Purchasing Ally/Synchrony CDs through Fidelity

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girishc
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Joined: Tue Jun 19, 2018 6:38 pm

Purchasing Ally/Synchrony CDs through Fidelity

Post by girishc » Tue Jun 19, 2018 6:54 pm

I am contemplating CD purchases as a safe investment option. The banks under review are Ally, Synchrony and PurePoint Financial. A few questions in this regard.

1) Is PurePoint Financial safe to invest with? They seem to have a slightly lower rating compared to Ally and Synchrony.
2) I already have an account with Fidelity for my 401k retirement account. And I noticed they offer brokerage CDs including competitive rates from Ally and Synchrony. Apparently, there is the new issue offerings and also brokered CDs from the secondary market.
2a) Are the new issue offerings via Fidelity the same as investing in a CD directly with Ally or Synchrony? According to the Fidelity site, they just have the added convenience.
2b) I don't fully understand how the secondary market CDs work since the implication seems to be that if I carry these CDs to full maturity, they are no different from the new issue offerings. However, if I decide to draw before the maturity date, I may make or lose money on the principal (make money if the interest rates have gone down and vice-versa).

Any thoughts or clarity on these questions would help.

Thank you.

MrPotatoHead
Posts: 429
Joined: Sat Oct 14, 2017 10:41 pm

Re: Purchasing Ally/Synchrony CDs through Fidelity

Post by MrPotatoHead » Tue Jun 19, 2018 7:30 pm

As long as you are under the FDIC limit you principle is secure. Be aware the FDIC does not (or at least did not; it been along time since I was in banking) cover the interest you earned so it may become relevant on a large denomination CD that compounds for many years. Also any acquiring bank can adjust the interest rate.

You have a general idea of how the secondary market works. Be aware that when you look at a secondary CD's balance at Fidelity, it may show a capital loss simply because it is reflecting the market value that day. You do get the full face value when it matures. But it can be a but ominous the first time you see it, especially on large denomination purchases.

Also, I shall not pretend to be a tax expert, but my understanding is there is a tax advantage to buying a brokered CD that is sold for less than face value. Simply put the interest payments are ordinary income but the difference between what you paid for the bond and the face value at maturity will be taxed as a capital gain meaning you may get the long term capital gain rate on what you would normally consider interest. Once again my understanding only

Cheers....
Last edited by MrPotatoHead on Thu Jun 21, 2018 9:44 pm, edited 1 time in total.

girishc
Posts: 3
Joined: Tue Jun 19, 2018 6:38 pm

Re: Purchasing Ally/Synchrony CDs through Fidelity

Post by girishc » Thu Jun 21, 2018 7:45 pm

Thank you for the info. Appreciate it.

MrPotatoHead
Posts: 429
Joined: Sat Oct 14, 2017 10:41 pm

Re: Purchasing Ally/Synchrony CDs through Fidelity

Post by MrPotatoHead » Thu Jun 21, 2018 9:44 pm

girishc wrote:
Thu Jun 21, 2018 7:45 pm
Thank you for the info. Appreciate it.
You are very welcome.

As an FYI, I think Fidelity has the best fixed income help desk in the industry. It is a separate phone number with dedicated specialist but I found them even more helpful than Schwab(which surprised me) and certainly far above Vanguard when it comes to fixed income.

stlutz
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Joined: Fri Jan 02, 2009 1:08 am

Re: Purchasing Ally/Synchrony CDs through Fidelity

Post by stlutz » Thu Jun 21, 2018 10:49 pm

Also, I shall not pretend to be a tax expert, but my understanding is there is a tax advantage to buying a brokered CD that is sold for less than face value. Simply put the interest payments are ordinary income but the difference between what you paid for the bond and the face value at maturity will be taxed as a capital gain meaning you may get the long term capital gain rate on what you would normally consider interest. Once again my understanding only
That's actually incorrect (in the US). If I buy a CD for $95 today and it matures 5 years from now at $100, at maturity that $5 is taxed as interest income. You'll add a line for "accrued market discount" on your schedule B.

Buying brokered CDs in a taxable account does introduce some tax reporting complexities. Accrued interest paid at purchase is another one that you'll need to be aware of, as this is a deduction from interest income that you can take.

It's definitely worth reading the sections of IRS Pub 550 that relate to taxable bonds before getting into brokered CDs in a taxable account:

https://www.irs.gov/publications/p550

girishc
Posts: 3
Joined: Tue Jun 19, 2018 6:38 pm

Re: Purchasing Ally/Synchrony CDs through Fidelity

Post by girishc » Tue Jun 26, 2018 11:09 am

Thank you all for the info. Very useful.

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