What Happens to a Brokered CD at Maturity?

A brokered certificate of deposit (CD) is a savings instrument offered by brokerage firms. These CDs are issued by various banks but held in your brokerage account. The process for a brokered CD at maturity differs from a traditional bank CD.

Automatic Rollover and Cash Out

When a brokered CD reaches its maturity date, two common outcomes may occur if an investor does not provide specific instructions to their brokerage firm. One common scenario involves an automatic rollover, where the principal amount and any accrued interest are reinvested into a new CD. This new CD may feature different terms, such as a revised interest rate or a new maturity date. The brokerage firm often defaults to this action if no other directive is received from the investor.

Alternatively, the principal and accrued interest from the maturing brokered CD may be disbursed as cash into the investor’s brokerage account. These funds then become available for withdrawal or for reinvestment. This “cash out” option is another frequent default, depending on the specific policies of the brokerage firm or the terms of the original CD offering. The precise default action can vary based on the brokerage firm’s procedures and the CD’s characteristics.

Directing Your Broker

Investors must proactively communicate their intentions to their brokerage firm before the maturity date. This communication can be done through various methods, including secure online portals, direct phone calls to a representative, or by submitting written instructions. Providing clear instructions is important to avoid default actions.

Brokerage firms establish a specific deadline by which they must receive instructions regarding a maturing CD. This deadline usually falls within a few business days prior to the actual maturity date. If an investor misses this instruction deadline, the brokerage firm will proceed with its default action, which could be either an automatic rollover into a new CD or a cash disbursement into the investor’s account.

Investors have clear choices when providing instructions. If choosing to reinvest, the investor will need to specify a new CD from the offerings available through the brokerage. For those preferring to cash out, a simple instruction to deposit the funds into the linked brokerage account is sufficient. After providing instructions, investors should confirm their directive with the broker and review their account statements after the maturity date to ensure the instructions were executed correctly.

Tax Considerations

All interest earned on a brokered CD is considered taxable income when earned or paid, regardless of whether the funds are cashed out or reinvested. Brokerage firms are responsible for reporting this interest income to the Internal Revenue Service (IRS) and to the investor. This reporting is done on IRS Form 1099-INT.

For CDs that were originally purchased at a discount, known as original issue discount (OID), the discount is treated as interest income that accrues over the life of the CD. This accrued OID is taxable annually, even if the cash payment of the discount does not occur until the CD matures. The brokerage firm will also report this accrued OID on Form 1099-INT.

Unlike selling a CD on the secondary market before its maturity date, there are no capital gains or losses recognized when a brokered CD matures at its par value. At maturity, the investor receives the original principal amount plus all accrued interest, meaning there is no sale event that would trigger a capital gain or loss calculation. The method by which the funds are handled at maturity, whether through reinvestment into a new CD or a cash payout, does not alter the taxability of the interest income earned during that period.