Not all CDs are the same…

A 90-second read by Anthony Benante: When investing in a Certificate of Deposit (CD), you may have more options than you think.  You can purchase a CD at a local bank or you can purchase CDs in your investment accounts (such as a taxable account, IRA or Roth IRA, etc.).  These are typically known as Brokered CDs.  Even though the CDs you get from the bank and the CDs in your investment accounts are called Certificates of Deposit, you should know that there are differences.  In either case, we would recommend that the CDs you invest in are fully covered by FDIC insurance.  If you would like to learn more about FDIC insurance coverage, feel free to ask us or you can go online to www.fdic.gov.

Purchasing CDs from your local bank: If you were to purchase a CD from a local bank that is FDIC insured, you would receive interest and would get your principal investment at maturity. If you receive regular statements, the value of your CD would most likely never change because it is not tradeable.  If for some reason you wanted access to your funds prior to maturity, you would most likely be subject to a penalty, such as 90 days’ worth of interest (but this should be verified individually). Other factors to consider are that local banks can offer “teaser rates” (rates higher than the market) for CDs to attract deposits, but those rates may not be available after your CD matures.  Unless you want to consistently move your money from institution to institution, using time and effort, you will be subject to the rates being offered only by your bank.

Purchasing Brokered CDs in your investment accounts: Purchasing CDs in your investment accounts may offer added capabilities, but you will need to verify that the CD is covered by FDIC insurance, because not all are.  One of the added capabilities is that the Brokered CD can be traded, meaning you can sell it before it matures. Since it is tradeable, the price of your CD on your investment statement represents an approximate market value.  This means that you may see the value of your CD go below or above your original principal investment.  At maturity, you will receive the repayment of your original principal amount and any interest due, regardless of market conditions.  If you do need to access cash by selling the CD prior to maturity, though there is no penalty, the price you receive is set by the market.  This means you may receive less than your original investment, but you could also receive more. In your investment account, you can review Brokered CD offerings from many institutions all in one place. You also have the ability to choose the CD with the best rate for the maturity date you are interested in, instead of being locked into one institution. Also, for larger accounts, it is much easier to keep your CD exposure within FDIC insurance limits because you can hold CDs from several institutions within the same account.

As you can see, there are several factors to consider when investing in CDs. This is not a specific recommendation to invest in CDs.  Please consult with your financial professional before making any investment decisions. For clients, we are happy to use our expertise to help maximize investment decision-making. If you have any questions, feel free to reach out to your Baron Team.