FDIC-insured Bank CD 5.0% for 10 years? Ohio 529

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FDIC-insured Bank CD 5.0% for 10 years? Ohio 529

Postby Tramper Al » Tue Aug 03, 2010 9:28 am

Hi,

I don't really keep track of interest rates too much, except maybe for my MMF cash positions (minimal).

Our 529s hold mainly TIPS these days, and I am over my target allocation. I just happened to notice the bank CD rates in our Ohio 529 accounts, and the 10 year is an even 5.0%. This seems like a pretty good rate, no? FDIC insured, and compounds daily for CDs < $100K.

The early withdrawal penalties are substantial, but it is after all captive money in the 529 account. My eldest son turned 6 this week, so 10 years seems OK.

We do look at our 529s as part of the overall portfolio, so this CD rate is competing against things on the nominal side like MMFs, T-Bills, intermediate Treasuries. I note that the rate on 10-year Treasuries this morning is 2.90%.

What do you think?
Last edited by Tramper Al on Tue Aug 03, 2010 9:55 am, edited 1 time in total.
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Postby bigROI » Tue Aug 03, 2010 9:35 am

In addition to this have you considered changing the beneficiary to say your mother or father? or your spouses mother and father? I hear you can modify this later after they look at assets for financial aid packages. This shields that account when it is not at the parental or student level. I was going to further fund my 529's but am fencesitting with consideration of making this change. That 5% in this market doesn't seem too bad - what is the detail of the penalty terms?
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Fifth Third Ohio 529 CDs

Postby Tramper Al » Tue Aug 03, 2010 9:37 am

Fifth Third Certificates of Deposit

$500 minimum opening deposit

CD Term APY*
3-5 Month CD 0.50%
6-11 Month CD 0.70%
12-23 Month CD (1 to 2 years) 1.00%
24-35 Month CD (2 to 3 years) 1.50%
36-47 Month CD (3 to 4 years) 2.00%
48-59 Month CD (4 to 5 years) 2.50%
60-83 Month CD (5 to 7 years) 3.00%
84-119 Month CD (7 to 10 years) 4.00%
120-143 Month CD (10 to 12 years) 5.00%
144 Month CD (12 years) 5.00%
*Annual percentage yields (APYs) are accurate as of 8/2/2010
Contributions to the Fifth Third 529 Savings Account and CD Options require two business days to complete the transaction. Accordingly, such contributions will receive the APY in effect on the business day following the receipt of a contribution received in good order before 4:00 p.m. on any given business day. Online contributions may take one to four banking days to process completely.
Minimum opening balance is $500. The interest rate will remain the same until the maturity date of the CD. Interest begins to accrue on the business day of deposit and will be calculated using the daily balance method. This method applies a daily periodic rate to the balance in the account each day. Interest is compounded continuously for CDs of less than $100,000. For CDs of $100,000 or more, the simple interest method is used, and interest is not compounded. Interest will be credited to the CD. Penalty for withdrawing funds prior to maturity date is equal to the greater of (a) one-half of the interest for the unexpired term of the 529 CD; or (b) for 529 CDs of 3-11 months, an amount equal to three months of interest, or for 529 CDs of 12-144 months, an amount equal to 6 months of interest. You may lose money if you withdraw the CD prior to maturity.
Last edited by Tramper Al on Tue Aug 03, 2010 9:38 am, edited 1 time in total.
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Postby Chuck » Tue Aug 03, 2010 9:37 am

5.0% is more than 2.9% with the same risk-free-ness. Sounds like a free lunch as far as nominal rates go.
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Postby Tramper Al » Tue Aug 03, 2010 9:43 am

Chuck wrote:5.0% is more than 2.9% with the same risk-free-ness. Sounds like a free lunch as far as nominal rates go.

Thanks, that's what I'm thinking.

I was contemplating a partial rollover of one of our VG 529s (Virginia, Ohio) to a Fidelity plan (e.g. NH), just to get access to nominal Treasuries (intermediate index), but this would seem preferable. I guess I expect more in terms of diversification benefit (vs. equities) from market-priced Treasuries, but not to the tune of a 2.1% bonus.
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Re: Fifth Third Ohio 529 CDs

Postby keepingDownLow » Tue Aug 03, 2010 9:45 am

Tramper Al wrote:Fifth Third Certificates of Deposit

$500 minimum opening deposit

CD Term APY*
3-5 Month CD 0.50%
6-11 Month CD 0.70%
12-23 Month CD (1 to 2 years) 1.00%
24-35 Month CD (2 to 3 years) 1.50%
36-47 Month CD (3 to 4 years) 2.00%
48-59 Month CD (4 to 5 years) 2.50%
60-83 Month CD (5 to 7 years) 3.00%
84-119 Month CD (7 to 10 years) 4.00%
120-143 Month CD (10 to 12 years) 5.00%
144 Month CD (12 years) 5.00%
*Annual percentage yields (APYs) are accurate as of 8/2/2010
Contributions to the Fifth Third 529 Savings Account and CD Options require two business days to complete the transaction. Accordingly, such contributions will receive the APY in effect on the business day following the receipt of a contribution received in good order before 4:00 p.m. on any given business day. Online contributions may take one to four banking days to process completely.
Minimum opening balance is $500. The interest rate will remain the same until the maturity date of the CD. Interest begins to accrue on the business day of deposit and will be calculated using the daily balance method. This method applies a daily periodic rate to the balance in the account each day. Interest is compounded continuously for CDs of less than $100,000. For CDs of $100,000 or more, the simple interest method is used, and interest is not compounded. Interest will be credited to the CD. Penalty for withdrawing funds prior to maturity date is equal to the greater of (a) one-half of the interest for the unexpired term of the 529 CD; or (b) for 529 CDs of 3-11 months, an amount equal to three months of interest, or for 529 CDs of 12-144 months, an amount equal to 6 months of interest. You may lose money if you withdraw the CD prior to maturity.


Anyway to find out if another bank is offering such a 10-year CD yield? My area doesn't support Fifth Third, sadly.
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Re: Fifth Third Ohio 529 CDs

Postby Tramper Al » Tue Aug 03, 2010 9:50 am

keepingDownLow wrote:Anyway to find out if another bank is offering such a 10-year CD yield? My area doesn't support Fifth Third, sadly.

So I think this rate table applies only within the 529. I don't live in a Fifth Third area either, but evidently our Ohio 529s do.

