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.

Disadvantages of a Brokered CD

In particular, buying a long-term brokered CD exposes investors to interest rate risk. A 20-year brokered CD can decrease substantially in price if an investor has to sell it on the secondary market after a few years of rising interest rates.

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.)

While bank CDs can renew automatically, brokered CDs do not. Instead, the principal and interest earned are deposited into your brokerage account at maturity.

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.

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.

If your CD gets called when interest rates drop, you may end up having to reinvest your money in an investment with a lower yield. Potential losses (when sold early). Since callable CDs are usually brokered CDs, you'll have to sell it on a secondary market if you want to get out of it early.

What happens to a brokered CD when the owner dies? ›

If the owner of a CD account passes away, the CD beneficiary can claim that account. This typically means contacting the financial institution where the CDs are held and offering proof of identity. The bank may also need to see a copy of the account owner's death certificate.

The interest is taxable, the IRS says, in the year it is paid. If you've earned more than $10 in interest in a year, the bank or credit union that issued the CD will typically send you a 1099-INT statement. Box 1 shows how much interest you earned that year from the CD.

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 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.

Brokered CDs are issued by banks and sold in bulk to investment firms and brokerages where they become available to investors for purchase. By doing this, the broker brings a lot of money to the bank, which often results in higher APYs than you can get with a traditional CD.

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.

CDs can help accelerate your savings, but they're not always worth it. If there's a chance you'll need access to your money during your CD's term, consider a high-yield savings account or money market account. But if you have a pool of money you can afford to lock up, it may be worth capitalizing on high CD rates.

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.

CDs are one of the safest ways to store money and earn a set rate of interest, which can help you better plan your finances. CDs opened at FDIC-insured banks, or credit unions backed by the NCUA, are guaranteed by the federal government.