What Is the Difference Between Money Market Accounts vs CDs?

What Is the Difference Between Money Market Accounts vs CDs?

Both certificates of deposit (CDs) and money market accounts (MMAs) are low-risk accounts that tend to earn higher interest rates than traditional savings accounts. But the primary difference between a money market account vs. a certificate of deposit is accessibility. An MMA is like a savings account in that you can withdraw money as needed; with a CD, your money is locked up for a period of time.

There are some other differences between a money market account vs. a certificate of deposit, but that’s the main one. Keep reading to learn the difference between these types of deposit accounts and what their pros and cons might be.

Recommended: What is Liquid Net Worth

What Is a Money Market Account?

Banks and credit unions offer a type of deposit account known as a money market account (also referred to as money market deposit accounts or money market savings accounts).

Money market accounts function much like regular savings accounts. It’s possible to withdraw funds from a money market account by draft, debit card, or electronic transfer. But MMAs may offer check-writing privileges as well. And like a traditional savings account, the money you deposit in an MMA is insured up to $250,000 by the Federal Deposit Insurance Corporation (FDIC), if held at a bank, or by the National Credit Union Administration (NCUA), if held at a credit union.

Pros of Money Market Accounts

Let’s look at some advantages associated with money market accounts.

•   Security. Because of the FDIC and NCUA insurance the funds in a money market account (up to $250,000) are insured against loss.

•   Higher interest rate. Typically, money market accounts have higher interest rates than normal savings accounts.

•   Liquidity. Those looking to keep their money close at hand while still earning interest on it will appreciate how liquid money market funds are compared with other investment vehicles, like a CD.

•   Ease of access. It’s possible to access the funds in a money market account by withdrawing cash, doing an electronic transfer, or even writing checks.

Cons of Money Market Accounts

Of course, there are also some disadvantages that come with money market accounts that are worth keeping in mind.

•   Minimum balance requirements. As mentioned earlier, banks and credit unions often require a minimum deposit to open a checking or savings, and an MMA is no exception. This amount is often higher than the one required for a traditional savings account. And in some cases, it might be necessary to maintain that minimum balance in order to avoid monthly maintenance fees.

•   Limited transactions. Federal banking regulations make it so account holders can’t make more than six withdrawals or transfers a month (typically this restriction applies to checks, debit card payments, wire transfers and other electronic transfers). The transfers you make in person, at an ATM, or via mail, are not restricted. If you exceed the number of allowed transactions per month, you will receive a warning from the bank and may be assessed a fine.

•   Interest rates vary. Saving interest rates can fluctuate as they are based on the overall market’s interest rates at a given time. It’s difficult to predict how the market will perform and if this interest rate will rise or fall.

•   Limited growth potential. Those hoping to experience higher long-term growth can potentially make more by investing their money elsewhere.

What Is a Certificate of Deposit?

A certificate of deposit is another savings vehicle offered by banks, but these products provide less flexibility than a money market account. Typically the funds deposited must remain untouched for a period of time, ranging from a few months to a few years. In exchange for leaving their money in the CD, the institution agrees to pay a higher interest rate.

Thus the money deposited in a CD is typically called the principal, because it is essentially a loan the consumer is offering to the bank. The interest the customer collects is what the bank pays for the privilege of borrowing the money.

If the CD owner decides to withdraw the money early, they will need to pay a withdrawal penalty (except in the case of a no penalty CD).

There are a few different types of CDs available and each come with varying deposit requirements and term lengths that can suit different financial goals.

Recommended: Average Savings by Age

Pros of Certificate of Deposits

Let’s take a closer look at some of the advantages that come with depositing money into a CD.

•   Potentially higher rates. CDs can have higher APYs (annual percentage yields) than regular savings accounts or money market accounts. Longer-term CDs usually have even higher interest rates.

•   Fixed rates can provide certainty. Because CDs tend to have fixed rates for fixed terms, the investor knows up front how long their money needs to stay in the CD and how much they will earn.

•   Security. Similar to money market accounts, CDs are either FDIC or NCUA insured.

•   Convenience. It’s fairly easy to open a CD as most banks and credit unions offer them.

Cons of Certificate of Deposits

Of course, there are also some disadvantages of CDs that are good to be aware of.

•   Lower rates than other investments. CDs often offer better interest rates than other deposit accounts, but they don’t usually offer competitive advantages over investments like stocks and bonds that can lead to longer- term growth.

•   Fixed interest rates can be limiting. Because CDs come with fixed interest rates, if the market improves and interest rates go up, the CD owner can be stuck with a lower interest rate until the CD term ends (unless they open a bump-up CD)

•   Withdrawal penalties. More often than not the CD owner has to keep the funds held in the CD until the term ends or they will need to pay an early withdrawal penalty.

•   Limited access. Unlike a money market account or savings account, it’s not possible to access the money in a CD until the term ends.

