Help With CD's

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choral54
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Help With CD's

Post by choral54 » Tue Jul 31, 2018 9:46 am

I have a lot of CD's and as they are coming due, I am wondering if anyone would recommend which route is the smartest to take considering the current interest rate environment--a 2 year CD at 2.8% or a 2 year CD ladder at 2.42% or 3 year CD ladder at 2.9%. I do not have any direct need for the money so would not most likely need to withdraw the money earlier. I'm not sure what makes the most sense given the current interest rate environment? Any thoughts? Thanks for your input!

PFInterest
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Re: Help With CD's

Post by PFInterest » Tue Jul 31, 2018 10:50 am

do they have to go back into CDs? what is the purpose of this money?
why not a bond fund, or the market?

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Pajamas
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Re: Help With CD's

Post by Pajamas » Tue Jul 31, 2018 10:51 am

In a rising rate environment it would make sense to ladder. Of course look for the best rates available nationally.

123
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Re: Help With CD's

Post by 123 » Tue Jul 31, 2018 4:38 pm

I've helped a number of elderly relatives with their investments over the years. Most of them have been 100% fixed income once they reach age 75 - 80, their preferance. It can be a tedious process to open and maintain CDs at local brick and mortar banks (or even at internet banks for that matter). If you don't do it already you may want to consider brokered CDs at places like Vanguard, Fidelity, or Schwab. It's a lot easier if most of your assets are at the same place. As an alternative to CDs you might want to consider Treasury bills or notes, often the rates are close to CD rates for shorter maturities (up to 2 years) and with Treasuries there is no state income which can be a savings depending on where you live. With CDs these days it doesn't necessarily pay to be in a rush to lock in a certain rate because, with rising rates, another bank will come along in a few days with a better rate.

If you use a brokerage account you may find that the beneficary options on the account are more flexible at Fidelity and Schwab than at Vanguard.
The closest helping hand is at the end of your own arm.

Charon
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Re: Help With CD's

Post by Charon » Tue Jul 31, 2018 5:49 pm

Pajamas wrote:
Tue Jul 31, 2018 10:51 am
In a rising rate environment it would make sense to ladder.
Anticipated market rate increases are built into the CD rates already, I expect? So you're betting CD rates will increase from unanticipated Fed rate increases and market forces.

OP, it sounds like you have not laddered your CDs in the past, but are potentially looking to start? Do you have a reason to ladder them?

mary1969
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Re: Help With CD's

Post by mary1969 » Tue Jul 31, 2018 6:18 pm

vanguard brokered cd rates:
-1 yr: 2.35%
-2 yr: 2.8%
-3 yr: 3%
-5 yr: 3.35%

I like having my CD's with 1 broker. I would ladder your purchases.

I recently have had CD's mature and have bought 3 yr and 5 yr CD's with the proceeds. I have also have purchased BND with the 10 yr. treasury near 3%.

gmaynardkrebs
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Re: Help With CD's

Post by gmaynardkrebs » Tue Jul 31, 2018 6:32 pm

choral54 wrote:
Tue Jul 31, 2018 9:46 am
I have a lot of CD's and as they are coming due, I am wondering if anyone would recommend which route is the smartest to take considering the current interest rate environment--a 2 year CD at 2.8% or a 2 year CD ladder at 2.42% or 3 year CD ladder at 2.9%. I do not have any direct need for the money so would not most likely need to withdraw the money earlier. I'm not sure what makes the most sense given the current interest rate environment? Any thoughts? Thanks for your input!
Assuming this is a taxable account, find your federal and state income tax rates, add the 3.8 Obamacare tax if your income is over 250K, and figure you tax equivalent yields vs munis of the same duration. Nothing wrong with a 2.8% brokered 2yr CD if the TEY works for you. Forget the business about rising rates, the market knows that, which is why you are getting such a good rate now on the 2y CD.

HickoryHill
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Re: Help With CD's

Post by HickoryHill » Tue Jul 31, 2018 7:34 pm

I've been investigating the same thing, and have my holdings at Fidelity. I took some cash from a bank savings account (net negative interest paid) 7/27 and placed in a taxable joint account I have with my wife. I will be buying a brokered 2-year laddered CD tomorrow. New rates should have been posted today (usually it's Tuesday) so will get the current rate. At Fidelity the rates today are 2.0%, 2.35%, 2.55% and 2.85%. No charge for the purchase - probably the same at Vanguard and others, if you have an account there.
All are liquid.
I lean toward a shorter duration as I have a little concern about rising interest rates, although as said elsewhere, the longer duration does have an increased rate to reflect possible rate increase.
I was shocked to learn only recently about brokered CDs, with the same FDIC guarantee as bank CDs - and I've had a few advisors over the years. Nobody ever suggested this as an option, even though we have more cash than necessary - that's another topic.

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Kevin M
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Re: Help With CD's

Post by Kevin M » Tue Jul 31, 2018 8:24 pm

Is this in IRA(s) or taxable account(s)? If in taxable, what are your federal and state marginal tax rates?

