A bank CD and a brokered CD are, in most cases, the same kind of bank deposit bought two ways: one directly from the bank that issues it, the other through a brokerage, where the brokerage or a sub-custodian it appoints typically holds the bank-issued certificate for you. The difference this page prices is the way out before maturity. A bank CD can usually be left early by paying the bank's penalty; a brokered CD, the SEC says, generally has no penalty and is sold instead, at whatever price a buyer will pay that day.
That sale can cost more than the penalty would, or bring in more than face value, depending on where rates have gone, among other things, so this page prices both exits on the same illustrative numbers. A brokered CD's insurance reaches you through the broker, on conditions, and FINRA notes that although most brokered CDs are bank products, some may be securities, which are not federally insured. No bank or broker is named here; definitions and mechanics are on the brokered CD explainer.
Bank CD vs brokered CD, line by line
| Bank CD | Brokered CD | |
|---|---|---|
| Who issues it | The bank | Also a bank; the brokerage, or a sub-custodian it appoints, typically holds it for you |
| Where you buy it | Directly from the bank | Through a brokerage account, when first issued or later from another holder |
| Minimum and increments | Set by each bank | $1,000, in $1,000 steps, at both large brokerages checked; one also sells some new issues from $100, in $100 steps |
| How interest is paid | Usually compounds inside the certificate; some banks let you take it out | Generally simple interest, paid out in cash at set intervals, per the SEC |
| Getting out early | Usually the bank's penalty, set by its terms; the legal minimum covers only withdrawals within six days of a deposit or a partial withdrawal | Generally no penalty: you sell at the market price, if there is a buyer |
| Callable | Some long-term CDs may be, FINRA notes | Some are; only the issuing bank can call, and the SEC says it might if rates fall |
| Insurance | Direct: $250,000 per depositor, per insured bank, per ownership category, counted with your other deposits there in that category | Pass-through, only if the FDIC's conditions are met; then counted with whatever else you hold at the issuing bank in that category |
| Fees | No broker to pay | No commission or trading fee on new issues, both large brokerages checked say; online secondary purchases $1 per $1,000 of face value, capped, at both; online sales free at one |
| On the owner's death | Whether the bank waives its penalty is a term of the account | Both large brokerages' disclosures: early withdrawal of the entire CD generally permitted without penalty; issuer terms vary |
| Tax reporting | Form 1099-INT, or Form 1099-OID for a CD of more than a year with original issue discount; any penalty is shown separately and is deductible | The brokerage reports as nominee; the IRS text located has no rule written for a CD sold early |
The exit, priced both ways (illustrative rates)
The SEC staff's 2023 investor bulletin says brokered CDs "generally do not have early withdrawal penalties like CDs purchased directly from a bank" and can generally be sold on a secondary market, "subject to market conditions"; the SEC's 2008 alert adds that a sole owner may be able to pay the issuing bank's penalty instead.
Every figure below is illustrative: $10,000 in a five-year certificate at 4.00%, needed after one year. Each certificate pays out $400 of simple interest in that year (left inside and compounded daily, the bank's would earn $8.08 more). The bank penalty is the third shape on the penalty page, 180 days' simple interest on the amount withdrawn for terms over two years: $197.26 on the $10,000, on a 365-day year. The brokered certificate is taken to pay its $400 once a year and to be sold just after a payment. Its price is the present value of what remains, four payments of $400 and the $10,000 at maturity, each discounted yearly at the illustrative rate a new certificate of the same remaining term is assumed to pay: the price at which a buyer earns exactly that yield. Fees and mark-downs are left out of the model.
If rates rise to 5.00% (illustrative)
| Rates rise to an illustrative 5.00% | Bank CD | Brokered CD |
|---|---|---|
| Interest received in the first year | $400.00 | $400.00 |
| What leaving costs | $197.26 penalty | $354.60: sold for $9,645.40 |
| What you leave with | $10,202.74 | $10,045.40 |
The brokered exit is $157.34 behind: in the model, a buyer who can earn 5.00% on a new certificate pays less than face value for one paying 4.00%. A 2002 notice from NASD, FINRA's predecessor, which FINRA still posts, tells member firms to disclose that a sale price before maturity "may be less than its original purchase price", particularly if rates have risen. With four years left, the model sale costs as much as the penalty at a yield of about 4.55%, an illustrative rise of a little over half a point.