Maybe something else to compare this 10-year CD to (within a portfolio) might be the TIAA Traditional, which also takes 10 years or so to unwind? That seems to top out at 3.50% currently? I do like the idea of FDIC protection too, though.
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Re: Fifth Third Ohio 529 CDs

Postby Grt2bOutdoors » Tue Aug 03, 2010 10:12 am

Tramper Al wrote:
keepingDownLow wrote:Anyway to find out if another bank is offering such a 10-year CD yield? My area doesn't support Fifth Third, sadly.

So I think this rate table applies only within the 529. I don't live in a Fifth Third area either, but evidently our Ohio 529s do.

Maybe something else to compare this 10-year CD to (within a portfolio) might be the TIAA Traditional, which also takes 10 years or so to unwind? That seems to top out at 3.50% currently? I do like the idea of FDIC protection too, though.


Fifth Third is based in Cinncinati - hence the Ohio 529 plan offering it. Sounds like a great bond to own - 5% for 10 years, wonder how long that free lunch will last?
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Re: FDIC-insured Bank CD 5.0% for 10 years? Ohio 529

Postby BenAiken » Tue Aug 03, 2010 11:26 am

Tramper Al wrote:Hi,

I don't really keep track of interest rates too much, except maybe for my MMF cash positions (minimal).

Our 529s hold mainly TIPS these days, and I am over my target allocation. I just happened to notice the bank CD rates in our Ohio 529 accounts, and the 10 year is an even 5.0%. This seems like a pretty good rate, no? FDIC insured, and compounds daily for CDs < $100K.

The early withdrawal penalties are substantial, but it is after all captive money in the 529 account. My eldest son turned 6 this week, so 10 years seems OK.

We do look at our 529s as part of the overall portfolio, so this CD rate is competing against things on the nominal side like MMFs, T-Bills, intermediate Treasuries. I note that the rate on 10-year Treasuries this morning is 2.90%.

What do you think?


Usually, I'd say it's an annuity bate and switch tactic. But in a 529 plan it might be worth looking into.

10 years is a long time for a cd and your interest rate risk will be very high. Since most of your money is in TIPS I guess your expecting inflation. If that is the case 10 year cd is a bad choice.
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Postby lws6772 » Tue Aug 03, 2010 12:45 pm

5% sounds pretty good to me too. I remember reading yrs. ago by some famous investor(maybe Bogle), that the average investor is lucky to get 6%(long term) after all costs are accounted for. After I got out of the stock market in 04' and had a chance at 5 & 6%(because of a boglehead tip - thanks a million), I jumped on those rates. And that's with NO fees and NO expense ratios AND FDIC insured, plus I can sleep good at night. Works for me.
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Re: FDIC-insured Bank CD 5.0% for 10 years? Ohio 529

Postby Tramper Al » Tue Aug 03, 2010 1:33 pm

GRT2BOUTDOORS wrote:Fifth Third is based in Cinncinati - hence the Ohio 529 plan offering it. Sounds like a great bond to own - 5% for 10 years, wonder how long that free lunch will last?

Right. 5.0% on a 10-year FDIC CD seems to be quite a bit higher than the marketplace (standard retail banks) are offering. Makes we wonder if there is a subsidy at work. Not that I'm complaining.

It's also not strictly comparable to what you might get with a typical 529 bond fund, for example. Every 529 fund has some layer of fees, generally higher than what it would cost to own such a fund in standard retail fund or ETF form. But no fees for these Fifth Third CDs. I think we just get that 5% nominal yield.

BenAiken wrote:Usually, I'd say it's an annuity bate and switch tactic. But in a 529 plan it might be worth looking into.

Why would you usually say anything about an annuity?

BenAiken wrote:10 years is a long time for a cd and your interest rate risk will be very high. Since most of your money is in TIPS I guess your expecting inflation. If that is the case 10 year cd is a bad choice.

I don't follow this logic. Only our 529 locations are mainly in TIPS, and that's just because they are tax-inefficient (much like a 5% CD) so I locate them there. Maybe a betting man would load up on TIPS if he expected inflation, I don't know. I use TIPS so that at least some part of my portfolio is indifferent to inflation expectations.

Sure, with any 10-year fixed rate instrument like this one runs the risk of rising rates in the interim. That's basically why I mentioned the often held 10-year Treasury with its substantially lower yield of 2.9% for comparison's sake.
Last edited by Tramper Al on Tue Aug 03, 2010 2:35 pm, edited 2 times in total.
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Postby hsv_climber » Tue Aug 03, 2010 1:40 pm

I envy you that you have access to such a great deal. :wink:
Go for it.
Alabama 529 does not offer CDs at all.

How do you buy TIPS in your 529 plan? Directly from treasury or via a fund?

I just invested some money today into Alabama 529, which would go into Vanguard Inflation-Protected Securities 529 Portfolio with 0.37 expense ratio.
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Postby SteveB3005 » Tue Aug 03, 2010 1:41 pm

10 years is a long time for a cd and your interest rate risk will be very high. Since most of your money is in TIPS I guess your expecting inflation. If that is the case 10 year cd is a bad choice.


In my view, TIP's can compliment longer term issues nicely, because interest rate risk is most often directly related to inflation risk.

Holding a large proportion of TIP's allows you to extend duration on your nominal bonds or CD's and earn the higher premium in a positively sloped yield curve.

This barbell is even more effective than the traditional barbell of short notes (1-3 years) and longer notes (8-15 years) , because of the quicker reaction of TIP's to the 6 month change in CPI.

edit:typo and syntax
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Postby Tramper Al » Tue Aug 03, 2010 1:48 pm

hsv_climber wrote:I envy you that you have access to such a great deal. :wink:
Go for it.
Alabama 529 does not offer CDs at all.

How do you buy TIPS in your 529 plan? Directly from treasury or via fund?

I just invested some money today into Alabama 529, which would go into Vanguard Inflation-Protected Securities 529 Portfolio with 0.37 expense ratio.

Thanks, I think I will have to give this serious consideration.

For TIPS in 529s, we just use the VG funds. My notes indicate that the cost is 0.28 with Virginia and 0.27 with Ohio. So not too bad.
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Postby jsl11 » Tue Aug 03, 2010 1:48 pm

As usual, there is no free lunch. The "price" in this case is the potentially huge penalty for early withdrawal. It could be as much as half of the unpaid interest. For example, if after two years, interest rates are much higher than present, and you want to change to a higher yield CD, you would be penalized 50% of 8 years interest. This would be a 20% penalty (or more if they include compound interest).

