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Certificate of deposit accounts can be a useful tool for saving money. You deposit money into a CD, which then earns interest. Once the CD matures, you can withdraw your deposit and the interest earned.
Brokered CDs are a special type of CD option that can potentially offer much higher rates than traditional bank CDs.
What is a brokered CD? And is it better to save in a brokered CD vs. a bank CD? Here’s a closer look at how these savings products work.
What Is a Brokered CD?
A brokered CD is a certificate of deposit that’s purchased through a broker or brokerage rather than a bank. The bank issues the CDs to the brokerage, and the brokerage then sells those CDs to its customers.
Like bank-issued CDs, brokered CDs are time deposits with specific maturity dates. A brokered CD earns interest, like other CDs. But instead of compounding, interest is paid out to savers in regular intervals. Brokerages may pay interest monthly or may follow another set schedule.
How Does a Brokered CD Work?
When a bank issues a CD specifically for the customers or clients of a brokerage or investment firm, those are brokered CDs. Instead of going to the bank to open a CD account, you go through your brokerage.
A brokered CD blends features of investment products and savings accounts. For instance, deposits earn interest over a set maturity term, similar to a regular CD. But brokered CD rates may easily surpass traditional CD rates.
You deposit money into a brokered CD through your brokerage. But because those CDs are issued by a bank, they enjoy the benefit of Federal Deposit Insurance Corp. protection—as long as the bank is FDIC-insured. The current FDIC coverage limit is $250,000 per depositor, per account ownership type, per financial institution.
Brokered CDs are also unique in that they can be traded on the secondary market. If you’d like to withdraw money from a brokered CD before maturity, you could sell it on the secondary market and avoid an early withdrawal penalty. There is a risk, however, since CDs may lose value when sold before maturity.
Are Brokered CDs Worth It?
Brokered CDs could be worthwhile to a saver who’s looking for higher rates or greater flexibility with their savings. For example, say you’re interested in opening CDs with multiple banks to maximize your interest earning potential. Instead of setting up accounts at several banks, you could purchase brokered CDs from each bank inside your brokerage account.
A brokered CD may also appeal to someone who’s interested in longer-term CDs. With bank CDs, the maximum maturity might be 60 to 72 months. But brokered CDs may have terms ranging up to 30 years.
Brokered CD Pros and Cons
| Pros | Cons |
|---|---|
| Greater liquidity, since you can sell CDs on the secondary market without a penalty. | Selling brokered CDs before maturity can be risky if they lose value. |
| Brokerages may offer greater variety for CD terms. | Higher rates are not guaranteed. |
| Savers can hold multiple CDs from different banks in a single brokerage account. | Some brokered CDs may be callable, meaning the issuer can terminate them before maturity. |
| Rates may be higher than bank CDs. |
When assessing whether a brokered CD is worth it to you, consider your savings goals, timeline and how much risk you’re comfortable taking.
Brokered CD vs. Bank CD
While brokered CDs are issued by brokers, they’re virtually the same as the CD products banks issue to personal or business banking customers. The most notable differences between a brokered CD vs. bank CD include:
- Terms. Brokered CDs may have longer terms or a greater variety of maturity terms compared to bank CDs.
- Minimum deposit. Minimum deposits for brokered CDs may be slightly higher than those for bank CDs. For example, you might need $1,000 to open a brokered CD, but you may be able to open a bank CD with $500.
- Rates. Brokered CDs may offer higher rates than bank CDs, though that’s not always the case. Reviewing the best CD rates available through your brokerage can give you an idea of the interest you might be able to earn.
- Liquidity. When you open a bank CD, it’s assumed you’ll leave the money there until it matures. Brokered CDs give you more flexibility because you can sell them on the secondary market.
- Fees. A brokered CD does not charge an early withdrawal fee if you cash it out before maturity the way that a bank CD would. But you might pay a fee to trade brokered CDs on the secondary market.
Again, the one thing bank CDs and brokered CDs have in common is FDIC coverage. In fact, holding brokered CDs can be an effective way to expand your FDIC protection because each CD is covered separately.
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How To Choose Brokered CDs
If you’re interested in brokered CDs, it’s important to choose an account that aligns with your needs. It’s also helpful to do some preliminary research to compare your CD options.
Some of the most important things to consider include:
- Brokered CD rates
- CD terms
- Minimum deposit requirements
- Fees, if any
- Whether a particular brokered CD is callable, meaning the brokerage or bank can “call back” and redeem the CD early if interest rates go down
You’ll also want to take a look at how the brokerage pays out CD interest and what happens when a brokered CD matures. While bank CDs can renew automatically, brokered CDs do not. Instead, the principal and interest earned are deposited into your brokerage account at maturity.
Where To Buy Brokered CDs
Generally speaking, you’ll need a brokerage account to purchase brokered CDs. If you work with a financial advisor or financial planner to manage your investments, you can ask them about buying brokered CDs.
When evaluating where to buy brokered CDs, consider the reputation of the brokerage or financial institution. If a brokerage claims to hold specific certifications or credentials, investigate for yourself to make sure the claim is legit.
Also, watch out for red flags that could signal a scam. If a broker is promising brokered CD rates that seem too good to be real, trust your instincts. Again, you’ll want to research the CDs yourself to verify the rates you’re being quoted.
Finally, make sure the brokerage offers brokered CDs from FDIC-insured banks. Otherwise, FDIC protection won’t apply to your deposits.
How To Transfer a Brokered CD From One Bank to Another
If you’re holding one or more brokered CDs and you decide you’d like to swap them out for other CDs, you can do so by trading them on the secondary market. You’d do that through your brokerage account, and the process is similar to selling stocks or any other type of security you own.
Once you sell a brokered CD, you can then deposit the proceeds into another CD. The new brokered CD would replace the old one in your brokerage account.
Keep in mind that you may pay a transaction fee to transfer your brokered CDs to someone else or to purchase new brokered CDs. And remember that if you end up selling a brokered CD for less than face value, you’ll take a loss.
Frequently Asked Questions (FAQs)
Are brokered CDs safe?
Brokered CDs are safe in the sense that they’re protected by FDIC insurance when issued by an FDIC member bank. Before purchasing a brokered CD, it’s helpful to verify that the issuing bank does have FDIC coverage.
Can you lose money in a brokered CD?
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.
How are brokered CDs taxed?
Interest earnings from CDs, including bank CDs and brokered CDs, are generally considered income for tax purposes. It’s possible to defer taxes on brokered CD interest income by holding your CDs in an individual retirement account (IRA) rather than a taxable brokerage account.
