few financial institutions, but chances are those rates are only available on CDs with maturities of 12 months or less. Financial institutions offer high rates to compete for business, but they don't want to pay customers ultra-high rates over many years.

Brokered CDs allow you to access a wide selection of CDs with more convenience than a single bank does. Furthermore, brokered CDs offer the same FDIC protection as bank-issued CDs.

Interest earned on CDs is considered taxable income by the IRS, regardless of whether the money is received in cash or reinvested. Interest earned on CDs with terms longer than one year must be reported and taxed every year, even if the CD cannot be cashed in until maturity.

Interest rate fluctuation

Like all fixed income securities, CD valuations and secondary market prices are susceptible to fluctuations in interest rates. If interest rates rise, the market price of outstanding CDs will generally decline, creating a potential loss should you decide to sell them in the secondary market.

The biggest risk to CD accounts is usually an interest-rate risk, as federal rate cuts could lead banks to pay out less to savers. 7 Bank failure is also a risk, though this is a rarity.

For some people, it can be worth putting money into a CD. If a person is seeking a riskless investment with a modest return, CDs are a good bet—you'll earn a higher rate than you would with a checking or savings account, but you'll have to commit your funds for a fixed period.

Like other bank accounts, CDs are federally insured at financial institutions that are members of a federal deposit insurance agency. If a member bank or credit union fails, you're guaranteed to receive your money back, up to $250,000, by the full faith and credit of the U.S. government.