Why I’m Using Brokered CDs to Earn More Interest

If you’re looking for a better way to save and grow your money, you could try a high-yield savings account or traditional CDs. However, if you’re comfortable with a little risk, you might consider a brokered certificate of deposit (CD) account instead.

What Are Brokered CDs?

Brokered CDs are time deposit accounts that are sold through a brokerage, not a bank. You can open brokered CDs in a taxable investment account or a tax-advantaged account, like an IRA. The minimum deposit requirement depends on the brokerage. A typical minimum is $1,000 but some brokerages may set the threshold as low as $100.

When you open a bank CD, you deposit money and earn interest for a set time. Interest typically accrues daily or monthly and is credited to your account monthly or quarterly. Once the CD matures, you withdraw the principal and interest earned. Minimum deposits may be $100, $500 or more.

With brokered CDs, interest is paid at regular intervals instead of compounding daily or monthly. Instead of an interest rate or annual percentage yield (APY), the brokered CD has a coupon rate. The CD issuer determines when the interest is paid and credited to your account.

Bank CDs are FDIC-insured, meaning they’re protected if the bank fails. Brokered CDs enjoy the same coverage since they’re the obligation of the issuing bank, but the brokerage you buy them from doesn’t extend additional FDIC protection.

Here are some other differences between brokered CDs and bank CDs.

• Early withdrawals from a bank CD can result in a penalty that’s equivalent to some or all of the interest earned.
• Brokered CDs don’t charge a penalty since you have to sell them to get your money back.
• Selling a brokered CD before the maturity date could result in a loss in value if interest rates are rising.
• Brokered CDs may offer higher yields than bank CDs but earnings aren’t guaranteed.

That last point is one of the main reasons to consider a brokered CD vs. a bank CD, since you may find better rates through a brokerage. But is it worth it?

Which Banks Have the Best CD Rates?

Many banks offer high-yield CDs, competing intensely to offer top rates. We’ve listed some of the best CD accounts to help you find ones that align with your financial goals.

A Look at Saving With Brokered CDs

Having written about brokered CDs before I decided to give saving with them a try. So in March of 2024, I opened two brokered CDs through Vanguard, the same brokerage that holds my SEP IRA for retirement and my taxable investment accounts.

Opening the accounts was easy enough. I reviewed the list of brokered CDs available and selected two:

• One four-month CD with a coupon rate of 5.35%
• One three-month CD with a coupon rate of 5.35%

The minimum investment for each one was $1,000 but I chose to deposit $20,000 apiece into them instead. So how much interest did I earn?

The four-month CD earned $357 while the three-month CD earned $262, for a total of $619 in interest. I didn’t lose any money and I earned a little more than I would have if I’d left my savings in my money market settlement account.

So why did I open these accounts? Purely to experiment and see if I could get a better return compared to my other CD and savings accounts. I wasn’t sure what to expect and so I was satisfied with the interest I earned. As long as interest rates remain on the higher side I’ll likely continue testing brokered CDs as part of my savings strategy.

Brokered CD Pros and Cons

Brokered CDs have some attractive features but there are downsides to consider, as with any type of savings vehicle.

Here’s what I liked about my experience in saving with brokered CDs along with some drawbacks to consider.

How to Open a Brokered CD

If you’re interested in giving brokered CDs a try, it helps to know what to expect. Here are some tips to guide you through the process.

Consider your goals. Why are you interested in opening a brokered CD? What’s your goal for doing so? Asking that question can help you decide if a brokered CD is the best way for you to save and invest your money.

1. Choose the Right Brokerage

If you don’t have a brokerage account already you’ll need to open one to buy brokered CDs. When comparing brokerages, look at the range of investment options and accounts offered, as well as the fees. I prefer Vanguard because their fees are low and their index funds consistently rank as some of the most reliable.

2. Decide How Much to Invest

You’ll need to decide how much of your savings you want to put into brokered CDs. If you’re new to saving with them, you might want to stick to the minimum deposit required until you get a feel for how they work.

3. Compare Terms and Yields

With bank CDs, you typically have to choose a longer term to get a higher rate. Brokered CDs, on the other hand, can offer competitive rates across all terms. You’ll have to decide how long you want to leave your money in the CD and weigh that against the coupon rate you could earn with a shorter or longer term.

4. Decide If You Want Callable or Noncallable CDs

As mentioned, callable CDs may be called in before they mature which could cost you interest earnings. As you compare brokered CDs, you’ll have to decide if you’re comfortable with that added risk for a shot at earning a higher APY.

5. Check the Fees

It’s worth mentioning again that you should pay attention to any fees you might pay with a brokered CD. Keeping fees to a minimum means you get to keep more of your savings.

Here’s one more tip: don’t forget about taxes. Interest earned with a brokered CD is considered to be taxable income, which means you’ll have to give the IRS its fair share. You can defer paying taxes on earnings from a brokered CD by holding them inside a tax-deferred account, such as a traditional IRA.