IRA Savings Account and CD’s VS Bond Funds

Have a question about your personal investments? No matter how simple or complex, you can ask it here.

IRA Savings Account and CD’s VS Bond Funds

Postby sensei » Mon Jul 15, 2013 4:22 pm

My bond allocation is currently split into three equal parts Total Bond Market (BND), Short Term US (VBIRX and BSV) and TIPS (VIPSX) all in tax-deffered accounts.

I read some of the debate over the supposed bond bubble but don’t really have a strong opinion other then a general feeling that more people are in US bonds then is warranted by our balance sheet.

I decided to skirt the debate by looking for risk-free alternatives that work in taxable accounts and was surprised to find Ally bank has IRA online saving account at .84 that has a higher return then my Short-Term Bonds (.81). without the risk of a drop in NAV.

I plan to rethink my bond allocation overall and consider an Ally 12 month or 2 year CD to replace the Total Bond Market, but in the meantime putting my Short-Term bond money into the saving account seems like a no-brainer (other then the hassle of setting up the account and transferring the IRA)..

If bond rates shoot up I should be able to buy them later at a lower NAV relative to the rates (or just stay with Ally as long as there rates go up in step).

I’ll admit to not being near as comfortable with bond funds as I am with equities funds despite reading many Boglehead recommended books.

I imaging this isn’t as much this isn’t a simple as it seems to me - Anyone see the risks that would be associated with this move?

Thanks all!

Lance
sensei
 
Posts: 23
Joined: Fri Aug 20, 2010 2:31 pm

Re: IRA Savings Account and CD’s VS Bond Funds

Postby ieee488 » Mon Jul 15, 2013 4:34 pm

I have a bank money market earning 1.05% APY, so you can do better than Ally 0.84% unless you aren't able to deposit at least $5K.

Edit: Also, you should look into i-Bonds.
Dell Precision M6300 (Ubuntu Linux 12.04 + Windows 7), Dell Precision M6300 (Windows 7), Dell Latitude D530 (Windows Vista), Dell Latitude D531 (Windows Vista)
ieee488
 
Posts: 1539
Joined: Thu Dec 10, 2009 8:57 am

Re: IRA Savings Account and CD’s VS Bond Funds

Postby sensei » Mon Jul 15, 2013 4:56 pm

iBonds are good up to the 10k limit - I'll replace some TIPS with those.

Regarding the money market account - are you able to put that in tax differed accounts?

If not at the highest tax rate I think one would do a bit better at Ally...

Thanks!
Lance
sensei
 
Posts: 23
Joined: Fri Aug 20, 2010 2:31 pm

Re: IRA Savings Account and CD’s VS Bond Funds

Postby billyt » Tue Jul 16, 2013 5:51 am

To make this decision, I would consider the relative interest rates and the intended holding period. The yield on TBM is about 2% and the 1 and 2 year Ally CD's about 1%. If my investment horizon was long I would go with TBM. If I need the money in 5 years or less, I would go with the CD (match the term to when you need the cash). If you buy the CDs and rates rise sharply in the near term, you could liquidate your CDs and by back into TBM when it is 'on sale'. If this doesn't happen, you are losing 1% a year in relative to TBM. You might make some money timing the bond market, or not. The case for swapping your short term bonds for CDs is stronger, because the rates are very close. Of course, if this is retirement money that will not be needed for a while, you might want to exchange that short term bond fund for TMB, as that ought to have a higher total return over the long haul.
billyt
 
Posts: 633
Joined: Wed Aug 06, 2008 9:57 am


Return to Investing - Help with Personal Investments

Who is online

Users browsing this forum: FAST Enterprise [Crawler], Frank-NL, Ward Cleaver and 16 guests