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Postby Tramper Al » Tue Aug 03, 2010 1:56 pm

jsl11 wrote:As usual, there is no free lunch. The "price" in this case is the potentially huge penalty for early withdrawal. It could be as much as half of the unpaid interest. For example, if after two years, interest rates are much higher than present, and you want to change to a higher yield CD, you would be penalized 50% of 8 years interest. This would be a 20% penalty (or more if they include compound interest).

Jeff

Yes. I did mention the penalties, no? I see this mainly as a liquidity risk, rather than a (new to me) interest rate risk. Within the confines of the 529, I'm not sure that my 10 year liquidity is all that important. One CD in each of our 3 OH 529s, carefully staying clear of standard FDIC limits, might amount to about 30% of our 529 locations, and about 4.5% of our overall AA.

I could certainly put together a ladder of CDs with various maturities, rather than focusing on the 10-year. They all seem quite competitive, I think. The fact is, though, our AA already has 10-year range interest rate risk. It just doesn't pay as well as this does. And even if I just want to focus on the college tuition time line, that is 10+ years out.

To be honest, I have not bought a CD in about 20 years. But I did recognize the penalty structure as being rather severe. If planning to withdraw early, I don't think you even break even until you are a third of the way through the decade. I think I would consider this a 10 year commitment, just like a 10-year bond and somewhat like TIAA Traditional.

Again, though, I compare these to the 10-year Treasury, which is basically what they would be replacing in our portfolio. In your scenario, I would have the same regret 2 years into 10 with my Treasury note in the case of a huge spike in interest rates, though they'd have to go quite a bit higher to regret the CD. With the Treasury, this would be fully reflected in the value of the note, so I would gain nothing by selling it then either. Thus, does it make any difference that the CD is not tradable?

We do have other components in our AA, mind you, so I don't plan to be devastated by one particular scenario or another. Just trying to assess this 529 offering for what it is, and thought that the rates seemed rather generous.

Maybe I should get opinions on the relevance of these penalties, though. I just see it as a 10 year nominal yield contract that pays much better than a comparable 10 year nominal yield contract. That's all.

Is it overly simplistic to reduce the decision to: Which would you rather own in a 529, a 10-year US Treasury yield 2.9% at purchase OR a 10-year FIDC-backed CD (with withdrawal penalties) yield 5.0%? The comparison is not quite optimal since I can only buy an intermediate Treasury fund in a 529, but you get the idea.

Thank you all for the feedback so far, and please keep it coming . . .
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Postby xerty24 » Tue Aug 03, 2010 3:05 pm

jsl11 wrote:For example, if after two years, interest rates are much higher than present, and you want to change to a higher yield CD, you would be penalized 50% of 8 years interest. This would be a 20% penalty (or more if they include compound interest).

Yeah it's quite harsh. Some observations:

- holding for less than 3 years causes you to lose lots of money (up to 30%!)
- holding for 3 years is an average rate of -3.5% (bad!)
- holding until 4 years breaks even (~0%)
- holding until 5 years beats the 5 year treasury by a little (1.9% vs 1.6%)
- holding until 7 years beats treasuries by 1.4%
- holding until 10 years beats treasuries by 2%

Yield-to-maturity, including the penalty effects, are around 8-9% - you would not want break the CD to buy a replacement CD (with the same original maturity date) unless you could lock in a rate of at least 8-9%.
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Postby Tramper Al » Tue Aug 03, 2010 3:20 pm

xerty24 wrote:
jsl11 wrote:For example, if after two years, interest rates are much higher than present, and you want to change to a higher yield CD, you would be penalized 50% of 8 years interest. This would be a 20% penalty (or more if they include compound interest).

Yeah it's quite harsh. Some observations:

- holding for less than 3 years causes you to lose lots of money (up to 30%!)
- holding for 3 years is an average rate of -3.5% (bad!)
- holding until 4 years breaks even (~0%)
- holding until 5 years beats the 5 year treasury by a little (1.9% vs 1.6%)
- holding until 7 years beats treasuries by 1.4%
- holding until 10 years beats treasuries by 2%

Yield-to-maturity, including the penalty effects, are around 8-9% - you would not want break the CD to buy a replacement CD (with the same original maturity date) unless you could lock in a rate of at least 8-9%.

Thanks for that.

So, are you comparing the harsh-penalty CD to a Treasury note that loses value in the kind of rising interest rates that would cause you to consider breaking a CD?

Or is this a liquidity problem?

I am still trying to get my head around side by side positions in a 10-year WD penalty CD and a 10-year Treasury note. My understanding is that the Treasury note marked-to-market has no put provisions, that is you will never be better off selling a 10-year note 2 years later to buy an 8-year note. A CD that you can discard early without penalty would certainly be an advantage.

But what is the fair comparison?

I can clearly understand how a 10-year penalty free CD would be preferable to a 10-year penalty-laden CD. And that you'd accept a lower interest rate to be able to swap mid term.

But how are you ever worse off in a higher rate 10-year CD than in a lower rate 10-year Treasury note, if you cannot (will not) terminate early the former, and you gain nothing by selling/replacing the latter? Other than interim liquidity?

Thanks . . .
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Postby xerty24 » Tue Aug 03, 2010 3:48 pm

Tramper Al wrote:So, are you comparing it to a Treasury note that loses value in the kind of rising interest rates that would cause you to consider breaking a CD?

I'm comparing to a shorter term treasury, held to its maturity. The situation is "I know I want to hold for exactly 5 years. Do I want to buy a 5 year treasury or hold this 10 year CD and break it at the 5 year point?"

I am still trying to get my head around side by side positions in a 10-year WD penalty CD and a 10-year Treasury note. My understanding is that the Treasury has no put provisions, that is you will not be better off selling a 10-year note 2 years later to buy an 8-year note. A CD that you can discard early without penalty would certainly be an advantage. But what is the fair comparison?

It's easier not to think about selling the 10 year treasury early - think instead about holding it to maturity and breaking the CD. Basically you've got almost all downside risk on treasuries anyway (rates don't have that far to fall). Your 10 year treasury as a ~5 year duration, so you'd lose a lot if rates rose to the YTM cutoffs I was citing in the ~8% range (around 40% if it happens right away, maybe half that if it happens in the middle).

