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Review of Some Brokered CD Rates and Features

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Review of Some Brokered CD Rates and Features

If you are looking for the highest CD rate, you may want to consider brokered CDs. Many times CDs offered through brokerage firms have rates lower than what you could get by buying the CDs directly at banks or credit unions. However, sometimes you can get a higher rate for a specific maturity with a brokered CD. Readers commented on Friday about 10-year brokered CDs at Fidelity and Vanguard that have higher rates than what you can get directly at banks or credit unions.

I checked this morning (7/30/2012), and Vanguard and Fidelity are currently offering new issue brokered 10-year CDs from GE Capital Retail with a 2.60% yield.

In today's awful interest rate environment, this is a high rate. The highest rate from a nationally available direct CD is 2.50% APY from Patelco Credit Union (7-year term). The highest at a bank is 2.25% APY at Discover Bank (10-year term).

The deals are not as good for shorter-term brokered CDs. For example, Vanguard lists a yield of only 0.60% for 1-year CDs. You can get a direct CD for a 1-year maturity with a yield over 1.00% at several internet banks.

To see the latest rates at Fidelity, go to the Fidelity CD page and click on the "See new issue CDs" link at the top of the right menu.

To see the latest rates at Vanguard, go to the Vanguards Bonds & CDs page and click the "Buy CDs" link at the top of the "CD Yields" table.

You'll need a brokerage account to buy these brokered CDs.

Brokered CD Downsides

It should be noted that brokered CDs have some downsides as compared to direct CD (besides lower rates):

One important downside to brokered CDs is that you have to sell it on the secondary market if you need the money before maturity. You could lose a significant amount of principal if you have to sell it. You typically would lose more if interest rates are rising.

All of the CDs offered by Vanguard and Fidelity are FDIC-insured. However, it's important to understand that if you purchase a CD at a premium on the secondary market, the amount of the premium is not FDIC insured.

With a brokered CD, you will not receive a certificate or other evidence of ownership of the CD from a bank. In short, you may have to trust your broker in maintaining the proper documentation to ensure your deposits will qualify for FDIC coverage if the issuing bank should happen to fail. DA reader Over6T described this issue in a comment from a previous brokered CD blog post. This issue has also been discussed at length in this Bogleheads thread.

If the issuing bank should happen to fail, there may be some issues even if your broker has all of the proper documentation for the FDIC. There can be a long delay before you can get access to the money. The FDIC needs the brokers to provide detailed customer account information which can take more than a month. A reader commented in this blog post about a brokered CD through Schwab that was held by a bank that failed in 2009. He was told he would have to wait up to 6 weeks for his money.

It's not necessarily a downside, but interest on brokered CDs is typically not compounded. The regular interest payments are paid into your core brokerage account.

Also, you should not expect that your brokered CD will be automatically renewed when the CD matures. This may be considered an advantage over most direct CDs since you don't have to worry about missing the grace period.

Brokered CD Advantages

Brokered CDs do have some advantages over direct CDs.

If you are concerned about the CD disclosures from banks which can restrict your right to an early withdrawal, you won't have to worry about this issue with a brokered CD in which you can sell in the secondary market. This won't protect you from a loss, but at least you will have access to your money.

For those who place a high value on simplicity, brokered CDs can have a big advantage. You can buy brokered CDs without all the paperwork that's required when you buy a direct CD. Also, with brokered CDs you can manage multiple CDs issued by different banks from one brokerage account.


  Tags: CD rates

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Comments
10 Comments.
Comment #1 by Bozo posted on
Bozo
As Ken noted, lack of compounding might be a minor issue for most, but it does factor into yield. Over a ten year period, 2.6% compounded on a $100,000 CD yields $29,656 in interest. Without compounding, the interest is, of course, the APR of 2.6% ($26,000). For retirees harvesting interest payments anyway, brokered CDs with higher APRs are ideal. Folks still accumulating, less so. As a practical matter, if you are not spending the interest, you face re-investment decisions every month. I suspect most folks just default to their sweep or money-market accounts, where (today) yields are quite low.

