Earn More Interest With Brokered CDs

Your broker may be able to find better CD deals than your bank offers

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Harriet Edleson,

AARP

En español

Published January 17, 2023

If you want to earn 4 percent or more on your money with relatively low risk, investing in certificates of deposit (CDs) can be a way to do so. And if you want to make the job of finding high-yielding CDs easier, you might consider buying them through your broker.

A traditional bank CD is a bank deposit that pays interest for a set period of time — typically one month to five years, although you can get CDs that mature in up to 20 years. A traditional bank CD comes with an early withdrawal penalty if you cash in the CD before its maturity date. The penalty is usually a few months’ worth of interest, but you should always check the terms before you invest.

Because your funds are locked up, a CD typically pays more than most savings or money market accounts. For example, the average one-year CD rate during the week of Jan. 11 was 1.41 percent, compared with 0.26 percent for the average bank money market account, according to Bankrate.com.

But those are just average yields. The Federal Reserve has been raising short-term interest rates since March, 2022, pushing its key fed funds rate from 0.25 percent to a range of 4.25 to 4.5 percent in December 2022. As a result, CDs are sporting higher yields than they have in more than a decade. For example, as of this writing, many top-yielding one-year CDs yield more than 4 percent. “We’ve been waiting for rates like this for more than a decade,” says Rob Williams, managing director of financial planning and retirement income at the Schwab Center for Financial Research.

Bank CDs versus brokered CDs

A brokered CD, as you might suspect, is sold by a brokerage, such as Fidelity or Charles Schwab. The broker does not issue the CD, which is issued by a bank or credit union. The broker simply markets the CDs to its customers and collects a fee from the banks for its services. The brokerage can buy in bulk, so banks usually offer brokers higher-yielding CDs than they would to small savers.

Because banks issue the CDs, the interest and principal are insured up to $250,000 per account per bank by the Federal Deposit Insurance Corporation (FDIC). You may be able to insure even more, depending on the type of account and how the account ownership is structured. FDIC insurance makes CDs some of the safest investments on the planet.

You will typically receive all the interest at maturity for CDs that mature in a year or less. For CDs with longer maturities, you’ll get interest at set intervals, such as monthly, quarterly or semiannually. Interest is not compounded.

Pros and cons

Brokered CDs normally don’t charge an early withdrawal fee, but if you want to cash in the CD before it matures, you must sell it on the secondary market. Risk enters here. If interest rates have risen since you bought your CD, you may get less money on your sale than you invested. Conversely, if rates have fallen, your CD yield will look attractive to new buyers, and you could get more from your CD sale than if you had held it to maturity.

Convenience is one big plus for brokered CDs. Rather than calling various banks around town or across the country, you can choose from a menu of hundreds of CDs with a wide range of yields and maturities. With one brokerage account, you can buy brokered CDs from more than one bank, says Mark Byelich, principal with Attleboro Wealth Management in Yardley, Pennsylvania.

One caution: Check to see whether the brokered CD you are considering is callable or not. Callable means the bank can call back the brokered CD before it reaches its original maturity date. More and more brokered CDs are callable, says Ken Tumin, senior industry analyst at LendingTree and founder of Deposit Accounts by LendingTree.

Part of a portfolio

Whether you’re five years away from retiring or already retired, consider your overall financial situation to help you decide whether a brokered CD is right for you.

Before you buy any CD, brokered or otherwise, be sure you have your emergency and rainy day funds in place. You don’t want to incur a penalty or sell a CD before it matures should you have an emergency. Financial advisers typically recommend having one to two years’ worth of living expenses in a high-yield savings account or another liquid account that won’t hit you with early withdrawal frees. The rainy day fund is for small financial shocks, such as a car or appliance repair. Your emergency fund is typically larger and for situations such as a job loss or a health shock.

Then, figure out your cash flow needs. While brokered CDs are not for everyone, they can play a role in retirement savings. If you have funds that you won’t need for one to five years, or have funds you plan to use for a specific short-term goal, brokered CDs can be a place to invest.

Laddering brokered CDs

One strategy for investing in CDs is creating a ladder — meaning you purchase several CDs with different maturity dates so that they will come due at regular intervals — say, every three months.

In a typical brokered CD ladder, for example, you buy a three-month CD, a six-month CD, a nine-month CD and a one-year CD. As the CDs come due at different times, you will have cash if you need it for any reason. “You will have a cushion of cash to spend so you don’t have to sell stocks,” Williams says. If you don’t need the cash when your CD matures, you can simply reinvest each CD in a one-year CD so that you’ll continue to have a CD maturing every three months.

Be aware that interest from CDs, brokered or otherwise, are taxed as regular income. Investors are required to pay both state and federal income tax on the interest accrued in a particular year.

Short-term goals

Alternatively, brokered CDs can be a way to maximize the interest rate on funds you are saving for short-term goals such as the purchase of a home or vehicle.

For example, if you are planning to buy a new vehicle within the next year, and have the cash to pay for it, you can purchase a nine-month or one-year brokered CD through a brokerage account. You will know how long the money is locked up and at what rate. If you’re saving for a $20,000 car and you put it into a 4.5 percent CD, you’ll have $900 in interest in one year, which could go a long way toward paying for gas.

Finding a suitable time frame for you and a creditworthy bank or credit union from which to buy are essential when shopping for brokered CDs.

“It’s not always about the highest return,” Byelich says. With the right brokered CD, you can get what you need “comfortably, safely and with certainty.”

If you have more than one brokerage account, you can compare the available rates each offers or, with one brokerage, you can compare rates for various specified time periods. You can shop for the right time frame and yield for you, Schwab’s Williams says.

“When you need the money is as or more important than the return on it,” he adds. “[Brokered CDs] are attractive if you don’t need the money to pay everyday bills.”

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Harriet Edleson is a financial journalist who has written for The New York Times, The Washington Post and MarketWatch.