Put simply:

- if rates are going to rise, treasuries will fall more than the cost of breaking this CD (and you may not want to break it)
- if rates are going to fall, treasuries will make a little more, but not much (probably ~breakeven since the CD has a 2% annual advantage)
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Postby Sammy_M » Tue Aug 03, 2010 4:04 pm

I really like the idea. Even considering it for myself. I too view our 529s as part of our overall portfolio. In my case I'd transfer TIPS from the VA 529 to Ohio CDs and then would sell intermediate nominals in my retirement accounts to buy direct TIPS.

Only potential limitation I see is if it left you (or me) with very little in nominal treasuries in the remainder of your overall portfolio.

If we had a similar situation to 2008 where equities take a major dip, and TIPS suffer from a liquidity crunch... being able to sell off liquid treasuries to meet rebalancing needs is a great thing.
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Postby Tramper Al » Tue Aug 03, 2010 4:20 pm

Sammy_M wrote:Only potential limitation I see is if it left you (or me) with very little in nominal treasuries in the remainder of your overall portfolio.

If we had a similar situation to 2008 where equities take a major dip, and TIPS suffer from a liquidity crunch... being able to sell off liquid treasuries to meet rebalancing needs is a great thing.

Agreed, and I will undertake this only in moderation. The 30-year bonds and zero coupon ETF are still in place for doomsday rebalancing. Did someone mention interest rate risk?
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Pass

Postby grok87 » Tue Aug 03, 2010 9:00 pm

I had seen this too but the early withdrawal penalty is too egregious for me. I prefer penfed 5 year CDs which have only a 6 months interest penalty or less if it's only been open less than 6 months. Yield is 3 percent for a spread of about 130 bps. Say interest rate spike by 200 bps shortly after buying either of these CDs. If the fifth 3rd 10 year cd were a treasury it's value would fall by about 17 percent (assuming duration of 8.5). Ie you could get out at 83. Instead with the cd they will let you out for 75. Seems kind of harsh.
Compare to the penfed cd. In that case you can get out at par vs if it were a treasury you could get out at say 90.5, assuming duration of 4.75.
So the penfed cd is a much better deal IMHO- decent spread over treasuries plus protection against interest rate rises instead of a worse than treasury penalty in the fifth 3rd case
cheers,
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Postby xerty24 » Wed Aug 04, 2010 4:19 am

If rates spike 200bp you don't need to cash out the 5/3 CD since it's the same rate (5%). Remember it's not a treasury and doesnt lose money with the rise.

You'll never beat this deal with treasuries unless you can time the market. You won't beat it with other CDs unless you guess some big rate hikes in advance (that the market isn't forecasting). Sure you could do better with a 5 year penfed CD IF rates in 5 years are 8% or higher, but you'll do worse if they aren't. You need to assume some pretty dramatic moves for this to be a worse deal than the alternatives.
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Postby nisiprius » Wed Aug 04, 2010 7:39 am

Mr. Broken Record here. Before you consider a 10-year CD, be absolutely certain what the terms and conditions are. In particular, be absolutely certain that you actually do have the right to pay the penalty and break the CD. Be sure you have the full document describing the full terms and conditions, and that you've read it carefully enough to see that there isn't any language saying that early withdrawal is "at the bank's discretion."

That is, that you could make an early withdrawal and the bank could decide not to let you do it.

There may be such language and there may not be. The bank decides what its terms are. There's no uniformity. Sometimes the terms are "This is the penalty for early withdrawal provided we decide to let you make that early withdrawal."
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Postby Tramper Al » Wed Aug 04, 2010 8:41 am

nisiprius wrote:Mr. Broken Record here. Before you consider a 10-year CD, be absolutely certain what the terms and conditions are. In particular, be absolutely certain that you actually do have the right to pay the penalty and break the CD.

Good to read the fine print, generally.

In a 529, with our eldest child 11+ years from college, and this CD making up 1.5% of our overall liquid AA, I am pretty confident that I will be able to leave this CD intact for the duration of its term. I am willing to give up some marginal liquidity here, as I already consider the 529 location out of reach now, due to the penalties/taxes for any non-qualified withdrawal.
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Postby Tramper Al » Fri Aug 06, 2010 10:43 am

OK, I've just done it, bought a 10-year 5.0% CD within one of our Ohio 529s.

Let the buyer's remorse begin.
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Postby detifoss » Sun Aug 08, 2010 10:43 am

Funny, I was just reviewing the options in my Ohio 529 plan this AM, and came across the FifthThird CD rates (I currently have my 9 mo boy's 529 invested 50/50 split between the Vanguard Tips Fund, and the Vanguard Extended market fund). I'm about to add a substantial sum to his account, and wanted to have a nominal bond component to balance the TIPS (I generally view the 529 in the context of our overall AA, but due to the fact that I need to use this money in 18-22 yrs (college/grad school) the time horizon is shorter. More importantly, the tax advantaged nature of the 529, if used for college expenses, is exactly like Roth - tax deferred growth, tax free 'withdrawal.'

I could compare it to the 10 year treasury, with a yield of 2.86%. Of course this has vastly better liquidity, but would need to be in a Roth to achieve the same tax treatment, which sort of limits the liquidity. I could compare it to a California GO, maturing in 2011 (though it has a call option in 2019 at par). This is completely tax exempt, and has some slightly better (but hard to measure) liquidity compared to this CD option. Unfortunately it 1.) has a ytm of just under 4% (at fidelity) and a yield to worst of 3.73% (assuming Cali takes the par call in 2019 I presume) and all of this presumes reinvestment is available at the same rate 2.) California GO bonds are likely very very safe, but are not nearly as safe as an explicitly safe CD.

In my eyes, then, this is a no brainer. This ten year CD has a 284 basis point liquidity premium compared to the equivalent treasury (which I can't get in my Roth, where it loses some liquidity anyway) security, and is safer and has a higher tax equivalent yield (by about 130 basis points) than a Cali GO muni bond.

By my calculations, given my state and federal tax brackets, I would need to find an investment with just under 9% nominal yield to match this 10 year CD on an 'after tax' basis.

Finally, there are no fees on this CD.

Keep costs down, taxes matter, invest simply, for the long term.

Seems like a CD ladder in my 529, likely weighted toward longer term CDs makes quite a bit of sense in my 529.

If I could get a ten year CD outside of my 529 with 8.9% yield, even with these harsh early withdrawal penalty terms, I would take it (for a portion of the nominal fixed income portion of my portfolio).