I can't tell you what's best for you, but I can tell you what I've been doing lately, and what I'd do if I had more CDs maturing now.

In an IRA, I prefer brokered CDs at 2-year and 3-year maturities, with more in the 2-year range. CD yield curve is very steep to 2-year maturity, and reasonably steep to 3-year maturity, but flattens out too much for my tastes beyond that. You get decent yield premiums over Treasuries at these maturities in an IRA (where the state tax exemption is not a factor). If you want some 1-year maturity, you'll probably get slightly higher yield with a 1-year Treasury, and since Treasuries are more liquid, I'd go with Treasuries unless there's a yield premium with CDs.

In taxable, right now I prefer Treasuries out to 2-year maturity, as the taxable equivalent yield (TEY) for me is higher than CDs or AA munis, and the yield curve is reasonably steep out to two years. The Treasury yield curve flattens out too much for my taste beyond 2-year maturity, but my Treasury TEY beats AA munis or CDs out to 3-year maturity. My federal and state marginal tax rates are 27% and 8%.

Kevin
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gmaynardkrebs
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Re: Help With CD's

Post by gmaynardkrebs » Tue Jul 31, 2018 9:19 pm

Kevin M wrote:
Tue Jul 31, 2018 8:24 pm
My federal and state marginal tax rates are 27% and 8%.
Not really the point, but how does one get a 27% federal rate? I see 24 and 32, and the former plus 3.8 is 27.8. :confused

mega317
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Re: Help With CD's

Post by mega317 » Tue Jul 31, 2018 10:51 pm

12% bracket plus every dollar pushes a dollar of capital gains from 0% to 15%, correct?

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Kevin M
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Re: Help With CD's

Post by Kevin M » Wed Aug 01, 2018 10:06 am

mega317 wrote:
Tue Jul 31, 2018 10:51 pm
12% bracket plus every dollar pushes a dollar of capital gains from 0% to 15%, correct?
Exactly.

Kevin
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RetiredTrvl
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Re: Help With CD's

Post by RetiredTrvl » Wed Aug 01, 2018 10:24 am

Kevin M wrote:
Wed Aug 01, 2018 10:06 am
mega317 wrote:
Tue Jul 31, 2018 10:51 pm
12% bracket plus every dollar pushes a dollar of capital gains from 0% to 15%, correct?
Exactly.

Kevin
I thought interest from CDs was taxed as ordinary income so how does the capital gains rate come into play? For someone in the middle of the 22% federal tax bracket, wouldn't they pay 22% on their CD interest?
For capital gains eligible investments, wouldn't someone in the 12% tax bracket just pay the 15% long term capital gains rate rather than 12% + 15%=27%?
Last edited by RetiredTrvl on Wed Aug 01, 2018 2:42 pm, edited 1 time in total.

gmaynardkrebs
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Re: Help With CD's

Post by gmaynardkrebs » Wed Aug 01, 2018 11:05 am

Kevin M wrote:
Wed Aug 01, 2018 10:06 am
mega317 wrote:
Tue Jul 31, 2018 10:51 pm
12% bracket plus every dollar pushes a dollar of capital gains from 0% to 15%, correct?
Exactly.

Kevin
Is that the answer to my question, below? I believe you, but it's hard for me to see how someone in the 12% bracket ends up at 27%
Not really the point, but how does one get a 27% federal rate? I see 24 and 32, and the former plus 3.8 is 27.8. :confused

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Kevin M
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Re: Help With CD's

Post by Kevin M » Wed Aug 01, 2018 2:35 pm

gmaynardkrebs wrote:
Wed Aug 01, 2018 11:05 am
Kevin M wrote:
Wed Aug 01, 2018 10:06 am
mega317 wrote:
Tue Jul 31, 2018 10:51 pm
12% bracket plus every dollar pushes a dollar of capital gains from 0% to 15%, correct?
Exactly.

Kevin
Is that the answer to my question, below?
Yes.
gmaynardkrebs wrote:
Wed Aug 01, 2018 11:05 am
I believe you, but it's hard for me to see how someone in the 12% bracket ends up at 27%
Not really the point, but how does one get a 27% federal rate? I see 24 and 32, and the former plus 3.8 is 27.8. :confused
RetiredTrvl wrote:
Wed Aug 01, 2018 10:24 am
I thought interest from CDs was taxed as ordinary income so how does the capital gains rate come into play? For someone in the 22% federal tax bracket, wouldn't they pay 22% on their CD interest?
Work through a Schedule D worksheet or Capital Gains and Qualified Dividends Tax worksheet and you'll see how it works (except it will be 12% bracket in 2018 instead of 15% bracket in 2017).