Where Can You Find Money Market Accounts and CDs?

As previously noted, both CDs and money market accounts are available at banks, credit unions, and select financial institutions.

In many cases you can open either of these accounts online, over the phone, or in person.

Because interest rates vary widely, it’s a good idea to do some research to decide whether you want to open a money market account vs. a certificate of deposit, and which institution has the most favorable terms.

Differences Between a Money Market Account and a Certificate of Deposit

Not sure which type of account is the right fit? These are the main differences to consider when choosing between a money market account vs. a CD.

•   Withdrawals. It’s possible to make withdrawals a month from a money market account (some restrictions can apply), but CD funds are typically unavailable until the end of the term.

•   Interest rates. CDs tend to offer higher interest rates (fixed) than money market accounts (variable).

•   Penalties. One withdrawal from a CD can lead to a penalty, whereas you can typically withdraw money at any point from a money market account (although in some cases, especially with regard to electronic transfers the number may be capped at six withdrawals per month).

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When to Choose a Money Market Account Over a CD

Here’s a brief look at when a money market may be a better choice than a CD.

•   When they require accessibility. Someone who requires more access to their savings will appreciate the flexibility and liquidity that comes with a money market account.

•   When building an emergency fund. A money market account is a great place to earn a little extra interest on an emergency fund that the account holder doesn’t need to access often.

When to Choose a CD Over a Money Market Account

There will be times when a CD is a better fit for a consumer than a money market account.

•   When they have longer term investment goals. If someone wants to earn more money in interest, they’ll find a CD is a better fit thanks to longer terms and higher interest rates.

•   When they won’t miss the money. If the consumer is confident they won’t need to access the funds before the CD term ends, they can earn extra interest in a safer way than investing in stocks.

The Takeaway

Both money market accounts and CDs offer safe ways to earn extra interest on savings compared with a traditional savings account. While money market accounts offer more flexibility and liquidity than CDs, CDs may have higher interest rates.

The main difference between money markets and CDs is that with the former you can access your money virtually any time — and with the latter your funds are unavailable until the CD matures. The length or term of a CD typically ranges from a few months to a few years.

If you’re ready to open a savings account, one easy way is through SoFi’s all-in-one Checking and Savings. You can sign up for an account right from your phone and pay zero account fees — and if you qualify by setting up direct deposit you can earn 1.25% APY. Open your Checking and Savings today.

Learn more about SoFi Banking rates and terms today!

FAQ

Can you lose your money in a money market account?

It’s highly unlikely. Money market accounts at banks are insured by the FDIC, and money market accounts at credit unions are insured by the NCUA (up to a certain amount).

Why would you choose a CD over a money market account?

If you don’t need to access your funds for a while, a CD could be a better fit. CDs tend to offer higher interest rates than money market accounts, and the interest rate is fixed which makes the return predictable.


SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2022 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
SoFi members with direct deposit can earn up to 1.25% annual percentage yield (APY) interest on all account balances in their Checking and Savings accounts (including Vaults). Members without direct deposit will earn 0.70% APY on all account balances in their Checking and Savings accounts (including Vaults). Interest rates are variable and subject to change at any time. Rate of 1.25% APY is current as of 4/5/2022. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Photo credit: iStock/Vanessa Nunes
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Brokered Certificates of Deposit (CDs): What Are They and How They Work

Brokered Certificates of Deposit (CDs): What Are They and How They Work

What are brokered certificates of deposit? A brokered CD is one that’s sold by a brokerage firm or deposit broker, rather than a bank. Brokered CDs may offer higher rates than traditional CDs sold at a bank, but they can also entail greater risk for investors.

Before investing in brokered CDs, it’s important to understand how they work, how they differ from traditional CDs, and the potential pros and cons of these accounts.

What Is a Brokered Certificate of Deposit?

A certificate of deposit is a time deposit account that allows you to deposit money and earn interest over a set time period called the term, usually a few months to five years. When a traditional CD reaches maturity, you can withdraw the principal plus interest, or roll it over to another CD. Traditional CDs are generally FDIC insured.

A brokered CD is a type of CD that’s offered by a stockbroker or brokerage firm that’s authorized to act as a deposit broker on behalf of an issuing bank. It may be a bank product or a security, so brokered CDs are not always FDIC insured.

So what is a brokered CD in simpler terms? It’s a CD you buy from a brokerage. A deposit broker buys the CDs from a bank, then resells them to investors. Brokered CDs are held in a brokerage account. They can earn interest, but instead of only being static investments that you hold until maturity, you can trade them like bonds or other securities on the secondary market.

Compared to a standard CD, a brokered CD may require a higher minimum deposit. For example, you may need $10,000 to open one versus $500 or $1,000 for a traditional bank CD. The trade-off, however, is that brokered CDs may potentially offer much higher returns than you could get with a regular CD — while still being relatively safe investments.