Am I missing something else here?
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Postby Sammy_M » Sun Aug 08, 2010 7:10 pm

I saw this on FatWallet Finance and am wondering if there is any truth to it:

teammjs wrote:Ohio only allows one primary owner (whereas some states, like Utah, allow joint). The problem is that even if you have a successor, if something happens to you, the terms of the CD call not only for the liquidation (where you lose half the interest), but you also have to take out a new CD for the original term.

So, let's say you have a 10 year CD set to mature when your daughter is 18. You are the owner of the CD and you die when she's 15. Your wife becomes the owner, but the CD has to be broken per the rules, and a new 10 year CD takes it's place-- maturing well after college years. If your wife decides she doesn't want it, there's ANOTHER penalty to break the 2nd CD resulting in lost principal. This is a flaw in the terms that I've pointed out to them (I do have 529s with them, just not in CDs), but they don't seem to care.

http://www.fatwallet.com/forums/finance/1021537

Having a primary owner with successor as spouse seems the norm. CD being broken upon death...well that doesn't sound right. I still plan to buy the 10Yr CD as soon as my check comes in from VA 529. OH doesn't do custodian to custodian transfer. Hope the rates hold until then. Even if the above is the case, if I happen to kick the bucket, there will be enough life insurance to cover the CD penalty and tuition.
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Postby milestogo » Sun Aug 08, 2010 7:19 pm

Does the ohio 529 plan allow for a trust to own the account?
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Postby livesoft » Sun Aug 08, 2010 7:23 pm

So anyone getting a 4% 401(k) loan and putting in the 5% 529 CD?
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Postby detifoss » Sun Aug 08, 2010 11:54 pm

well I just moved some funds from the TIPS option to the 120 month (10 yr) CD at 5%

I'll replace the funds that I moved from the TIPS option on my next large lump sum contribution later this month, but I was slightly concerned about the possibility that rates would drop before I had a chance to buy some of the longer term CD portion of my ladder...

thanks for alerting us to the weird successor terms of this CD. guess I can't die..., but in the even that I do, my kid will have no trouble paying for college!
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Postby Sammy_M » Mon Aug 09, 2010 7:47 am

livesoft wrote:So anyone getting a 4% 401(k) loan and putting in the 5% 529 CD?

Interesting idea, but a few reasons I'm not seriously considering it:
1. Double tax on the 401K loan interest reduces the arbitrage opportunity.
2. Reduced liquidity. If I pull a $50K loan from the 401K now and tie it up in the CD, I won't be able to take a loan later if needed.
3. If job situation changes, 401K loan is due immediately.
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Postby eradicator » Mon Aug 16, 2010 9:00 pm

I plan on taking advantage of this. My daughter has about 10 years till I need this money and I will gladly accept the possible penalty to get a 5% tax free return. This is approx 8% in my tax bracket with state tax. Since we have the ability we will be making a large contribution to her 529 via this CD option.


Thanks again OP for bringing this to my attention.
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Postby Tramper Al » Tue Aug 17, 2010 8:47 am

eradicator wrote:I plan on taking advantage of this. My daughter has about 10 years till I need this money and I will gladly accept the possible penalty to get a 5% tax free return. This is approx 8% in my tax bracket with state tax. Since we have the ability we will be making a large contribution to her 529 via this CD option.


Thanks again OP for bringing this to my attention.

No problem, hope it works out well for both of us. And I just noticed that the yield on a 10-year nominal Treasury today is down to something like 2.6%.

Incidentally -- or is it coincidentally -- now a week or so after I purchased a 10-year 5.0% CD tax-free within a 529, I am just putting together the paperwork for a mortgage refinance, 10-years at 3.75% tax-deductible. Now I just have to stay healthy for 10+ years.

livesoft wrote:So anyone getting a 4% 401(k) loan and putting in the 5% 529 CD?

Instead of buying the CD, I could have paid down the mortgage. Obviously, my mortgage interest knows that it is being paid out for a house, and my CD interest knows that it is being paid in for tuition. So I am not in any way shape or form borrowing to invest, or borrowing while investing, or anything like that. Or am I?
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Postby Bob's not my name » Tue Aug 17, 2010 10:42 am

Point of reference on how good a deal that 5% 10-year is: I just had a 5% 20-year CD called after the first year.
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Thanks Tramper and all

Postby SteveD » Tue Aug 17, 2010 10:55 am

Thanks to OP and the others for calling my attention to this. In the current environment, the 5% CD combined with VIPSX seems to make sense, and I set up this combination last week. I have a second 529 for each of my 3 kids in Utah, and now I plan to use the Utah plans for the equity portion of their college funds. The Ohio plan is just right for the fixed allocation.

This forum has been a treasure trove of sage advice for me, and I appreciate everyone's time and insight.

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Postby eradicator » Tue Aug 17, 2010 8:54 pm

Tramper Al wrote:
eradicator wrote:I plan on taking advantage of this. My daughter has about 10 years till I need this money and I will gladly accept the possible penalty to get a 5% tax free return. This is approx 8% in my tax bracket with state tax. Since we have the ability we will be making a large contribution to her 529 via this CD option.


Thanks again OP for bringing this to my attention.

No problem, hope it works out well for both of us. And I just noticed that the yield on a 10-year nominal Treasury today is down to something like 2.6%.

Incidentally -- or is it coincidentally -- now a week or so after I purchased a 10-year 5.0% CD tax-free within a 529, I am just putting together the paperwork for a mortgage refinance, 10-years at 3.75% tax-deductible. Now I just have to stay healthy for 10+ years.

livesoft wrote:So anyone getting a 4% 401(k) loan and putting in the 5% 529 CD?

Instead of buying the CD, I could have paid down the mortgage. Obviously, my mortgage interest knows that it is being paid out for a house, and my CD interest knows that it is being paid in for tuition. So I am not in any way shape or form borrowing to invest, or borrowing while investing, or anything like that. Or am I?


Funny you mention this. I am also refi'ing into a 10 year 3.875 mort (no pts) and using some of my 80% equity to finance the cd. Either way I am going to be paying for college and this way I get a locked in return tax free and a tax ded loan to fund it.
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Postby detifoss » Tue Aug 17, 2010 10:34 pm

One thing to note - the funds go into the CD on a rather leisurely schedule, and you are given the rate that is effective on the date that your funds are credited to the CD, not on the date that you made transaction.

