Are Brokered CD’s a good idea?

[samclem]

Regarding #1, the easy takeaway is to not buy CDs with money where there is any chance you will need it earlier.

IMO, it's not so much about possibly needing the money. Especially for a long-term CD, the ability to just accept the early withdrawal penalty and get out of the CD to buy one with a higher rate could be very valuable if rates go up. This "insurance" is free if the CD is bought straight from the issuer, but generally unavailable in brokered CDs. If rates go to 5% and I have to find a buyer for a 3% CD with 3 years left on the contract, I'm gonna lose some money (about $55 per $1000 CD value, plus any trading costs). OTOH, the early withdrawal penalty on a 5 year CD at Ally bank is 150 days of interest (about $12 per $1000 CD value, no trading costs).

There's no doubt that brokered CDs are more convenient in many cases.

 

[njhowie]

IMO, it's not so much about possibly needing the money. Especially for a long-term CD, the ability to just accept the early withdrawal penalty and sell the CD to buy one with a higher rate could be very valuable if rates go up. This "insurance" is free if the CD is bought straight from the issuer, but generally unavailable in brokered CDs. If rates go to 5% and I have to find a buyer for a 3% CD with 3 years left on the contract, I'm gonna lose some money (about $55 per $1000 CD value, plus any trading costs). OTOH, the early withdrawal penalty on a 5 year CD at Ally bank is 150 days of interest (about $12 per $1000 CD value, no trading costs).

There's no doubt that brokered CDs are more convenient in many cases.

All true.

Your final statement becomes most important when we're discussing IRAs. Generally, someone is not going to be able to go through the effort of moving IRA money to whatever bank or credit union is offering the best rate/promotion. Further, if you do move IRA money to a particular institution to take advantage of a good rate, when it matures or is time that you no longer want to keep it at that bank, rolling it over usually takes some time and can be a hassle.

If we're taking about cash in a taxable account, I certainly agree - if it's as easy as simply clicking a button to move money to an institution to take advantage of a great rate, and you reserve the ability to exit with only the early cancel penalty, it could be valuable down the road - especially when we are in such a low interest rate environment at this time.

 

[samclem]

A minor point that might interest some people: If a CD is held in an IRA and the owner is subject to RMDs, some (all?) banks allow the owner to withdraw the RMD amount each year without paying an early withdrawal penalty.

I know Ally Bank computes the allowable free withdrawal using all the IRA funds that a person has with them. So, if Mr Smith has $200k in IRA deposits with Ally, and he is 71 years old (26.5 age factor), in that year he could withdraw $7,547 penalty-free from any of his Ally IRA CDs. That saves $90 in EWP if the interest rate is 3%.

I'm not sure if this provision is available with brokered CDs. Again, not a huge amount of dough at today's low rates, but every little bit. It is certainly worth k owing about if you intend to break a CD anyway to get a better rate.