How Brokered CDs Work

To buy a brokered certificate of deposit, you first need to find a deposit broker that offers them. Banks can issue CDs specifically for the customers of brokerage firms. These CDs may be issued in large denominations, say $50 million. The brokerage would then break that large CD into smaller CDs to offer to its customers.

You could then buy a brokered CD, depositing the minimum amount required or more. The brokered CD then earns interest, with the APY typically corresponding to the length of the maturity term. For example, you might be offered a 12-month brokered CD earning 1.5% or a 24-month brokered CD that yields 3%.

Ordinarily, you’d have to keep the money in your CD until the CD matures (if you withdraw the funds before the CD matures, you could face an early-withdrawal penalty). You could then roll the original deposit and interest into a new CD or withdraw the total amount.

With brokered CDs, on the other hand, you have the option to sell the CD on the secondary market before it matures.

Advantages of a Brokered CD

Wondering whether a brokered CD might be right for you? Brokered CDs can offer several advantages, though they may not be the best option for every investor. Here are some of the most attractive features of a brokered certificate of deposit.

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More Flexibility Than Traditional CDs

Brokered CDs can offer more flexibility than investing in bank CDs in the sense that they can have a variety of maturity terms, so you can choose ones that fit your needs and goals. You might select a 90-day brokered CD, for example, if you’re looking for a short-term investment or choose one with a 10-year maturity if you’d prefer something with a longer term. It’s also possible to purchase multiple brokered CDs issued by different banks and hold them all in the same brokerage account for added convenience.

Easier to Get Money Out Early on the Secondary Market

With a standard CD, you’re more or less locked in to the account until it matures. (While you could take money out early if your bank allows it, it’s likely you’ll pay an early withdrawal penalty to do so. This penalty can reduce the amount of interest earned.) Brokered CDs don’t have those restrictions; if you need to get money fast then you could sell them on the secondary market, effectively cashing out your principal and interest gains — without a penalty.

Higher Yields Than Standard Bank CDs

Deposit brokers that offer brokered certificates of deposit can use the promise of higher interest rates to attract investors. Rather than earning 0.25% on a CD as you might at a bank, you could potentially earn 2% or more with a brokered CD. If you’re seeking higher returns in your portfolio with investments that offer greater liquidity, brokered CDs could hit the mark.

You may also get a higher yield from a brokered CD versus a bond, with greater liquidity to boot.

Potential to Make Profit Once It Reaches Maturity Even If Interest Rates Fall

Interest rates for brokered CDs are locked until maturity. So even if rates fall during the maturity period, you could still profit when you sell the brokered CD later. As a general rule, shorter-term brokered CDs are less susceptible to interest rate risk than ones with longer terms.

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Disadvantages of a Brokered CD

Is a brokered certificate of deposit a foolproof investment? Not necessarily. Brokered CDs can have some drawbacks that investors need to know about.

Long-Term Brokered CDs Expose Investors to Interest Rate Risk

As mentioned, the longer the CD term the more exposure you have to interest rate risk. Brokered CD prices are subject to fluctuations on the secondary market. If interest rates rise, this usually has an inverse effect on the market price of existing brokered CDs. That means if you were to sell those CDs before maturity, you run the risk of getting less than what you paid for them.

Different Risk When Interest Rates Fall

You can also run into a different type of risk when rates are dropping if your brokered CDs are callable. A callable CD means the issuing bank can terminate or call the CD prior to maturity, similar to a callable bond. Callable brokered CDs can be problematic when rates drop because you’re forced to cash in your investment. In doing so, you’ll miss out on the full amount of interest you could have earned if you’d been able to hold the CD to maturity.

Investors Can Sell on the Secondary Market

The early withdrawal penalty associated with bank CDs actually serves an important purpose: It keeps you from taking money out of your CD early. Since brokered CDs don’t have this penalty, there’s nothing stopping you from selling your CDs on the secondary market whenever you like. That means it’s easier to cash out your investment, rather than sticking with it, which could cost you interest earnings.

Brokered vs Bull CD

A bull CD is a CD that offers investors an interest rate that’s tied to an index or benchmark like the S&P 500 Index. Investors are also guaranteed a minimum rate of return. Bull CDs can also be referred to as equity-linked or market-linked CDs.

Brokered CDs earn interest but the rate is not tied to a market index. Instead, the rate is fixed for the maturity term.

Brokered CD

Bull CD

•   Issued by a bank; sold by a brokerage

•   Investors earn a fixed interest rate

•   Maturity terms are fixed, though brokered CDs can be sold before maturity on the secondary market

•   Issued by a bank; sold by a brokerage

•   Investors earn an interest rate that correlates to an underlying index

•   Investors are guaranteed a minimum rate of return

Brokered vs Bear CD

Bear CDs are the opposite of bull CDs. With this type of CD, interest is earned based on declines in the underlying market index. So in other words, you make money when the market falls.

