Exploring Brokered CDs

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I recently added some brokered CD options to our Best Savings Accounts list and thought it worth a quick write-up about these accounts. Often the best traditional CDs will have the highest rates, yet recently the brokered CDs rates seem to be running highest.

Brokered CDs are much like traditional CDs purchased through a bank, except that these are purchased through a brokerage account instead, through the likes of Fidelity, Schwab, Vanguard, etc. You’ll buy and manage the CD from within your brokerage account and the funds are held by an outside bank. When purchasing the CD, the brokerage will offer a list of rates from various banks and you’ll choose one to buy.

Many or all of these banks are FDIC insured, just double check on the institution before completing the purchase. In fact, buying brokered CDs allows you to keep tabs on all of your funds in a single brokerage login, all while holding CDs across multiple financial institutions. This is favored by larger investors as an easy way to bypass the $250,000 FDIC limit through CD purchases of $250,000 per bank at multiple banks.

These CDs can be purchased in various lengths from as little as a 1-3 months to as much as 10+ years. Be sure to note whether the brokered CD is a standard CD or a ‘callable’ CD. The latter will usually offer higher rates, but it allows the bank the option to close out the CD earlier than the time allotment. You’ll still get your full interest rate for the months deposited, but you lose the lock-in length should the bank decide to call the CD. The standard ‘non-callable’ CD is fully locked in like a traditional bank CD.

Brokered CDs never automatically renew, and the funds + interest will be deposited into your brokerage settlement account. An interesting feature of brokered CDs is that you have the ability to resell them midterm on the secondary market. A traditional bank CD can usually be broken midterm with some kind of penalty from the bank; with brokered CDs you can sell it off at whatever the going rate is on the secondary market if you don’t want to keep it to term.

There is no cost to buy new issue brokered CDs with Fidelity, Schwab or Vanguard. (Purchases and sales on the secondary market will incur a fee.)

Brokered CDs are sold in $1,000 increments with a minimum $1,000 deposit and maximum of $250,000 per purchase. If you want to try out brokered CDs, you can easily buy a small $1,000 CD for a short 3-month term to test the waters. Feel free to discuss further in the comments below.



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