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Differences between Brokerage and Bank CDs

Originally published February 11, 2010 at

Robert Schmansky, CFP(r)

In a prior article I wrote about ways to supercharge your cash and still keep it safely within FDIC-insured limits.

One way we often recommend to increase the returns on your brokerage money market is by creating a certificate of deposit (CD) ladder. A CD ladder is a portfolio of CDs maturing at different intervals. Since the CDs eventually will be of a longer-term nature, the opportunity to increase your yield over short-term rates exists.

An easy way to build a CD ladder is keep all of your CDs in one place. Buying CDs from multiple banks within your brokerage account is one simple way to do this and to spread your money over multiple institutions.

While a brokerage CD is the same as any other CD, there are differences in holding your CDs at the bank or within your brokerage account.

Advantages of bank CDs:

  • If you are a CD shopper, you can find deals by moving between banks for greater yield. Often directly held CDs will pay a higher yield and you have many more choices.

  • If you need the funds prior to maturity, you will know what you will get for them. Usually it is a penalty of one to three months of interest payments.

Advantages of brokerage CDs:

  • Simplicity. All of your CDs can be held in one place, eliminating multiple accounts.

  • FDIC coverage limitations apply to the underlying bank issuing the CD. You can purchase CDs from multiple banks within your brokerage account that together surpass the FDIC insurance limit (so long as individually the total amount of money you have with a bank is under the limit).

The penalty for selling your brokerage CD early is that you will receive what the market will pay, which is heavily determined by where interest rates have gone since it was issued. If rates have dropped, it is possible you would get back all of your principal or more, since your interest payments are greater than what a new CD will pay. However, if rates have risen, the value your CD may be less than the face amount of the CD.

When purchasing a brokerage CD, be sure to check if you are purchasing a newly issued CD or if the CD is being sold to you by another investor on the market. Since the price of the CD will change with interest rates, if you are not limiting your search to new CDs, you may pay a premium to buy a CD on the market. That premium will not be covered by FDIC-insurance limits; only principal and interest is covered.

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