What’s the difference between brokered and bank CDs?

By Sabrina Karl

Certificates of deposit are a bank product, but did you know banks aren’t the only places to open one? In fact, if you have a brokerage account for your retirement savings or other investments, you might have noticed CDs being offered there as well. So are brokerage and bank CDs different?

The answer is both yes and no. The CDs you can open at a place like Vanguard or Fidelity are called “brokered CDs”, and they are indeed issued by a bank. But there are some important differences you’ll want to understand.

The primary advantage of brokered CDs is convenience. On the front end, you can open numerous certificates at various banks all within your brokerage account, saving you the trouble of establishing relationships with individual banks.

It also simplifies recordkeeping, since all the certificates appear together on your brokerage statement, along with maturity dates, regardless of how many banks’ CDs you access.

But as with most things, convenience comes at a price. Although brokered CDs are occasionally competitive with the top bank rates, usually you’ll earn less with brokered CDs. So you’ll have to prioritize between maximizing your return versus simplifying your process.

In addition, bank CDs always stipulate an unambiguous early withdrawal penalty, which you can calculate with basic arithmetic. Not so with brokered CDs, where exiting early requires you to sell the CD on the secondary market. Although your brokerage makes the selling process easy, you’ll enjoy no guarantees on a minimum price, even leaving your initial principal at risk.

For those chasing the highest returns, direct bank CDs are the way to go. But if you have little appetite for opening the necessary bank accounts yourself, and feel confident you’ll hold the CDs to maturity, sacrificing some return can make your life a little simpler. 

CD, time deposit, share certificate… What’s the difference?

By Sabrina Karl

If you shop for certificates of deposit in the newspaper or online, venturing beyond just your local bank, you’ll likely encounter some names for CDs that leave you wondering if you’re considering apples to apples.

CDs are what the banking industry calls “time deposits”, or sometimes “term deposits”. Those names signify that your deposit is made with an agreement that you will keep it at the bank for an established time period or term. This is different than checking, savings or money market accounts, where you can generally deposit and withdraw funds at any time of your choosing.

But while “certificate of deposit” and “CD” are fairly ubiquitous terms, not every U.S. financial institution uses those names, and shopping for the best CDs in the country will occasionally put a product in front of you that certainly looks like a CD but goes by some other name.

This most often happens at credit unions or community banks. Instead of CDs on their product menu, you might simply see “time deposits” or “term deposits”, such as “3-Year Time Deposit”. And at credit unions, where customers are members who hold a share in the credit union, you might see “share certificates” instead of CDs.

Does this matter? Essentially no. While some wonky banking rules specify minor differences in these products, they do not come into play for the vast majority of consumers. Whether it’s called a CD or a time deposit or a share certificate, it’s the same product: Deposit X dollars for a period of Y months or years and we’ll pay you Z percent interest.

So when you see X, Y, and Z in a deposit product’s description, rest easy that you are looking at that institution’s version of a CD, no matter the marketing name they’ve given it.

Americans leaving information on the table when choosing a bank

By Sabrina Karl

In today’s world of ever-increasing digital information, checking other buyers’ reviews is an easy way to inform our own consumer choices. But new survey data shows that while Americans are pretty savvy at utilizing reviews for choosing a restaurant or hotel, they’re rarely tapping this guidance in deciding where to bank.

The online survey conducted by The Harris Poll on behalf of Ally Bank asked approximately 2,000 U.S. banking consumers how much they considered reviews when choosing their financial institution, as well as how much reviews played into their decision-making on other fronts.

They found that almost 9 in 10 (87 percent) said checking online reviews and ratings before buying a product or service was at least somewhat important, and 78 percent indicated they trust online reviews as much as a personal recommendation.

Yet, when it came to banks and financial institutions, only 3 in 10 Americans (31 percent) said they had used online reviews to choose a financial provider in the previous year.

Even worse, 15 percent reported they didn’t know reviews of banks and financial institutions existed, and a full quarter (25 percent) said even though reviews were available, they opted not to check them.

Compare that to other common consumer decisions, where a much heftier half of survey respondents relied on reviews to choose a restaurant (53 percent) or a hotel (49 percent). Choosing a vacation spot also beat out checking bank reviews, with 36 percent of consumers reporting they had considered reviews in their travel decision.

"People seek advice online for a number of daily purchases but accept the status quo when it comes to banking," said Diane Morais, president of consumer and commercial banking products at Ally Bank. "They can and should expect more from their bank just like they do for other purchases.”

Are longer CDs taxed at a different rate?

By Sabrina Karl

If you’ve ever invested money in stocks or mutual funds, you’re likely aware that capital gains (and losses) come in two flavors: short-term and long-term. And the time you notice this is usually during tax season, since the two types are taxed differently.

But what if you’ve invested some of your savings in safer certificates of deposit? CDs come in short and long terms, and everything in between, so do their tax rates vary?

The answer lies in how CD returns are classified. Unlike stocks and mutual funds, which grow through dividends and price appreciation, or capital gains, what you earn on CDs is interest income. And when it comes to interest income on your tax return, the IRS employs a “one size fits all” policy.

That means it makes no difference whether your earnings are from a 6-month certificate or a 6-year certificate, or even a savings or money market account. Interest income is interest income, period.

You may also wonder when CD earnings become a taxable event. Does it depend on when you cash out the CD or when it matures? Again the answer is no, as certificate earnings become taxable whenever the bank or credit union applies the interest — usually monthly or quarterly — regardless of when you withdraw it.

One exception is CDs opened within an IRA. Because the same rules apply to all IRA investments, interest earned on retirement CDs is not taxable until the funds are dispersed post-retirement.

Whether you own one certificate or a portfolio of dozens, the tax implications of CDs are straightforward, and unfazed by any attempt to strategize term lengths. So invest in whatever CDs make the best sense for you, and know that your bank will report the interest income lump sum in time for tax season.

Does the amount of my CD deposit affect my rate?

By Sabrina Karl

If you’re getting ready to sock savings away in a certificate of deposit, you may know how much you want to deposit. But as you shop rates, you might discover deposit minimums and rate tiers influencing your decision.

Most CDs stipulate a minimum deposit. That’s the smallest amount you can invest to open a particular CD. Fortunately for modest savers, many certificates have entry points as low as $1,000 or $500. Others even lower the bar to no minimum at all.

But that’s not always the case. Sometimes depositing more funds will earn you a better rate, and it happens one of two ways.

Some certificates simply have hefty minimum thresholds, requiring a deposit of $5,000 or $10,000. And there are also “jumbo” CDs requiring $25,000 or even $50,000 in a single certificate. These larger CDs aren’t guaranteed to pay better than lower-minimum options, but often they do.

Then there are banks and credit unions that offer CD rate tiers. Here, for example, you may earn one rate on deposits up to $4,999, then a slightly higher rate above $5,000, and perhaps a third rate if you deposit $25,000 or more.

These options may lead you to stretch a bit on your deposit in order to score a higher rate, moving for instance from an initially planned $20,000 up to $25,000 to qualify for a well-paying jumbo certificate.

It may also impact whether you open one vs. multiple certificates. The strategy of splitting your savings into more than one CD — to lessen the penalty hit if you need to cash out some of your savings early, but not all of it — is a smart one. But if it prevents you from earning a higher rate with a single, larger certificate, you may want to reconsider.