Are Brokered CD’s a good idea?

[FireCat]

Good day from Norway. While on a cruise with my DW I was thinking about investing in CD’s for my fixed income portion of our portfolio. I know how CD’s work outside a brokerage account, but I am not sure that buying them and setting up CD ladders inside my IRA’s makes sense. Anyone have any perspectives on doing this? The advantage as I understand it are I don’t have to pay taxes on money if I sell BND in my tIRA and purchase CD’s. They all seem to be callable? CD’s which seems like a bad idea for the investors and a good idea for the banks.. If I plan on keeping them until maturity and with FDIC insurance is there any additional risks to worry about. Any thoughts or perspectives would be appreciated

[Ready-4-ER-at-14]

Hi FireCat hope the cruise is going well and is memorable.

I purchase CDs within several brokerage accounts and have owned them in taxable and tax deferred and roth accounts.

Usually a choice of investment vehicles depends on the purpose and needs of the people.

First your tax situation and why or when you need the money. I assume you are being taxed under the US tax code. I also assume you want your investment as safe as possible and as high an interest rate as possible. I would next wonder how long till I needed the money.

If I could get a higher interest rate for a short term fdic insured CD that was callable I might do it if I wanted that money soon anyway. I actually never used callable cd's.

Also as to the issuing company/bank I tend to buy no more than is fdic insured should they go belly up.

Then finally will I be spending this money or reinvesting it. If I need chunks of cash, I buy the best yield for the time frame involved to make a bond/cd ladder.

I compare cd rates to secondary market treasuries and look at agency bonds as well.
Agencies are theoretically not as safe but few if any have failed if my knowledge is correct.

I use laddered cds/treasuries to insure cash is there during crucial years like when kids were to be in college or final years between possible retirement and turning on social security.

If I don't need the cash I buy the best safe yield as far out as possible. Risk of this though is yields go way up on new cd's and bonds and you or heirs sell before the things mature and you take a bad haircut. Not quite exact math to follow, if you buy a cd out 10 years paying 4% and tomorrow the interest paid jumped to 5% new money would make your old cd worth 1% less for each of ten years so rule of thumb estimate for me if I sold it I would get only about 90% of my money back.

[BeachOrCity]

Keep in mind two things. 1. CD in a brokerage can’t be redeemed with early withdrawal penalty. Basically you have to sell it. Depending on how interest rates move from when you purchased it you can either lose or make money. 2. In a brokerage account the CD doesn’t auto renew the way it does in a bank.

[GenXguy]

Quote:

Originally Posted by FireCat CD’s which seems like a bad idea for the investors and a good idea for the banks.

Why bad? I have several CDs and don't consider them bad. I use them in place of part of my bonds in my AA. My bond funds will lose money when interest rates increase while my CDs are locked in to the same interest rate until maturity. Unfortunately, interest rates have actually come down over the last several months.

[pb4uski]

IMO owning a CD in an IRA is no different from owning a Treasury bond. Both are credit "risk-free"/full faith and credit as long as you stay within the FDIC limits, both pay periodic interest, both have interest rate risk, etc.

I don't have any because rates haven't been very attractive to me, but if you plan to hold to maturity I think they are fine for an IRA.

I have held bank CDs in my IRA. Both have been "specials" that had an attractive rate. However, getting the money in and out is a hassle but in my case both have been 5 year CDs so the hassle is only once every 5 years.

[njhowie]

Quote:

Originally Posted by GenXguy Why bad? I have several CDs and don't consider them bad. I use them in place of part of my bonds in my AA. My bond funds will lose money when interest rates increase while my CDs are locked in to the same interest rate until maturity. Unfortunately, interest rates have actually come down over the last several months.

I think the thought was that "callable" CDs are a bad idea for the investor and a good idea for the bank, which is somewhat true. It entices the investor to purchase with a higher yield over the life of the CD. However, the bank has the option of redeeming it early if rates drop ... where they can refinance for less, but leaves the investor getting his/her money back exactly when rates are lower.

That being said, I have a fair number of callable CDs. I fully understood the possibility of them being called, and I have had a number of them called in the past 2 months. However, at the time of purchase, my thought was that if they called them, it would make the effective yield significantly higher than if I had purchased the non-callable CD of equivalent maturity. I still stand by that view.

At this time, new issue CDs, whether callable or non-callable are not as enticing as they were 6 to 9 months ago. However, even with lower yields, they are still significantly higher than they were just 3 and 4 years ago.

[gwraigty]

I've bought new issue brokered CDs many times, both callable and not. Sometimes the callable CDs will continue to run past the first call date. As long as you realize they may not run through maturity, you won't be disappointed. Are they all really callable? I haven't checked in quite some time.

[njhowie]

Quote:

Originally Posted by gwraigty Are they all really callable? I haven't checked in quite some time.

Currently at Fidelity, about half of those from 2 to 6 years, and everything greater than 6 years.

[Earl E Retyre]

I purchase brokered CDs in my vanguard nontaxable account - but they are not callable.

I just looked up one of the CDs I purchased. It was on 1/2019 for $150k on a 3.5% 5-year CD. Since interest rates have now dropped, Vanguard is showing that the CD now has a gain of $6,000. So, about 6 months later and I assume this means I could sell the CD for a 4% gain. Not bad for 6 months return on an FDIC insured CD.

I am not going to sell and am happy to continue to receive my 3.5% annual tax free income. Slow and steady wins the race. Of course, if interest rates go up within the next 5 years then the value of the CD would decline if I needed to sell it. As long as I keep it for 5 years, I am guaranteed my principle back plus the 3.5% annual interest.

[gwraigty]

Quote:

Originally Posted by njhowie Currently at Fidelity, about half of those from 2 to 6 years, and everything greater than 6 years.

OK, you made me look.

