Is it better to buy CDs through brokerage or bank?
Brokered CDs generally command a higher yield than bank CDs, as they are in a more competitive market. The broker has invested a large sum with the bank, and that generates more interest than smaller amounts. As with all CDs, holders receive the full principal with interest at maturity.
Brokered CDs offer some of the same benefits as bank CDs. They are steady and predictable; offer FDIC insurance1 and a broad selection of terms (maturity dates), and can also be held in a variety of investment accounts. Also, choosing brokered CDs can also make it easier to build CD ladders.
Cons. Brokered CDs come with certain risks. For example, when interest rates are rising, you might lose money on a brokered CD if you sell it before the maturity date. However, brokered CDs are still safe in the sense that they're protected by a bank's FDIC insurance.
Can you lose money in a brokered CD? 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.
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.
And brokered CDs are like bonds in that when they're being traded, their value can change based on the interest-rate environment — so you could lose money. Plus, some brokerages tack on a trading fee when you sell CDs. (For more access to funds, see the best high-interest savings accounts.)
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.
The benefit of core deposits to a bank is that they are generally stable in the long term, have predictable costs, and are less vulnerable to interest rate fluctuations. 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.
Certificates of deposit available through Schwab CD OneSource typically offer a fixed rate of return, although some offer variable rates. They are FDIC-insured and offered through Charles Schwab & Co., Inc.
There's no limit on the number of CDs you can have, and it's possible to have multiple CDs at the same bank or different financial institutions.
What happens to a brokered CD when the owner dies?
If you're listed as the beneficiary to a CD, you have the right to inherit the money in the account when the owner passes away. 6 You'll likely need to provide the bank with a copy of the death certificate before you can claim the funds.
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.
Are CDs safe if the market crashes? Putting your money in a CD doesn't involve putting your money in the stock market. Instead, it's in a financial institution, like a bank or credit union. So, in the event of a market crash, your CD account will not be impacted or lose value.
Brokered CDs generally offer much more flexibility than traditional bank CDs. 2 For example, brokered CDs can have much longer terms than bank CDs, up to 20 to 30 years in some cases. The secondary market for brokered CDs also makes it much easier to get money out early.
A brokered certificate of deposit (CD) is sold through a broker or brokerage firm. This type of CD is still issued by a bank, but a brokerage buys the CDs in bulk to negotiate a higher rate. The brokerage then charges the purchaser a fee in addition to the principal amount deposited into the CD.
Brokered CDs, offered by FDIC-insured institutions, are eligible for FDIC insurance and can be held in a Vanguard Brokerage Account. You're responsible for monitoring the total assets you hold at each bank for FDIC coverage and limitations.
Vanguard offers a wide range of FDIC-insured brokered CDs. If a bank fails, the government will back each CD for up to $250,000 per depositor per bank. However, there is always the risk of inflation, which means that you may earn a lower rate through your CDs than the rate of inflation.
You can generally sell brokered CDs at any time in a secondary market, subject to market conditions. However, if you sell a brokered CD in the secondary market, you may lose some of your original investment due to a change in the market price of the CD.
Inflation risk
Locking your money in fixed-rate CDs carries the danger that your money could lose its purchasing power over time if your interest gains are overtaken by inflation.
If the CD is placed in a tax-deferred 401(k) or individual retirement account (IRA), any interest earned on the CD may be exempt from paying taxes in the year it was earned. 2 Instead, you will pay taxes on that money when it is withdrawn from the 401(k) or IRA after you retire.
What happens when a brokered CD reaches maturity?
Once the CD matures, you may have a grace period, established by the bank, to decide whether to renew the CD or withdraw the funds. The bank will pay interest, if any, once the CD matures in accordance with your account agreement and bank policy during the grace period.
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.
Inflation erodes the purchasing power of your money over time, and if your CD's interest rate isn't keeping up with inflation, you're essentially losing money. For example, if your CD earns a 2% annualized return but inflation is running at 3%, you're actually losing 1% of your purchasing power every year.
A callable CD is likely to be called back if broader market interest rates decline, but it's not likely to happen if CD rates rise or remain steady. The CD issuer can call a CD on its call dates, which usually occur every six months from the date you open the account.
If you're in a position to save in today's higher interest rate environment, investments like CDs could help accelerate your savings. CD rates have skyrocketed since 2022: 1-year CD rates have increased more than twelve-fold, with 3-year and 5-year CDs up nearly six-fold and five-fold, respectively.