Thus, the 5% may be here today gone tomorrow, and in that time you could get the lower rate. No real way to prevent this problem.

I do believe their rates just dropped on the 4-5 yr and 5-7 year CDs.

Just be aware of the rules on this. I've put some in already and am racing to get my next amount in there before the APY drops at the long end. This is one of the few free lunches left out there (240 bps above the 10yr is nothing to sneeze at).
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Postby Saluki31 » Wed Aug 18, 2010 4:25 pm

detifoss wrote:One thing to note - the funds go into the CD on a rather leisurely schedule, and you are given the rate that is effective on the date that your funds are credited to the CD, not on the date that you made transaction.

Thus, the 5% may be here today gone tomorrow, and in that time you could get the lower rate. No real way to prevent this problem.

I do believe their rates just dropped on the 4-5 yr and 5-7 year CDs.

Just be aware of the rules on this. I've put some in already and am racing to get my next amount in there before the APY drops at the long end. This is one of the few free lunches left out there (240 bps above the 10yr is
nothing to sneeze at).


I've very interested in the 10 year cd too, but worried about the rate changing between the time I fund the account and when the CD is actually funded. I called and asked about this. I asked that if the rate dropped to a rate I would not want, can I cancel without penalty. I was told that yes, I could cancel the cd without penalty. It would take about 10 days to get the funds back. I feel a lot better about moving forward on this now. I'll use this for the fixed income portion and keep my Utah plan for equity.
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Postby Tramper Al » Wed Aug 18, 2010 5:35 pm

detifoss wrote:One thing to note - the funds go into the CD on a rather leisurely schedule, and you are given the rate that is effective on the date that your funds are credited to the CD, not on the date that you made transaction.

Thus, the 5% may be here today gone tomorrow, and in that time you could get the lower rate. No real way to prevent this problem.

I do believe their rates just dropped on the 4-5 yr and 5-7 year CDs.

Just be aware of the rules on this. I've put some in already and am racing to get my next amount in there before the APY drops at the long end. This is one of the few free lunches left out there (240 bps above the 10yr is nothing to sneeze at).

Yikes, you are right. The rates on all the CDs 2 - 7 years have dropped since I started this thread.

CD Term APY*
3-5 Month CD 0.50%
6-11 Month CD 0.70%
12-23 Month CD (1 to 2 years) 1.00%
24-35 Month CD (2 to 3 years) 1.35%
36-47 Month CD (3 to 4 years) 1.75%
48-59 Month CD (4 to 5 years) 2.00%
60-83 Month CD (5 to 7 years) 2.50%
84-119 Month CD (7 to 10 years) 4.00%
120-143 Month CD (10 to 12 years) 5.00%
144 Month CD (12 years) 5.00%
*Annual percentage yields (APYs) are accurate as of 8/17/2010.


I submitted my 529 transaction mid day on a Friday, and was showing that I was in the bank CD Tuesday morning, with a Monday transaction date.
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Postby Tramper Al » Wed Aug 18, 2010 7:12 pm

Another few blurbs from the 529 Offering, potentially relevant to the Fifth Third CDs.

The initial term of the Fifth Third Agreement is five years and
ends September 1, 2010. There is no automatic renewal/
extension of the Fifth Third Agreement.

Fifth Third has notified OTTA of its desire to extend the
agreement until September 15, 2015 and the parties may be
negotiating updated terms.

If the parties cannot reach an agreement, there is no guarantee
that the Fifth Third Bank Options will be available after
September 1, 2010 or, the new agreement termination date,
or, if available, that they will be the same or similar products.

If unmatured CDs are transferred by OTTA, OTTA will pay any
applicable early withdrawal penalties unless the termination of
the Fifth Third Agreement is due to the negligence of Fifth Third, in
which case the early withdrawal penalties will be waived by Fifth
Third.
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Postby detifoss » Thu Aug 19, 2010 12:20 am

Tramper Al wrote:Another few blurbs from the 529 Offering, potentially relevant to the Fifth Third CDs.

The initial term of the Fifth Third Agreement is five years and
ends September 1, 2010. There is no automatic renewal/
extension of the Fifth Third Agreement.

Fifth Third has notified OTTA of its desire to extend the
agreement until September 15, 2015 and the parties may be
negotiating updated terms.

If the parties cannot reach an agreement, there is no guarantee
that the Fifth Third Bank Options will be available after
September 1, 2010 or, the new agreement termination date,
or, if available, that they will be the same or similar products.

If unmatured CDs are transferred by OTTA, OTTA will pay any
applicable early withdrawal penalties unless the termination of
the Fifth Third Agreement is due to the negligence of Fifth Third, in
which case the early withdrawal penalties will be waived by Fifth
Third.


does that effectively mean that the CDs would be broken and the principal repaid along with interest, but that the CD rate and term would no longer be valid/available?

or does it mean get your money in before 9/1/10 b/c after that all bets are off?
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Postby Tramper Al » Thu Aug 19, 2010 5:29 am

detifoss wrote:
Tramper Al wrote:Another few blurbs from the 529 Offering, potentially relevant to the Fifth Third CDs.

The initial term of the Fifth Third Agreement is five years and
ends September 1, 2010. There is no automatic renewal/
extension of the Fifth Third Agreement.

Fifth Third has notified OTTA of its desire to extend the
agreement until September 15, 2015 and the parties may be
negotiating updated terms.

If the parties cannot reach an agreement, there is no guarantee
that the Fifth Third Bank Options will be available after
September 1, 2010 or, the new agreement termination date,
or, if available, that they will be the same or similar products.

If unmatured CDs are transferred by OTTA, OTTA will pay any
applicable early withdrawal penalties unless the termination of
the Fifth Third Agreement is due to the negligence of Fifth Third, in
which case the early withdrawal penalties will be waived by Fifth
Third.


does that effectively mean that the CDs would be broken and the principal repaid along with interest, but that the CD rate and term would no longer be valid/available?

or does it mean get your money in before 9/1/10 b/c after that all bets are off?

My read of the document as a whole is that even in the event that they stop offering anything from Fifth Third, you can likely keep your old CD. And if forced out, it won't be you who pays the fees. I think the language is just meant to say they cannot guarantee there will always be Fifth Third CDs offered. My guess is that there will be a new agreement, but maybe not such a good CD rate. I do expect some change as of Sept 1.
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Postby detifoss » Thu Aug 19, 2010 10:24 am

Tramper Al wrote:
detifoss wrote:
Tramper Al wrote:Another few blurbs from the 529 Offering, potentially relevant to the Fifth Third CDs.