Again, brokered CDs don’t work this way. There is no index correlation; returns are based on the interest rate assigned at the time the CD is issued.

Brokered CD

Bear CD

•   Issued by a bank; sold by a brokerage

•   Investors earn a fixed interest rate

•   Maturity terms are fixed, though brokered CDs can be sold before maturity on the secondary market

•   Issued by a bank; sold by a brokerage

•   Returns are tied to an underlying market index

•   Interest moves in the opposite direction from the underlying index

Brokered vs Yankee CD

Yankee CDs are CDs issued by foreign banks in the U.S. market. So, for example, a Canadian bank that has a branch in New York might offer Yankee CDs to its U.S. customers. Yankee CDs are typically suited to higher net worth investors, as they may require $100,000 or more to open. Unlike brokered CDs, which have fixed rates, a Yankee CD may offer a fixed or floating rate.

Brokered CD

Yankee CD

•   Issued by a bank; sold by a brokerage

•   Investors earn a fixed interest rate

•   Maturity terms are fixed, though brokered CDs can be sold before maturity on the secondary market

•   May be FDIC insured when issued by a qualifying bank

•   Issued by a foreign bank and sold in the U.S.

•   May require $100,000 or more to open

•   Rates may be fixed or floating for Yankee CDs

•   Are not federally insured

Are Brokered CDs FDIC Insured?

Brokered CDs are generally FDIC-insured if the bank issuing them is an FDIC member. The standard FDIC coverage limits apply. Currently, the FDIC insures banking customers up to $250,000 per depositor, per account ownership type, per financial institution. You have to be listed as the CD’s owner in order for the FDIC protection to kick in.

There is an exception if brokered CDs are classified as securities. In that case, you would have no FDIC protection. The FDIC does not consider money held in securities to be deposits and encourages consumers to understand where they’re putting their money so they know if they’re covered or not.

However, it’s possible that you may be covered by the Securities Investor Protection Corporation (SIPC) if a member brokerage or bank brokerage subsidiary you have accounts with fails.

Are Brokered CDs Better Than Bank CDs?

Brokered CDs do offer some advantages over bank CDs, in terms of flexibility, liquidity, and returns. You’re also free from withdrawal penalties with brokered certificates of deposit. You could, however, avoid this with a no-penalty CD.

What is a no-penalty CD? Simply, it’s a CD that allows you to withdraw money before maturity without an early withdrawal fee. Some banks offer no-penalty CDs, along with Raise Your Rate CDs and Add-On CDs to savers who want more than just a standard certificate of deposit account.

Here’s something else to keep in mind. You’ll typically need more money to invest in brokered CDs vs. bank CDs. And you’re taking more risk with your money, since brokered CDs are more susceptible to market risk, interest rate risk, and credit risk. Bank CDs, by comparison, are some of the safest places to keep your money and earn some interest in the bargain.

When to Consider Brokered CDs Over Bank CDs

You might choose a brokered CD over bank CDs if brokered certificates of deposit are offering competitive rates and you plan to hold the CD until maturity. Even if rates were to rise during the maturity period, you could still realize a gain when it’s time to cash the CD out.

Paying attention to interest rates can help you decide on the right time to invest in a brokered certificate of deposit. Also, consider the minimum investment and any fees you might pay to purchase the CD.

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When to Consider Bank CDs Over Brokered CDs

You might consider bank CDs over brokered CDs if you’d prefer to take less risk with your money. When you put money into a CD, you’re virtually guaranteed to get it back, along with the interest earned. The only time you might lose money from a bank CD is if you cash it out early and have to pay an early withdrawal penalty.

Bank CDs may also be more attractive if you don’t want to tie up all your money in a single brokered CD. For example, instead of putting $10,000 into a single brokered certificate of deposit you might spread that out across five or six bank CDs with different maturity dates instead.

This is called CD laddering. Creating a CD ladder can create some flexibility, since it may be easier to avoid early withdrawal fees if a maturity date is always on the horizon. You could also use a CD ladder to capitalize on rising rates by rolling CDs over once they mature.

How to Buy a Brokered CD

If you’d like to buy a brokered CD, you’ll first need to find a brokerage that offers them. You can then open a brokerage account, which typically requires filling out some paperwork and verifying your ID. Most brokerages let you do this online to save time.

Once your account is open, you should be able to review the selection of brokered CDs available to decide which ones you want to purchase. When comparing brokered CDs, pay attention to:

•   Minimum deposit requirements

•   Maturity terms

•   Interest rates

•   Fees

Also, consider whether the CD is callable or non callable as that could potentially affect your returns.

The Takeaway

Brokered CDs offer some distinct advantages over regular bank CDs, if you have a larger sum of money to invest and you want a fairly safe place to put it. Brokered CDs are generally available through a brokerage firm, and because they require higher initial deposits (and sometimes a longer maturity period) these CDs often pay higher interest rates. Perhaps the biggest advantage to brokered CDs, though, is that you can access your money at any time by selling the CD on the secondary market. Of course, this could limit the returns you’d see if you kept your money in the CD. But some investors may want that flexibility.

