What are brokered CDs and should you get one? (2024)

If you want to boost your savings while keeping your financial portfolio safe, a brokered CD might be an option worth considering.

A brokered CD is a type of CD you can buy through a broker or brokerage firm rather than a bank. With a brokered CD, you can get most benefits a traditional CD offers plus take advantage of longer terms and higher interest earnings. At the same time, it isn't a perfect option for everyone. You should be aware of potential pitfalls before purchasing a brokered CD.

Below, CNBC Select explains how a brokered CD works, its advantages and drawbacks and whether you should consider investing in one.

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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.

For example, at the time of this writing, Fidelity is offering 4.6% APY on brokered CDs for term lengths between nine and 18 months. Charles Schwab advertises even higher returns of 4.7% APY for maturity ranges between 10 and 18 months. To compare, First National Bank of America CD, CNBC Select's pick for the best one-year CD, earns 4.4% APY as of writing.

To buy a brokered CD, you'll need a brokerage account. Further, a broker sets a minimum investment amount — typically, $1,000 — and minimum increments for adding funds. If you're buying a new-issue CD, or a CD available to buy for the first time, there are usually no upfront costs. If you're buying on the secondary market, meaning you're purchasing from people selling their brokered CDs, your broker might charge you a fee.

You can buy CDs from different banks and keep them in one brokerage account. This can be helpful if you have a large amount to invest and would like to manage all of your CDs in one place. FDIC limits federal insurance to $250,000 per customer at an insured bank. Since your brokerage account can hold CDs from multiple banks, you can protect amounts beyond a single bank's FDIC limit.

When buying a brokered CD, pay attention as to whether it's callable. Banks often offer higher yields on these CDs, but there's a caveat. If you buy a callable brokered CD, the bank may end it before it reaches the maturity date. For example, this might happen if interest rates are falling. In this case, you'll get your initial deposit back, as well as any interest you'll have earned — but you won't get the full return you've been expecting.

After you purchase a brokered CD, you can leave it alone until the maturity date or opt to sell it. Note that this can be risky as a CD can lose some of its value, especially in a rising rate environment. When interest rates on new CDs are going up, you might face less demand for CDs you have purchased at a lower APY. Plus, you'll likely pay sales fees for trading your CD.

Brokered CDs and traditional CDs share many similarities: both are issued by a bank (meaning they're both protected by FDIC insurance), earn fixed interest and come with specific maturity dates. However, there are several key differences.

• Terms: A typical bank CD's term length is between three months and five years. A brokered CD can offer much more flexibility with terms ranging between one month and 20 years.
• Interest distribution: A bank CD allows you to take advantage of compound interest and pays all of it at the maturity date. Brokered CDs, on the other hand, don't compound interest. Some send interest payments in regular periods, such as monthly or twice a year, and others — at maturity. If you want to earn on your yield, you'll have to reinvest the interest yourself.
• Early withdrawal: If you withdraw money early from a bank CD, you'll usually pay a penalty worth months of interest. With a brokered CD, you sell the CD instead and might only need to pay a small fee.

Before you commit to investing in brokered CDs, consider their benefits and disadvantages.

Pros

• Brokered CDs offer greater liquidity. The option to sell the CD at the secondary market allows you to pull the funds out early without having to worry about high penalties.
• You can take advantage of longer terms. You can purchase a brokered CD with a term length as long as 20 years — or even 30 years, in some cases — and keep earning a fixed interest rate.
• You can keep multiple CDs in the same brokerage account. This can help you protect larger amounts of money, provided the issuing banks are insured by the FDIC.
• You can earn higher returns. In general, brokered CDs earn higher APYs than bank CDs. However, this might not always be the case. Like with any financial products, it pays to shop around.

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.
• The issuing bank can call a brokered CD. This may cause you to miss out on potential future earnings.
• Interest on brokered CDs is not compounded. If you want to earn on your interest, you'll have to reinvest it in another account.

While not an ideal choice for everyone, brokered CDs can make a lot of sense in certain cases.

This is especially true if you're looking to invest in a CD but have more than $250,000 to deposit. In this situation, you can purchase multiple CDs through one brokerage account and have all of the funds covered by federal insurance.

A brokered CD may also be a good choice when you're looking for more flexibility than a traditional CD can provide. For instance, if you want more term length options or don't want to worry about penalties in case you need to withdraw the money early, a brokered CD can be a good choice.

On the other hand, if you want something simpler and more predictable, you might want to stick with a traditional CD. Brokered CDs can appear more complex and some terminology may be new to you if you haven't traded investments before. Plus, there's the risk of losing on potential value, depending on when you sell or if the bank decides to call the CD.

Opening a brokered CDcan be a good idea if you're saving for a large purchase and want to take advantage of longer term lengths. Although they offer greater liquidity than traditional CDs, for the easiest access to your cash —such as if you're saving for youremergency fund — you'll want to go with a high-yield savings account instead.

Currently, there are high-yield savings accountsthat offer APYs of over 4% and charge no monthly fees. Here are CNBC Select's picks of thebest high-yield savings accounts:

• Best overall: LendingClub LevelUp Savings
• Best for earning high APY: UFB Portfolio Savings
• Best for no fees:Marcus by Goldman Sachs High Yield Online Savings
• Best for checking/savings combo: Ally Online Savings Account
• Best for easy access to your cash:Synchrony Bank High Yield Savings
• Best for earning airline miles:Bask Bank Interest Savings Account
• Best for welcome bonus: SoFi Checking and Savings
• Bestifyouwantextrahelpsaving:Varo Savings Account

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Information about the Synchrony Bank High Yield Savings Account has been collected independently by CNBC and has not been reviewed or provided by the bank prior to publication.