The initial term of the Fifth Third Agreement is five years and
ends September 1, 2010. There is no automatic renewal/
extension of the Fifth Third Agreement.

Fifth Third has notified OTTA of its desire to extend the
agreement until September 15, 2015 and the parties may be
negotiating updated terms.

If the parties cannot reach an agreement, there is no guarantee
that the Fifth Third Bank Options will be available after
September 1, 2010 or, the new agreement termination date,
or, if available, that they will be the same or similar products.

If unmatured CDs are transferred by OTTA, OTTA will pay any
applicable early withdrawal penalties unless the termination of
the Fifth Third Agreement is due to the negligence of Fifth Third, in
which case the early withdrawal penalties will be waived by Fifth
Third.


does that effectively mean that the CDs would be broken and the principal repaid along with interest, but that the CD rate and term would no longer be valid/available?

or does it mean get your money in before 9/1/10 b/c after that all bets are off?

My read of the document as a whole is that even in the event that they stop offering anything from Fifth Third, you can likely keep your old CD. And if forced out, it won't be you who pays the fees. I think the language is just meant to say they cannot guarantee there will always be Fifth Third CDs offered. My guess is that there will be a new agreement, but maybe not such a good CD rate. I do expect some change as of Sept 1.


I think that regardless of the extension of the agreement, the rates can and will change (they just did as we noted, for the shorter CDs), so I don't think 9/1/10 is a magical date, though I do think that they are more likely to change in september.

I guess what i am concerned about is the part where you (and I actually) interpreted this to mean that 'you can likely keep your old CD... AND if forced out it won't be you who pays the fees.'

Again, I don't know, and will need to contact them to clarify this issue, but if they can force us out of the CDs, then CDs are MUCH less attractive. They effectively become callable CDs, with the added problem of being very illiquid due to the fact that they are in a 529 plan. Obviously, this money can be moved to other investments in the 529 plan, and the Ohio plan is quite good, but if the CDs were called it would be to their advantage, not ours, and thus this would actually be a rather poor investment choice, by definition.

I was planning on really loading up on the longer term CDs, but until I get clarification I will stick with what I have for now. Please let me know if you find out anything sooner (or better!).
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Postby Bob's not my name » Thu Aug 19, 2010 11:46 am

A normal callable 10-year CD paying 5% would be an excellent investment, especially if part of a portfolio of fixed income investments with laddered maturities. True callable brokered 10-year CD's are paying 2.9%.

Moreover, this CD isn't really callable in the sense that the bank can make an interest-rate-based decision to call. If I understand correctly, this CD would be "called" only as a result of a sequence of events. It is perhaps analogous to the "call" risk of a non-callable 10-year CD in the event the FDIC closes the issuing bank.

In any case, it would not be tragic to make 5% on this CD for only three years.
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Postby detifoss » Thu Aug 19, 2010 12:40 pm

Bob's not my name wrote:A normal callable 10-year CD paying 5% would be an excellent investment, especially if part of a portfolio of fixed income investments with laddered maturities. True callable brokered 10-year CD's are paying 2.9%.

Moreover, this CD isn't really callable in the sense that the bank can make an interest-rate-based decision to call. If I understand correctly, this CD would be "called" only as a result of a sequence of events. It is perhaps analogous to the "call" risk of a non-callable 10-year CD in the event the FDIC closes the issuing bank.

In any case, it would not be tragic to make 5% on this CD for only three years.


1.) a normal callable CD is in a liquid account not a 529 (illiquid)
2.) a normal callable CD does not have the rather onerous penalty provisions that this CD would have if you (the account owner) exited earlier (loss of principal in this case
3.) agreed, it isn't truly callable, and the analogy to a failed bank CD being closed out is correct, but that is why banks with poor CAMELS scores are sometimes stuck trying to offer higher CD rates (though recent FDIC actions have curbed this practice dramatically) - it wouldn't be an interest rate decision to call them, unless the underlying assumption is that the reason for lack of renewal of the agreement is that the interest rate terms of these CDs are to onerous now (in which case why wouldn't the rates have been dropped across the spectrum of maturities - rhetorical question in anticipation of yours) and thus termination = call due to interest rate risk for the bank
4.) Why would the 5.0% for three years be the case? If the money went in today, wouldn't it be 5% for a few weeks?

all theoretical without knowing exactly what this statement means (and thanks to Tramper Al for bringing to our attention)
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Postby detifoss » Thu Aug 19, 2010 12:46 pm

Tramper Al wrote:Another few blurbs from the 529 Offering, potentially relevant to the Fifth Third CDs.

The initial term of the Fifth Third Agreement is five years and
ends September 1, 2010. There is no automatic renewal/
extension of the Fifth Third Agreement.

Fifth Third has notified OTTA of its desire to extend the
agreement until September 15, 2015 and the parties may be
negotiating updated terms.

If the parties cannot reach an agreement, there is no guarantee
that the Fifth Third Bank Options will be available after
September 1, 2010 or, the new agreement termination date,
or, if available, that they will be the same or similar products.

If unmatured CDs are transferred by OTTA, OTTA will pay any
applicable early withdrawal penalties unless the termination of
the Fifth Third Agreement is due to the negligence of Fifth Third, in
which case the early withdrawal penalties will be waived by Fifth
Third.


also, where did you find this statement

I surfed around their website and couldn't locate it - I must not be looking in the right place, or it is buried away somewhere
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Postby Bob's not my name » Thu Aug 19, 2010 12:53 pm

detifoss wrote:4.) Why would the 5.0% for three years be the case? If the money went in today, wouldn't it be 5% for a few weeks?
Random number.
Fifth Third has notified OTTA of its desire to extend the agreement until September 15, 2015 and the parties may be negotiating updated terms. If the parties cannot reach an agreement, there is no guarantee that the Fifth Third Bank Options will be available after September 1, 2010 or, the new agreement termination date
So you could make 5% for a few weeks, five more years, whatever number of years they agree on besides five, or ten years. For any of these terms, 5% is a great rate.