8
Comment #2 by LA GOLFER (anonymous) posted on
LA GOLFER
IF YOU HAVE SEVERAL BROKERED CDs IN YOU BROKERAGE ACCOUNT (SAY AT FIDELITY)

THEN, DO YOU HAVE TO TAKE THE REQUIRED MINIMUM DISTRIBUTION FROM EACH OF THEM?

(ASSUMMING YOU ARE OVER 70 1/2--AND THIS IS NO COUNTRY FOR OLD MEN)

THANKS

1
Comment #4 by Anonymous posted on
Anonymous
#2 - If you have several brokered IRA CD's at Fidelity, you do not have to take a portion of the annual RMD from each one....you can choose among the several, either all from one, a part from two or more, etc. The main thing to insure is that the total required RMD is taken, whether it be from only one IRA CD or multiple IRA CD's.  

6
Comment #3 by Anonymous posted on
Anonymous
Keep a liquid account to take the RMD from.  It's one big account.  So the CDs can stay intact.

4
Comment #5 by Anonymous posted on
Anonymous
Oh, contrare to the statement that you need to have available cash withheld from a long-term CD to meet the IRS requirements for each yearly MRD withdrawal. With at least some CU's, you can place ALL of your monies in a long-term CD and still get your yearly MRD's satisfied as well. Just ask the CD agency if they would set up a yearly, automatic, MRD payment.

I just did (last week) a 7 year CD with Patelco, and also talked at length with the Air Force CU as well, and I found-out that those two agencies would automatically set up a MRD withdrawal payment for me every year taken from my CD account, WITHOUT BREAKING THE LONG-TERM CD CONTRACT!

Based on that information, I would certainly imagine that other CU's would do the same if asked....I was surprised at that information as I, too, had thought that I needed to hold back cash for the yearly MRD's! BUT MAKE SURE YOU ASK WHEN SETTING UP THE CD, as that bit of information was not volunteered until I asked about it!

5
Comment #7 by Anonymous posted on
Anonymous
#5 - Good info but just a bit more, if you will. Is your entire IRA account(s) with the same institution? I am simply trying to clarify if your automatic, penalty free RMD withdrawal covers only the accounts in that specific institution or also includes IRA accounts in other institutions as well. Since I have CD IRA accounts in five different institutions, your answer could possibly be helpful to me and all those with IRA's in multiple instututions.

2
Comment #6 by Anonymous posted on
Anonymous
Pentagon FCU also will take the RMD from the LOWEST interest CD in your TIRA. They also give you the option of taking 100% of the RMD amount on 1 Jan or 1 Dec of the year or with a monthly incremental option. Additionally if rates rise fast (ha ha) you can break the IRA CD without penalty and put it into a higher rate CD (I believe they limit this to one time on each CD during the term).

4
Comment #8 by Anonymous posted on
Anonymous
What works for me at age 77 is I get from my accountant or those who do their own taxes each year. I add the value of all my retirement accounts as of December of the previous year and then figure based on the RMD chart what I owe for the coming year. I remove the amount in December of the year due and get interest up until it is removed. If you have automatic funds withdrawn you loose interest for the year. I am lucky as I have many higher interest locked up CD's from 5% to 2 1/2%. I take the RMD from the lowest yield CD.

I also do estimated taxes based on previous income for the year. It works well for me and I haven't had a problem asking the institution to give me a check for my RMD. Patelco is very flexible and will give you any amount without penalty. The IRS laws based on those over 70 1/2 demand that any institution give you the amount to satisfy your RMD without breaking any long term CD.

You can use the system that works well for you.

4
Comment #9 by Anonymous posted on
Anonymous
#8 or anyone else.  Please show me what IRS document states it is illegal for a bank to charge a "early withdrawl penality " to satisfy a RMD.

Thanks

1
Comment #10 by Anonymous posted on
Anonymous
I am not aware of any law barring charging you an early withdrawal penalty to satisfy the RMD when your IRA term has not matured.  For most banks, they will waive the early withdrawal penalty if you are over 70 1/2 years and must take out a RMD.  But they don't have to waive the early withdrawal penalty.  For the IRAs that I have seen, the custodian bank will not penalize you for taking the RMD even if the term of the CD has not matured.  However, they can charge you a penalty if the RMD has been issued and you make another withdrawal in the same year later.

3