The model price is not a quote. The same notice says the secondary market "may be limited", brokers need not maintain one, and statement values are estimates; the SEC bulletin says that, depending on market conditions, some brokered CDs may have no secondary market at all. Selling can also cost a fee, as the SEC warns: at the two large brokerages checked, an online sale of $10,000 of face value costs nothing at one and $10 at the other, and a sale through a representative can cost more.
If rates fall to 3.00% (illustrative)
| Rates fall to an illustrative 3.00% | Bank CD | Brokered CD |
|---|---|---|
| Interest received in the first year | $400.00 | $400.00 |
| What leaving costs | $197.26 penalty | Nothing in the model: sold for $10,371.71 |
| What you leave with | $10,202.74 | $10,771.71 |
Now the brokered exit is $568.97 ahead: in the model, a buyer who can get only 3.00% on a new certificate pays $371.71 over face value for 4.00%. The bank penalty has not moved, because it is a contract term. Had rates stayed at 4.00%, the model would sell at face value, $197.26 ahead of the bank exit before fees. A real sale can still fetch less than the model: one large brokerage's CD disclosure says the sale price "will reflect a mark-down" and that proceeds "may be less than the amount you paid".
Two caveats go with the premium. It assumes a certificate the bank cannot call: only the issuing bank can call, and the SEC says it might when rates fall, in which case you "should receive the full amount of your original deposit plus any unpaid accrued interest"; the 2002 notice says calls typically come when a brokered CD trades at a premium to its call price. And whoever pays the premium holds it uninsured: both large brokerages checked state in their CD documents that a premium paid over face value on the secondary market is not covered by FDIC insurance.
The exit as the certificate ages (illustrative rates)
| Years left when you leave | Brokered, sold to yield 5.00% | Brokered, sold to yield 3.00% | Bank CD penalty |
|---|---|---|---|
| 4 | −$354.60 | +$371.71 | −$197.26 |
| 3 | −$272.32 | +$282.86 | −$197.26 |
| 2 | −$185.94 | +$191.35 | −$197.26 |
| 1 | −$95.24 | +$97.09 | −$197.26 |
The penalty is set by the certificate's term, so here it is $197.26 whenever you leave. In the model the sale price drifts back towards face value as maturity nears; at 5.00% it costs more than the penalty with three or four years left and less with one or two.
Insurance: direct against pass-through
A bank CD at an FDIC-insured bank is insured directly: $250,000 per depositor, per insured bank, for each ownership category, principal and accrued interest together. A brokered CD's insurance passes through the broker to you. The FDIC's guide for deposit brokers says custodial deposits are covered "the same as if the funds had been deposited directly by the broker's clients", and the FDIC applies that only if all three of its conditions are met: the relationship is expressly disclosed in the bank's deposit account records; each owner's identity and ownership interest can be established from the bank's records or from records kept by the broker, or by someone keeping them on its behalf; and the owners, not the broker, actually own the funds. The FDIC decides this when a bank fails. If the conditions are not met, the deposits are combined with everything else in the broker's name at that bank and insured to the broker, to $250,000 in all. Are CDs FDIC insured covers the categories and this paperwork trap.
Pass-through adds no coverage. A brokered CD counts with anything else you hold at the issuing bank in the same category, however many brokers you buy through; the brokered CD explainer works the FDIC's own example. The SEC calls it "very important" to know which bank issued your CD; the FDIC's BankFind confirms whether that bank is insured, and the jumbo CD page covers spreading a large sum across issuing banks.
The broker in the chain adds three more differences. After a failure, the FDIC may need additional time to determine coverage on broker-placed deposits, and it withholds payment on an account until all its owners are identified and the documents it requires are submitted. The FDIC does not license or register deposit brokers, and money a broker fails to place in a CD at an insured bank is not FDIC-insured. And FDIC insurance does not protect against a broker's own failure: that is SIPC's role if the firm is a member, and SIPC says it protects only the custody function, not against a fall in value.