How about this conspiracy theory: Fifth Third offers a ridiculously attractive rate for 10-year CDs to gain negotiating leverage with OTTA on an agreement renewal -- if they don't renew they pay the penalties.
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Postby Tramper Al » Thu Aug 19, 2010 1:00 pm

detifoss wrote:also, where did you find this statement

I surfed around their website and couldn't locate it - I must not be looking in the right place, or it is buried away somewhere

They are from the "Offering" pdf. I picked a paragraph out from here and there, just to get the information across.

http://www.collegeadvantage.com/userfil ... marked.pdf

detifoss wrote:all theoretical without knowing exactly what this statement means (and thanks to Tramper Al for bringing to our attention)

Maybe I'm just not sufficiently cynical, but I'm just not seeing much here.

Liquidity? It's a 529 account, yes? Personally I was already at Ohio 529 for Vanguard. All my 529 money will be stuck in 529s for many years, regardless. And I've already worked out that I'd rather own a 10 year CD @ 5.0% than a 10-year Treasury at 2.6%. Should I hold cash waiting for Treasuries to go to 7.0%, at which time I might regret my CD lock? Probably not. I sure wouldn't want to be holding the 2.6% Treasury all that time, as a good bit of it would just be gone.

A big scheme to entice 529 investors and then pull the rug out? I kind of doubt it. Put out a prospectus/offering explaining that I won't have any penalties if a CD is terminated through no fault of my own, and then try to penalize me anyway? Seems unlikely. The Ohio 529 - Fifth Third agreement began 5 years ago, so basically every single OH 529 investor with a 5+ year CD is on board. That could mean half of affluent Ohio and then some, I don't know. It probably wouldn't fall to me to initiate the class action suit, though.

Would I buy an FDIC-insured 5.0% CD for 3 weeks? Sure, why not. The major annoyance would simply be having to work out what to do next with that cash/bond % AA in Sept 2010 rather than Sept Aug 2020. If they were so hell bent on not having 5.0% CDs out there, I would think by now they could have, you know, stopped offering them.

What I think will happen is that the new round of Fifth Third 529 CDs will top out at a more reasonable 3.0% or 3.5%, that's all. Maybe I'll buy one of those too, but as always it will depend on the alternatives.
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Postby detifoss » Thu Aug 19, 2010 1:43 pm

Tramper Al wrote:
detifoss wrote:also, where did you find this statement

I surfed around their website and couldn't locate it - I must not be looking in the right place, or it is buried away somewhere

They are from the "Offering" pdf. I picked a paragraph out from here and there, just to get the information across.

http://www.collegeadvantage.com/userfil ... marked.pdf

detifoss wrote:all theoretical without knowing exactly what this statement means (and thanks to Tramper Al for bringing to our attention)

Maybe I'm just not sufficiently cynical, but I'm just not seeing much here.

Liquidity? It's a 529 account, yes? Personally I was already at Ohio 529 for Vanguard. All my 529 money will be stuck in 529s for many years, regardless. And I've already worked out that I'd rather own a 10 year CD @ 5.0% than a 10-year Treasury at 2.6%. Should I hold cash waiting for Treasuries to go to 7.0%, at which time I might regret my CD lock? Probably not. I sure wouldn't want to be holding the 2.6% Treasury all that time, as a good bit of it would just be gone.

A big scheme to entice 529 investors and then pull the rug out? I kind of doubt it. Put out a prospectus/offering explaining that I won't have any penalties if a CD is terminated through no fault of my own, and then try to penalize me anyway? Seems unlikely. The Ohio 529 - Fifth Third agreement began 5 years ago, so basically every single OH 529 investor with a 5+ year CD is on board. That could mean half of affluent Ohio and then some, I don't know. It probably wouldn't fall to me to initiate the class action suit, though.

Would I buy an FDIC-insured 5.0% CD for 3 weeks? Sure, why not. The major annoyance would simply be having to work out what to do next with that cash/bond % AA in Sept 2010 rather than Sept Aug 2020. If they were so hell bent on not having 5.0% CDs out there, I would think by now they could have, you know, stopped offering them.

What I think will happen is that the new round of Fifth Third 529 CDs will top out at a more reasonable 3.0% or 3.5%, that's all. Maybe I'll buy one of those too, but as always it will depend on the alternatives.


I definitely wasn't trying to be cycnical or a conspiracy theorist about this issue- merely an informed investor and as such skeptical until proven otherwise.

The liquidity point is relevant IF the investor is forgoing other more liquid options (taxable account investing) to instead place more money than they normally would have inside of the 529 vehicle. Moreover, the length of the term does matter to me (though it may not at all to some) if I am going to put money towards the 529 that I might instead put to use for other investment choices.

Currently, I have 30 year mortgage with an effective after tax deduction rate of approx 4.0% (prob just under that actually). Paying it down gives me a guaranteed return of 4.0%. I have discretionary cash, which I can either use to pay off that loan, or put into the 529 and lock in 5.0% after tax yield for 10-12 years (not 30 years, I know). If I put the money in the 529, and then the CD is broken, now that money is in the 529 (where I certainly have other good investment options - but not with a guaranteed risk free rate of return that is higher than my mortgage). Interest rate arbitrage of this sort, net of taxes, is rarely available to a small retail investor - but this appears (or appeared?) to be just this sort of opportunity. Each investment is illquid, so really this is an apples to apples (sort of) comparison. If had a $100k windfall today, and I KNEW the CD would pay 5.0% for 12 years, it would be smarter for me to take that windfall and invest it in the CD in the 529 instead of using it to pay down the mortgage.

Also, money placed in the 529 is a truly great place for fixed income. It may or may not be (from a tax efficiency standpoint) a great option for equity investments from a tax efficiency and obviously liquidity standpoint.

When faced with my multiple fixed income options, I too agree strongly that 5.0% after tax is way better than 2.6% in a ten year (even if the ten year is held in a roth for instance). However, if the money is part of my fixed income allocaton, and then I can no longer achieve that 5.0% return, then I would be forced into a 'location' problem of having my fixed income needs allocation underrepresented, but without the tax deferred space to place the allocation most efficiently.

I highly doubt this is anything other than just a simple disclosure, and I think the terms of the CD are incredibly unlikely to be changed midstream, but I don't think its as simple as 240 basis points of a free lunch if the terms CAN be modified, and then the access to the funds is not possible.

When investing for college, I see this Ohio 529 CD as an incredible option, but after that, I have room in otrher taxable or tax deferred accounts where it might make more sense to place the money and then use it when the time comes.

Everyone's situation is different, I thought I would just try to flesh out my thinking a little bit more partially for my own sake - to figure ot if my logc is sound or not :)
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