Your Brokered CD Has No Early-Withdrawal Penalty. Selling It This Fall Costs Nearly Three Times One.

If you bought a CD inside a brokerage account this year and now need the money, you’re about to learn the one thing the “no early-withdrawal penalty” pitch skips. There’s usually no penalty because there’s usually no early withdrawal. You sell it. And since rates went up, buyers want a discount.

On a $10,000 five-year CD, that discount runs about $444 by our math. A bank CD’s penalty on the same money would be about $154.

What changed since you bought

Brokered CDs are bank CDs sold through Schwab, Fidelity, Vanguard and the like. They trade like small bonds. Their price moves opposite to rates.

And rates moved. The 5-year Treasury yield was 3.65% on February 20. On October 23 it closed at 4.82%, up 1.17 points, according to Treasury’s daily yield curve. The 2-year went from 3.48% to 4.69%.

Nobody wants your 3.75% CD at full price when a new one pays more. The SEC put it plainly years ago: “If interest rates have risen, there may be less demand for your lower-yielding CD. That means you would have to sell the CD at a discount and lose some of your original deposit.”

The brokerages say the same in their own fine print. Schwab: “There are no guarantees that you’ll get what you originally paid for the CD.” Vanguard: “Vanguard Brokerage does not make a market in brokered CDs.” Translation: the firm that sold it to you isn’t promising to buy it back.

The math

Say you put $10,000 into a 5-year brokered CD in February at 3.75%. Now assume comparable new CDs pay about 1.15 points more, roughly what the 5-year Treasury moved. With four years and four months left, we priced your CD at about $9,556. That’s a $444 haircut.

Then add the markup. Schwab says that when it trades as principal, the price can include a markup reflecting the bid-ask spread that is “not subject to a minimum or maximum.”

Compare a bank CD. Ally charges 150 days of interest to break a CD of 49 months or longer. At 3.75% on $10,000, that’s about $154.

Nearly three times the cost. Here’s the catch: the brokered version only looked more flexible.

What to do

Hold it if you can. Hold to maturity and you get the full $10,000 back plus every coupon. The lower number on your statement is a quote, not a loss.

Don’t sell just to chase today’s higher rate. The discount roughly equals the extra interest the new CD would pay. On our example, selling at $9,556 and reinvesting at 4.90% ends within about $40 of holding at 3.75%, before the markup. You pay a dealer to stand still.

Need cash anyway? Sell the CD closest to maturity first. Vanguard notes short-term CDs are less sensitive to rate moves. Ask for a bid before you commit and compare it to face value.

Building a ladder now? Keep emergency money out of it. Put that in a high-yield savings account or a no-penalty option and run the numbers in our savings calculator. Our CD comparison and CD vs. savings guide cover the bank side.

The detail

Most brokered CDs carry a survivor’s option. Vanguard says heirs can put the CD back to the bank “at full face value with no penalty.” Some are also callable, which cuts the other way when rates fall; we covered that in the callable CD trap. FDIC insurance protects up to $250,000 per depositor per bank if the bank fails. It doesn’t protect the price you get when you sell.

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