If you’re committed to saving, and you want to earn more than the standard savings account (and more than many standard bank CDs!), you’ve come to the right place. SoFi offers a number of options for ways to grow your money while minimizing risk — including SoFi’s new all-in-one Checking and Savings. You can sign up for an account right from your phone and pay zero account fees — and if you qualify and sign up with direct deposit, you can earn 1.25% APY. Open your Checking and Savings today.

Learn more about banking with SoFi.

FAQ

Can you lose money on a brokered CD?

It’s possible to lose money on a brokered CD if you sell it prior to maturity after interest rates have risen. Higher rates can cause the market price of brokered CDs to decline, meaning you could end up selling them for less than what you paid.

Are brokered CDs a good idea?

A brokered CD could be a good idea if you understand the risks involved. Brokered certificates of deposit can offer the potential to earn higher interest rates than regular CDs. But it’s also possible to lose money with this type of CD.

What is the difference between a brokered CD and a bank CD?

A brokered CD is issued by a bank and sold by a brokerage. Bank CDs are issued by banks and offered directly to their customers. Brokered CDs may have higher minimum deposit requirements and offer higher interest rates for savers.


SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2022 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
SoFi members with direct deposit can earn up to 1.25% annual percentage yield (APY) interest on all account balances in their Checking and Savings accounts (including Vaults). Members without direct deposit will earn 0.70% APY on all account balances in their Checking and Savings accounts (including Vaults). Interest rates are variable and subject to change at any time. Rate of 1.25% APY is current as of 4/5/2022. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Photo credit: iStock/Anchiy
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How Uninsured Certificates of Deposit Work

How Uninsured Certificates of Deposit Work

While most CDs are federally insured, an uninsured certificate of deposit is one that’s not covered by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Association (NCUA).

The FDIC and the NCUA provide insurance protection to consumers at banks and credit unions, respectively, up to $250,000.

Investing in an uninsured certificate of deposit could make sense if you’re hoping to earn a higher return for your money. But it’s important to understand the potential risks involved with uninsured CDs.

What Is an Uninsured Certificate of Deposit?

An uninsured CD is any CD that is not covered by depositor’s insurance. Depositor’s insurance protects consumers against financial losses in the rare event that a bank or credit union fails. The FDIC covers accounts at insured banks; the NCUA covers accounts at insured credit unions.

Types of Uninsured CDs

There are different kinds of uninsured certificates of deposit investors can open. The types of CD options available may include:

•   Yankee CDs. A Yankee CD is a certificate of deposit that’s issued by a foreign bank through a U.S. branch. These CDs may offer fixed or floating interest rates and require a minimum deposit of $250,000 or more. Because the funds are held at a foreign bank, these CDs are not federally insured.

•   Brokered CDs. A brokered CD is a CD that’s offered through a brokerage on the secondary market. Brokered CDs may be FDIC-insured if certain requirements are met; otherwise, they do not enjoy FDIC protection.

•   Market-linked or index-linked CDs. Market- and index-linked CDs offer returns based on an underlying market benchmark or index. For example, you might open an index-linked CD that aims to match the returns of the S&P 500® Index. These uninsured CDs are also referred to as equity-linked CDs.

A CD may also be uninsured if it’s issued by a financial institution that has no affiliate with the FDIC or NCUA. You can usually tell if a bank or credit union is FDIC-insured by looking for the appropriate signage at a branch or on the homepage of their websites.

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Advantage of an Uninsured CD

Why might someone choose to invest in an uninsured certificate of deposit?

A simple answer is that higher risk may be balanced against greater rewards. A two-year Yankee CD, for example, may offer a fixed rate approaching 2%. A regular two-year CD, on the other hand, might offer just 0.22% to savers. Thus the opportunity to earn a higher return may outweigh the potential risks for investors who are focused on growing their money with CDs.

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Are Certificates of Deposit FDIC Insured?

The FDIC insures a number of different types of deposit accounts at banks, including certificates of deposit. So CDs can be FDIC-insured, if they’re held at member banks. FDIC insurance coverage can extend to:

•   Standard CDs

•   Jumbo CDs

•   No-Penalty CDs

•   Add-on CDs

•   Bump Up CDs

•   Raise Your Rate CDs

But again, not all CDs are FDIC-insured. That’s important to note, as an uninsured certificate of deposit doesn’t carry the same protections as insured CDs. If your bank fails, you wouldn’t automatically be entitled to recoup money deposited in an uninsured CD held at that financial institution.

You also need to keep in mind that FDIC insurance and NCUA insurance is not blanket coverage. There are limits on how far this coverage extends. Generally only $250,000 is covered, per account, per person (see details below).

