Brokered CDs: Frequently Asked Questions (FAQ)

Larry, Managing Editor

Updated on:

Brokered CDs are generally compared to traditional bank CDs. We answer our readers’ frequently asked questions in this overview.

How does a certificate of deposit work?

A certificate of deposit (CD) is a type of fixed-term investment offered by banks and credit unions. When an investor purchases a CD, the issuing bank guarantees a rate of return based on the amount of the CD and the length of the term. The money invested in the CD remains locked in for the agreed-upon term, which can range from a few months to several years.

Why are brokered CD rates higher than traditional bank CDs?

A brokered CD (or brokered certificate of deposit) often offers higher rates than a traditional CD. Brokered CDs are CDs sold by banks on a brokerage, which then sells them to its customers. Because of the competition in the secondary market, brokered CDs often pay higher rates to attract customers.

Why is my CD losing money?

The value of a brokered CD can fluctuate in the secondary market due to changes in interest rates. If interest rates rise, the value of existing CDs (which have lower rates) can decline. In a rising rate environment, there will be more buyer demand for new CDs with higher rates compared to the CD you are selling, which will provide lower rates. However, this market value is irrelevant unless you plan on selling the CD before its maturity date. If you hold the CD until maturity, you will receive the full amount of your initial investment plus the agreed-upon interest.

How can a brokered CD be cashed out?

A brokered CD can be cashed out or sold in the secondary market before its maturity date. However, doing so may result in a loss if the CD’s value has decreased due to rising interest rates. If you hold the CD until its maturity date, you will get the full amount of your initial investment plus the agreed-upon interest.

Is there an early withdrawal penalty for redeeming a brokered CD early before maturity?

No, to withdraw money early with a brokered CD, you have to sell the CD on the secondary market. The broker will usually charge a fee for you to sell your CD. You should also be aware of whether your CD will lose value when sold, which can happen in an environment with increasing interest rates.

With a bank CD, there is typically an early withdrawal penalty for redeeming before its maturity date. The penalty can vary depending on the terms of the CD and the broker, but it is usually a percentage of the interest earned or a set number of months’ worth of interest. 

How safe are brokered CDs?

Brokered CDs are considered to be a safe investment as they are insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000 per account owner. However, it’s important to note that while the principal and the interest rate are guaranteed if held to maturity, the market value of the CD can fluctuate if sold early.

Are brokered CDs FDIC insured?

Yes, brokered CDs are FDIC insured. The FDIC insures CDs up to $250,000 per bank per depositor. If the bank issuing the CD fails, the investor’s money is protected up to the insured limit.

Are there fees for opening a brokered CD?

Typically, there are no fees associated with opening or maintaining a brokered CD. However, brokerage firms may charge a commission for selling the CD, which could indirectly affect the yield.

Where can I buy a brokered CD? How do I find a brokered CD broker?

Brokered CDs can be purchased from most financial institutions in the United States, including brokerage houses and banks. It’s important to shop around and compare rates and terms from different brokers to find the best deal.

Is a certificate of deposit a good place to keep emergency money?

Yes, a certificate of deposit can be a good place to keep emergency funds. CDs typically offer higher interest rates than savings accounts, and the fact that the money is locked in until the maturity date can prevent impulsive spending. However, keep in mind that if the CD is cashed out before the maturity date, a penalty might be incurred.

What will happen to my CD if the issuing bank collapses?

If the issuing bank of a CD collapses, the FDIC insures the money invested in the CD up to $250,000 per depositor.

How are CDs taxed?

The interest earned on a CD is taxed as interest income. At the end of the tax year, the issuing bank will provide the account owner with a 1099-INT form, which reports the interest earned on the CD. This interest income must be reported on your tax return and is taxed at your marginal tax rate.

Can I buy a CD inside an IRA or 401k?

Yes, you can buy a CD within an IRA or 401k. However, unless you are at retirement age, most financial planners advise against this because CDs typically offer lower returns compared to other investment options that might be more suitable for long-term growth.

To what extent is a CD’s interest rate guaranteed?

The interest rate of a CD is guaranteed as long as the CD isn’t callable. This means that the interest rate agreed upon at the time of purchase is the rate you will receive until the CD reaches its maturity date.

Are brokered CDs callable?

Some brokered CDs are callable, which means that the issuing bank has the right to “call” or terminate the CD after a set period, returning your principal and any interest owed. Callable CDs typically offer a higher interest rate to compensate for the call risk. However, if interest rates fall, the bank may call the CD and reissue it at a lower rate.