BROKERAGE ACCOUNT » Online Trading

When buying brokerage CDs, it's a good idea to check on the tax implications that may be inherently different than of those issued directly from banking institutions. To take a look at what some of these differences might be, let's explore what brokerage CDs are as well as how you might be taxed for investing in them.

Brokerage CDs

Brokerage CDs are very similar to bank CDs in that they are typically FDIC insured and offer predetermined rates of return that are paid out at the end of a maturation period. However, there are also some features associated with purchasing a CD from a broker that makes the process unique. For one, brokers purchase CDs in large blocks from banking institutions then resell them to customers in smaller denominations. Taking this approach gives them a certain amount of power over their CDs, which in turn allows them to offer them at higher interest rates, as well as resell them so that customers can withdraw their funds before they reach maturity.

Taxes on CDs from Broker Firms

Another feature that may be slightly different is the taxes on CDs from broker firms. You'll find that interest income from brokerage CDs is subject to federal income tax, as well as state and local income tax if applicable which is very similar to the traditional CD. However, because you can withdraw your CD early from the brokerage, you may have to deal with the difference between the sale price and purchase price, which is treated as a capital gain or loss and is taxed. The only time that you don't have to worry about taxes is when the funds are held in a tax-deferred retirement account.

There's nothing better than understanding every aspect of the investments that you make including taxes on CDs from broker firms. So don't be left in the dark regarding your brokerage CDs. Understanding how they are taxed can save you money in the long-run.

When you purchase CDs from a broker firm, it can be quite a bit different than making the same purchase directly from a bank. While the results of your investment will be quite similar, some details might be different.

Why Buy a CD from a Broker Firm?

There are a number of reasons that you might consider purchasing certificates of deposit from a broker firm vs. visiting your local banking institution. One reason is that you can usually enjoy the benefit of a higher interest rate due to the fact that brokerages have great negotiation power. Also, because they can resell CDs back to the market before the maturation period ends, you can often withdraw your funds early without suffering any penalties.

What to Look for When You Purchase CDs from a Broker Firm

Since the process is slightly different when you purchase CDs from a broker firm, let's explore what you want to look for in the firm and their process:

• Does the firm's commission affect you? Typically, the commission that representatives of the broker firm earn doesn't affect the investors. However, on occasion, you may see that in the long term, you yield to maturity (YTM) was a little lower than it could have been.
• Do they offer more than fixed-rate CDs? Nowadays, brokerages are offering more than just the traditional fixed-rate CD. So when looking for a firm to work with, its good to look for those that have options such as callable, zero, and secondary CDs to help you diversify your portfolio.
• Is the brokerage registered and licensed? Before investing money in any brokerage, it's important to make sure they are properly registered and licensed. To check their status, you can contact your states securities regulator or the Financial Industry Regulatory Authority (FINRA).

It's important that you conduct as much research as possible before working with a broker firm. By learning how investing in certificates of deposits works with them vs. banks, as well as what to look for in these firms, you can feel comfortable that youre making the best decisions possible when you purchase CDs.

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