How FDIC Insurance Works

FDIC insurance protects consumers if their bank fails. You don’t need to apply for this insurance coverage; you’re covered automatically when you have accounts at a member bank. If a bank fails, the FDIC pays depositors within a few days of its closing, up to the applicable limit.

The standard coverage limit is $250,000 per depositor, per account ownership type, per financial institution. This is the same coverage limit that’s offered by the NCUA for CD savers at credit unions. If you have accounts at both banks and credit unions, it’s possible to be covered by both types of insurance.

The coverage limit is important to remember when asking, Is a CD FDIC-insured? The answer may be yes, but only up to a certain amount, depending on how much money you keep in CD accounts and other deposit accounts at the same bank. The FDIC offers an online estimator tool to help you determine how much of your deposits are insured at any given time.

Understanding Uninsured Certificates of Deposit

An uninsured CD can be attractive as an investment if you’re looking for alternatives to the certificate of deposit options your bank offers. Generally speaking, CDs are safe investments. You can deposit money into a CD and earn a fixed interest rate. Once the CD matures, you can withdraw your deposit plus interest, or roll it over to a new CD.

Your money isn’t invested in the stock market so there’s very little risk of loss. And even if the bank fails, you’d likely still be covered by FDIC protection. An uninsured certificate of deposit, on the other hand, carries more risk since you don’t have FDIC coverage.

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Special Considerations for Uninsured CDs

When considering whether to invest in an uninsured certificate of deposit, it’s important to think about how much risk you’re comfortable taking. The risk factor can vary across different types of uninsured CDs. A floating rate Yankee CD, for example, may be riskier than a fixed-rate Yankee CD since it may be more difficult to estimate your returns.

Also, consider how much money you’ll need to invest if you’re looking into specialized uninsured CDs. While you might be able to open a standard CD at your bank with $500 or $1,000, you might need $100,000 or more to open a Yankee CD or a market-linked CD at a brokerage.

Uninsured CDs: Real World Example

It’s possible you might have an uninsured certificate of deposit without even realizing. For example, say you have checking and savings at the same bank. You don’t own those accounts with anyone else. Your combined balance across accounts is $200,000. You decide to open a new CD account and transfer $100,000 to it from an account held at a different bank.

Your combined balances across checking and savings and your CD account at the same bank now total $300,000. Under FDIC insurance rules, you’d only be covered up to $250,000 of that amount and the remaining $50,000 would be uninsured.

The FDIC applies insurance coverage limits per financial institution. So it’s possible to max out the limit at each bank where you have a CD account or any other eligible deposit account. Going back to the previous example, you could deposit $50,000 in the CD instead, then take the other $50,000 and open a CD at a different bank without exceeding FDIC insurance limits.

Pros of an Uninsured CD

Here are some of the advantages of uninsured CDs:

•   Investors may earn higher rates compared to regular CDs.

•   Market- or index-linked CDs may allow you to match the returns of a particular benchmark or index, similar to the way an index mutual fund works.

•   Brokered CDs may still be partially insured.

•   Uninsured CDs can also add diversification to a portfolio. The more diversified your investments are, the easier it may be to manage risk.

Cons of an Uninsured CD

Here are some of the drawbacks of an uninsured certificate of deposit:

•   No FDIC or NCUA protection.

•   Greater risk could mean a greater possibility of losing money.

•   Larger deposits may be required to open an uninsured CD.

Additionally, you may not be able to get a CD loan with an uninsured certificate of deposit. A CD loan allows you to borrow money using your CD balance as collateral. In terms of CD loan pros, this type of borrowing arrangement can help you build credit as you repay the loan. Your CD deposit can also continue earning interest during the loan period.

The Takeaway

Uninsured CDs could be a good fit for your financial plan, if you’re looking to set aside a large amount of money for a fixed period of time, at a higher rate than a standard CD or savings account. There are various types of uninsured CDs to choose from, but they generally require higher minimum deposits of $100,000, $250,000 or more. And these CDs may have additional restrictions, so be sure to do your research. A Yankee CD, for example, is only available via the U.S. branch of a foreign bank.

CDs aren’t the only way to save, of course, and SoFi now offers a new all-in-one Checking and Savings that can help you save big. You can sign up for an account right from your phone and pay zero account fees — and if you qualify and sign up with direct deposit, you can earn 1.25% APY. Open your Checking and Savings today.

Learn more about banking with SoFi.

FAQ

Are all CDs FDIC insured?

No, only CDs that are held at FDIC member banks are insured. FDIC coverage applies up to the standard limit of $250,000 per depositor, per account ownership type, per financial institution.

Who benefits from a certificate of deposit?

People who want a safe, secure way to save money while earning interest can benefit from opening one or more CD accounts. A CD can be used to save for short- or long-term goals and FDIC coverage offers reassurance that your money won’t be lost if your bank goes under.