Interest: compounded inside, or paid out
The SEC bulletin says a brokered CD usually pays interest at regular intervals and, "unlike CDs purchased directly from a bank", generally pays simple rather than compound interest; to earn interest on it, "you must reinvest these funds in another account". Both large brokerages checked say their CDs pay simple interest into the account's cash position.
A bank certificate usually compounds inside, and Regulation DD makes a bank whose certificate compounds, and lets you withdraw the interest, state that its annual percentage yield "assumes interest remains on deposit until maturity". At the same illustrative 4.00% for five years, daily compounding earns $2,213.89 on $10,000 against $2,000.00 of simple interest paid out; the $213.89 gap is what the paid-out cash must earn elsewhere to match. A bank discloses both an interest rate, which Regulation DD defines as a rate that "does not reflect compounding", and an annual percentage yield, which does; a brokered CD's simple rate is the first kind. APR vs APY explains why the two differ, and the CD rate-shopping page notes that rate lists sometimes mix bank and brokered certificates.
Fees and a death
Fees. Both large brokerages checked say a new-issue brokered CD costs the buyer no commission or trading fee, and that the brokerage may be paid by the issuing bank instead; one discloses a placement fee of up to half a percentage point a year of the principal.
A death. Regulation D lets a time deposit be paid early on an owner's death without "an early withdrawal penalty specified by this part", which is its own seven-day floor; it permits this rather than requiring it, and whether a bank waives its own contract penalty on a death is a term of the account. Both large brokerages' CD disclosures checked say early withdrawal of an entire CD is generally permitted without penalty on the owner's death or adjudicated incompetence; beyond that, the terms are the issuing bank's and vary.
Tax: a penalty, or a sale
Outside a retirement account, a bank CD's interest is reported on Form 1099-INT, or on Form 1099-OID for a certificate of more than a year that has original issue discount, with any early-withdrawal penalty shown separately; Publication 550 says you "can deduct the penalty on Schedule 1 (Form 1040)", and the penalty page has the mechanics. For a brokered CD the brokerage reports as nominee: the IRS's 1099 instructions cover interest "for which you were a nominee/middleman" and tell a broker holding a bank CD as nominee to report any original issue discount on Form 1099-OID.
An early sale is where the IRS text runs short. Publication 550 calls a CD "a debt instrument", but its rules on gain or loss from selling debt are written for "a bond or other debt instrument" and do not name CDs, and no IRS passage located addresses a CD sold before maturity.
Inside an IRA
Either kind can sit in an IRA; the IRS says you can open one "at a bank or other financial institution" or "through your stockbroker". Two rows then change. Tax reporting: the IRS tells payers not to report interest "earned but not distributed from an IRA", and money taken out is an IRA distribution, reported on Form 1099-R. Insurance: the FDIC adds all of one person's IRA deposits at a bank together, traditional and Roth alike, to one $250,000 limit separate from single accounts; for a brokered CD in a brokerage IRA, its rule that pass-through coverage depends on the ownership category in which the owner holds the funds points the same way, though no FDIC page read says so in terms. What an IRA CD is covers the wrapper; the IRA CD rules cover the bank's penalty and the IRS's additional tax.
Which rows matter: your horizon
No row in the table makes one kind better in general; which rows matter turns on when you need the money, and how sure you are of that date.
If the money stays to maturity, the early-exit row never applies. What differs is the rate each pays on the day you buy, compared like with like; whether interest compounds or arrives as cash; whether the certificate can be called; how much of the insurance limit is already used at the issuing bank; and fees.
If you might need it early, the exits are different kinds of cost. The bank certificate's is set by its terms and disclosed in advance: $197.26 in the illustration, whenever you leave. The brokered certificate's is unknown until you sell: on the same illustrative numbers, a $354.60 loss after a rise to 5.00% or a $371.71 gain after a fall to 3.00%, with four years left, narrowing towards maturity, unless there is no buyer or the bank calls first. A known cost against an unknown price is the trade. A bank certificate can also be bought without a penalty at a lower rate, which the no-penalty CD page prices, and the ladder guide staggers maturities with either kind.
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