One Way to Get the Highest Possible Yields From Your CDs

Certificates of deposit, or CDs, are paying some of the highest yields we've seen in years. However, many people don't realize that opening a CD directly through a bank isn't the only way to go, nor will it necessarily get you the best yield. Using a brokered CD can help you maximize your yield and provide several other important advantages as well

What is a brokered CD?

In a nutshell, a brokered CD refers to a certificate of deposit that is offered by a bank and sold to savers through a third party -- specifically a brokerage. Many brokerage firms want to offer as many income investment opportunities to their clients as possible, so banks will list their own CD products on platforms like Vanguard.

These CDs are held within the brokerage account -- meaning that while the bank is offering the CD and getting the deposit, you won't have to open and manage a separate account with the bank. And just like CDs you get from a bank, your brokered CDs will be FDIC insured for up to $250,000 per bank.

Advantages of brokered CDs

There are a few big advantages of brokered CDs that are important to know.

First, brokered CDs often have higher yields than comparable CDs offered directly by banks. After all, if banks are trying to attract large amounts of money, major brokerage firms can help them do it. But this creates a far more competitive marketplace than banks simply offering CDs to the public. As an example, there are 5-year brokered CDs offered through Vanguard's platform that have significantly higher yields than some of our favorite banks' 5-year CDs.

There is also more flexibility when it comes to CD terms available. Vanguard offers brokered CDs with terms as long as 15 years, while most banks max out at about five years. Plus, you can buy an existing CD through the platform, and you can choose to sell your CDs early if you need to, avoiding an early withdrawal penalty (although there will likely be some sort of sales charge). Continuing our Vanguard example, you'll pay a $1 transaction fee for every $1,000 CD you sell.

Another big advantage is that brokered CDs can be great for people with a lot of money to put to work. The typical FDIC insurance limit is $250,000 per person, per bank. But by using brokered CDs, you can select CDs from several different banks without having to open accounts at multiple institutions.

Finally, you can buy brokered CDs through any account type, including individual retirement accounts, or IRAs. This way, you can defer any income tax from the interest you receive -- or even avoid it altogether through a Roth IRA.

Which top brokers offer CDs?

Several top brokers offer CDs through their platforms, but not all do. I already mentioned Vanguard, but most of the full-featured brokers (not the newer app-based ones) do. Just to name a few that offer brokered CDs to clients, consider these:

• Fidelity
• E*TRADE
• Charles Schwab

The bottom line is that with CD yields at their highest level in a long time, and most experts expecting interest rates to decline in 2024, now could be a great time to lock in a yield for several years. And using brokered CDs can be the best way to maximize your yield.