SoFi members with direct deposit can earn up to 1.25% annual percentage yield (APY) interest on all account balances in their Checking and Savings accounts (including Vaults). Members without direct deposit will earn 0.70% APY on all account balances in their Checking and Savings accounts (including Vaults). Interest rates are variable and subject to change at any time. Rate of 1.25% APY is current as of 4/5/2022. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet
SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2022 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Guide to Yankee Certificates of Deposit

Guide to Yankee Certificates of Deposit

A Yankee certificate of deposit is a special type of CD that’s issued domestically by a branch of a foreign bank.

Yankee CDs, sometimes referred to as YCDs in finance, have several features that set them apart from other types of CDs, including higher minimum deposit requirements, short terms, and a lack of FDIC protection.

For those reasons, it’s helpful to understand how a Yankee certificate of deposit investment works and the potential risks involved.

What Is a Yankee Certificate of Deposit?

What are Yankee certificates of deposit? And how does a certificate of deposit work? Let’s compare the two.

First, a regular CD is a deposit account that requires investors to lock up their cash for a fixed period of time (typically a few months to a few years), and in exchange pays a higher interest rate than a traditional savings account. CDs purchased at a bank are generally FDIC insured up to $250,000 (CDs bought at a credit union are NCUA insured up to the same amount).

By contrast, a Yankee certificate of deposit is a CD account that’s issued by a branch of a foreign bank in the U.S., to U.S. customers. In general, the term of a Yankee certificate deposit is less than a year, and the minimum deposit required is more in line with a jumbo CD.

So, for example, a Canadian bank that has branches in the U.S. could offer Yankee CDs to U.S. residents. Even though the CDs would be issued by a foreign bank, they would still be subject to U.S. regulation by the Office of the Comptroller of the Currency (OCC) and the Federal Reserve Board. But a Yankee certificate of deposit would not be federally insured.

Foreign banks that operate in the U.S. can issue Yankee CDs in order to generate capital for making loans or investments. These CDs can be purchased at issuance or on the secondary market.

Recommended: What is Liquid Net Worth

How Yankee CDs Work

As noted above, Yankee CDs work much the same as other types of deposit accounts that are CDs. There are some differences, however, with regard to:

•   Minimum deposits

•   Interest rates

•   Maturity terms

•   Investment risk

Minimum Deposits

Though you might be able to invest in a standard CD with $500 or $1,000, a Yankee certificate of deposit investment might require an initial deposit of $1 million or more. Scotiabank, for instance, issues its Yankee CDs in increments of $250,000 while UBS requires a $1 million minimum deposit for Yankee CDs offered through its Stamford, CT, branch.

A CD of this size issued by a U.S. institution could be categorized as a negotiable CD or NCD. NCDs have a face value of $100,000 or more. But Yankee CDs are not negotiable CDs because they are not FDIC insured.

Fixed and Variable Rates

Interest rates for Yankee CDs may be fixed or variable, which is another difference from other CDs which typically offer a fixed rate, making them more predictable instruments for fixed-income investors.

Shorter Terms

Maturity terms for a Yankee certificate of deposit tend to be shorter (one to three years, depending on the issuer), while regular CDs can have terms ranging from 28 days up to 10 years. The investor cannot access their cash until the CD matures, without triggering an early withdrawal penalty.

Potential Risk

Perhaps the biggest difference between Yankee CDs and other types of CDs is the level of risk involved. Generally speaking, CDs are considered to be safe investments since they offer a practically guaranteed rate of return, and deposits are federally insured up to a certain amount. Yankee CDs, on the other hand, carry certain risks including credit risk and the possibility of lower-than-expected returns if you’re choosing a variable-rate option.

Recommended: Average Savings by Age

Why Does a Yankee CD Matter?

Yankee CDs are not something the everyday investor is likely to be concerned with. After all, most people don’t have $1 million or $50 million to invest into a single CD.

If you’re able to invest in a Yankee CD, however, it’s possible that you could earn a higher rate of return for your money. That’s important if you’re working on building wealth and want to diversify your portfolio.

Are CDs smart investments? They can be, if you’re comfortable leaving money in a CD account until it reaches maturity. Again, with a Yankee certificate of deposit you may be looking at a one- to three-year wait until the CD matures. So given the higher deposit requirements involved, it’s important to consider how comfortable you are typing up larger amounts for that long, and what kind of return you can expect.

From a banking perspective, Yankee CDs matter because they’re a source of capital for foreign banks, which may need U.S. dollars to cover domestic obligations.

Yankee CDs: Real World Example

Scotiabank is one example of a Canadian bank that offers Yankee CDs to U.S.-based savers. The bank, headquartered in Toronto, offers both floating-rate and fixed- rate Yankee certificates of deposit. The bank’s floating-rate products have maturity terms ranging from two to three years, with minimum deposits of $250,000 and target principal amounts ranging from $50 million to $90 million.