I'd recommend that OP take a look at the JP Morgan Chase Step-Up CD maturing 1/31/2027. Worst case is, it gets called 7/31/2020 and effectively becomes a 1 year CD @ 2.35%. That's better than the 1 year CD rates. It's callable annually and steps up to 2.75% on 7/31/2025, and 3.50% on 1/31/2027. Probably a slim to none chance of it going all the way to maturity, but still worthwhile.

I've bought step-ups before. They do sometimes step-up, at least once, before being called.

I wouldn't bother with those callable CDs that have a higher coupon of only .05% vs. the non-callable CDs, and are callable annually.

[njhowie]

Quote:

Originally Posted by gwraigty OK, you made me look.

The offerings are pretty drab compared to just six months ago.

Quote:

I'd recommend that OP take a look at the JP Morgan Chase Step-Up CD maturing 1/31/2027. Worst case is, it gets called 7/31/2020 and effectively becomes a 1 year CD @ 2.35%. That's better than the 1 year CD rates. It's callable annually and steps up to 2.75% on 7/31/2025, and 3.50% on 1/31/2027. Probably a slim to none chance of it going all the way to maturity, but still worthwhile.

Ditto - that does look like a good one considering the current rates for the steps.

Quote:

I've bought step-ups before. They do sometimes step-up, at least once, before being called.

Same here. However, during the past few months, they have been very aggressive calling the step coupon CDs.

I just quickly went through mine, and I have a few step CDs which haven't been called yet.

Here are the CUSIPs - pull them up on Fidelity and have a look - some of the rates at the steps are pretty wild - guaranteeing they will be called early:
48126XH24
05573JJP0
40434Y4L8
48126XH32

[audreyh1]

For buying CDs in an IRA I would definitely buy brokered CDs (probably new issue) because it’s a royal pain opening up additional IRAs and rolling over funds.

[daylatedollarshort]

I buy FDIC brokered CDs and have for years with no issues so far. Most of our CDs are from foreign banks as they tend to pay higher rates. But as long as they are FDIC insured I don't foresee any problems. Plus we spread our purchases around between different banks so if there was an issue we don't have too much invested at any one bank.

[OldShooter]

Brokered CDs are fine. Effectively they are just another government-backed security when under the FDIC guarantee limits. As easy to buy as the govvies. But they are a hassle and potentially expensive to sell before maturity. Treasury bills and notes are reasonable options usually at very slightly lower yields. So is a slightly lower yield a good trade for liquidity? It depends on your situation.

[pb4uski]

Quote:

Originally Posted by OldShooter Brokered CDs are fine. Effectively they are just another government-backed security when under the FDIC guarantee limits. As easy to buy as the govvies. But they are a hassle and potentially expensive to sell before maturity. Treasury bills and notes are reasonable options usually at very slightly lower yields. So is a slightly lower yield a good trade for liquidity? It depends on your situation.

Do you think the interest rate risk would be similar?

I guess I would view both as liquid, but with CDs more thinly traded than Tresasuries, Treasuries are more liquid.

[Al18]

Nothing wrong with brokered CD in an IRA. A year or two ago bond funds were yielding 1% per year, so I switched to CD's.



Note the interest is not componded on a brokered CD. The interest just appears in your base account according to the schedule on the CD.

[OldShooter]

Quote:

Originally Posted by pb4uski Do you think the interest rate risk would be similar? ...

I suppose so. The few times I have bought them have been cases where I absolutely knew I will not need the money early, so no interest rate risk and no early sale risk. Where I might need flexibility, even a small chance, I just buy t-bills -- on the auction if possible.

[friar1610]

Quote:

Originally Posted by audreyh1 For buying CDs in an IRA I would definitely buy brokered CDs (probably new issue) because it’s a royal pain opening up additional IRAs and rolling over funds.

A few months ago Navy Federal had a 40 mo. 3.75% IRA only deal with additional deposits allowed (up to $100K IIRC). I jumped on that but I agree it was a bit of a pain to open. Fortunately, part of the process was the creation of an IRA Share Savings IRA account so whether or not I actually have a CD at any given time, I'll maintain the Share Savings with a token amount. But I agree that as a general rule brokered CDs are the way to go for IRAs. I may take advantage of future direct CDs at Navy Federal but I don't plan to chase down direct CD deals all over the country.

[pb4uski]

Quote:

Originally Posted by audreyh1 For buying CDs in an IRA I would definitely buy brokered CDs (probably new issue) because it’s a royal pain opening up additional IRAs and rolling over funds.

Quote:

Originally Posted by friar1610 A few months ago Navy Federal had a 40 mo. 3.75% IRA only deal with additional deposits allowed (up to $100K IIRC). I jumped on that but I agree it was a bit of a pain to open. Fortunately, part of the process was the creation of an IRA Share Savings IRA account so whether or not I actually have a CD at any given time, I'll maintain the Share Savings with a token amount. But I agree that as a general rule brokered CDs are the way to go for IRAs. I may take advantage of future direct CDs at Navy Federal but I don't plan to chase down direct CD deals all over the country.

+2 I have done IRA bank CDs with both PenFed and Suncoast CU and both were a PITA to transfer money from Vanguard (not Vanguard's fault BTW).... but for 3%/3.5% for 5-years I can tolerate a little inconvenience.

[youbet]

Quote:

Originally Posted by audreyh1 For buying CDs in an IRA I would definitely buy brokered CDs (probably new issue) because it’s a royal pain opening up additional IRAs and rolling over funds.

Yeah, agree with that. The odds that I'd have to sell a CD in my IRA brokerage account at a significant loss before maturity are very low and therefore it's not worth the hassle of moving the money to a bank IRA. Actually, I've never sold a brokered CD or terminated a bank CD before maturity in my life.