The fixed-rate Yankee CD earns an impressive yield and requires a minimum deposit of $250,000, with a target principal amount of $100 million. The maturity period for this CD is also two years. Scotiabank offers these CDs exclusively to institutional investors who are accredited.

Special Considerations for Yankee CDs

There are two important things to keep in mind with a Yankee certificate of deposit investment. First, investors assume a certain amount of credit risk with these CDs.

The quality of these CDs is determined by the credit rating of the issuing bank. Banks with lower credit ratings may be more likely to default on financial obligations, including the payment of interest to CD holders. Tying up large amounts of money in Yankee certificates of deposit issued by banks with questionable credit ratings could therefore be risky.

Second, it’s important to keep in mind that FDIC protection does not apply to these CDs. Ordinarily, CDs issued at FDIC-insured banks are protected up to $250,000 per depositor, per financial institution, per account ownership type, in the rare event that the bank fails. With Yankee CDs, you don’t have that reassurance that your money is safe should the worst happen.

How to Open a Yankee CD

Opening a Yankee isn’t that different from opening any other type of CD. Here are the main steps involved:

•   Locate banks that offer Yankee CDs in the U.S.

•   Compare the Yankee certificates of deposit available, including the minimum deposit and interest rate.

•   Complete the application to open an account.

•   Make your initial deposit.

As noted, it’s important to choose a financial institution with good credit ratings. So you may want to take the additional step of checking credit ratings with Moody’s or Fitch Ratings to measure the bank’s financial health and strength.

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Alternatives to Yankee CDs

If you’re looking for CD options that may be more accessible than Yankee CDs, there are some other possibilities. You could use any of the following to reach your savings goals:

•   Standard CDs. A standard CD is a regular CD offered by a bank or credit union that pays interest and has a reasonable minimum deposit.

•   Jumbo CDs. Jumbo CDs are similar to standard CDs but have larger minimum deposit requirements. For example, you may need $10,000 or more to open a jumbo CD.

•   No-penalty CDs. A no-penalty CD allows you to withdraw money from your C before its maturity date without triggering an early withdrawal penalty.

•   Bump up CDs. Raise your rate or bump up CDs allow you to raise your interest rate once or twice during the CD term. This type of CD might be attractive if you expect rates to rise.

•   Add-on CDs. An add-on CD allows you to make additional deposits to your account after your CD has been opened. Ordinarily, CDs don’t allow additional deposits.

You may also consider CD-secured loans if you’re interested in a CD product that can help you build credit. With a CD-secured loan your CD serves as collateral. Your money stays in the CD until maturity, earning interest. Meanwhile, you make payments to the loan which can be reported to the credit bureaus.

Once the CD matures, you can withdraw the principal and interest or roll it into a new CD. You also get the benefit of on-time payment history, which can help to improve your credit score.

The Takeaway

A Yankee certificate of deposit is issued domestically by a branch of a foreign bank to U.S. investors. Yankee CDs are designed to help investors earn a solid return while allowing foreign banks to raise capital via U.S. investors. Due to their high minimum deposit requirements (as much as $1 million or more), these CDs may be better suited to some investors than others; they’re sometimes restricted to institutional investors.

Yankee CDs may offer competitive rates, but they are not federally insured like most U.S.-issued CDs.

If you’re committed to seeing your money grow slowly and steadily over time, the good news is you don’t have to miss out on a great rate when saving money. If you’re banking with SoFi, you can take advantage of SoFi’s all-in-one Checking and Savings. You can sign up for an account right from your phone and pay zero account fees — and if you qualify and sign up with direct deposit, you can earn 1.25% APY. Open your Checking and Savings today.

Get started with SoFi banking today.

FAQ

Can you lose money on a certificate of deposit?

Certificates of deposit (CDs) are generally a safe, secure way to save money. It’s possible, however, to lose money with a Yankee CD if the bank that issued it is unable to meet its financial obligations and pay interest to investors as scheduled.

What are the cons of a certificate of deposit?

Certificates of deposit may offer lower rates of return compared to other investments, which means your money has potential for growth. With bank CDs, savers may face early withdrawal penalties if they take money from their accounts before the CD matures.

How do I redeem a certificate of deposit?

If your CD is reaching maturity or you need to withdraw money for any other reason, you can visit a branch to redeem your CD or do so online if your bank allows it. You’ll need to specify how much money you want to withdraw and where that money should be sent if you’re redeeming CDs online.


SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2022 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
SoFi members with direct deposit can earn up to 1.25% annual percentage yield (APY) interest on all account balances in their Checking and Savings accounts (including Vaults). Members without direct deposit will earn 0.70% APY on all account balances in their Checking and Savings accounts (including Vaults). Interest rates are variable and subject to change at any time. Rate of 1.25% APY is current as of 4/5/2022. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Third-Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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