Visualize the QD/LTCG stacked on top of ordinary income, with the QD/LTCG stack spanning the 12% and 22% brackets. The QD/LTCG below the top of the 12% bracket (approximately*) is taxed at 0%, and that above it (approximately) is taxed at 15%. An extra dollar of ordinary income, e.g., from a CD, is inserted into the bottom stack and taxed at 12%, while it pushes an extra dollar of QD/LTCG in the top stack into the higher bracket, so taxed at 15% instead of 0%. So the marginal dollar of ordinary income is taxed at 12%, but pushes a dollar of QD/LTCG from 0% to 15%, so the net effect is a marginal tax rate of 27%.

*Note that in 2018 there is a $200 difference between top of 12% bracket and top of 0% QD/LTCG "bracket", so the above explanation is approximate, but hopefully good enough to conceptualize it.

Kevin
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gmaynardkrebs
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Re: Help With CD's

Post by gmaynardkrebs » Fri Aug 03, 2018 3:54 pm

Kevin M wrote:
Wed Aug 01, 2018 2:35 pm
gmaynardkrebs wrote:
Wed Aug 01, 2018 11:05 am
Kevin M wrote:
Wed Aug 01, 2018 10:06 am
mega317 wrote:
Tue Jul 31, 2018 10:51 pm
12% bracket plus every dollar pushes a dollar of capital gains from 0% to 15%, correct?
Exactly.

Kevin
Is that the answer to my question, below?
Yes.
gmaynardkrebs wrote:
Wed Aug 01, 2018 11:05 am
I believe you, but it's hard for me to see how someone in the 12% bracket ends up at 27%
Not really the point, but how does one get a 27% federal rate? I see 24 and 32, and the former plus 3.8 is 27.8. :confused
RetiredTrvl wrote:
Wed Aug 01, 2018 10:24 am
I thought interest from CDs was taxed as ordinary income so how does the capital gains rate come into play? For someone in the 22% federal tax bracket, wouldn't they pay 22% on their CD interest?
Work through a Schedule D worksheet or Capital Gains and Qualified Dividends Tax worksheet and you'll see how it works (except it will be 12% bracket in 2018 instead of 15% bracket in 2017).

Visualize the QD/LTCG stacked on top of ordinary income, with the QD/LTCG stack spanning the 12% and 22% brackets. The QD/LTCG below the top of the 12% bracket (approximately*) is taxed at 0%, and that above it (approximately) is taxed at 15%. An extra dollar of ordinary income, e.g., from a CD, is inserted into the bottom stack and taxed at 12%, while it pushes an extra dollar of QD/LTCG in the top stack into the higher bracket, so taxed at 15% instead of 0%. So the marginal dollar of ordinary income is taxed at 12%, but pushes a dollar of QD/LTCG from 0% to 15%, so the net effect is a marginal tax rate of 27%.

*Note that in 2018 there is a $200 difference between top of 12% bracket and top of 0% QD/LTCG "bracket", so the above explanation is approximate, but hopefully good enough to conceptualize it.

Kevin
Thanks. What happens when you've filled up the 12% bracket and are in 22%? Does you marginal rate decline to 22%? I think the CG bump effect problem goes away, until you get to 479K, when CG goes to 20% (or 23.8%)

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Kevin M
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Re: Help With CD's

Post by Kevin M » Sat Aug 04, 2018 4:11 pm

gmaynardkrebs wrote:
Fri Aug 03, 2018 3:54 pm
Thanks. What happens when you've filled up the 12% bracket and are in 22%? Does you marginal rate decline to 22%? I think the CG bump effect problem goes away, until you get to 479K, when CG goes to 20% (or 23.8%)
Exactly. Your taxable income is higher, but your marginal tax rate can decline once you've pushed all of your QD/LTCG into the 15% "bracket". Of course there are many other things that can affect your marginal tax rate as well, and cause it not to be the same as your tax bracket.

Kevin
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jebmke
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Re: Help With CD's

Post by jebmke » Sat Aug 04, 2018 4:17 pm

Kevin M wrote:
Sat Aug 04, 2018 4:11 pm
Exactly. Your taxable income is higher, but your marginal tax rate can decline once you've pushed all of your QD/LTCG into the 15% "bracket". Of course there are many other things that can affect your marginal tax rate as well, and cause it not to be the same as your tax bracket.
This is a not well understood phenomenon; there is a mental anchor on a generally progressive marginal rate curve. In my experience it is almost impossible to figure this out analytically except in the simplest cases. A heuristic approach works for me. There is a local maximum as you push up that stack dividend stack and then the marginal rate drops for a while. Eventually it starts to rise again to a global maximum. I made a miscalculation one year on a ROTH conversion. Fortunately, that was back when you could hit the "undo" button on ROTH conversions.
When you discover that you are riding a dead horse, the best strategy is to dismount.

andy2012
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Re: Help With CD's

Post by andy2012 » Sun Aug 05, 2018 10:39 am

mary1969 wrote:
Tue Jul 31, 2018 6:18 pm
vanguard brokered cd rates:
-1 yr: 2.35%
-2 yr: 2.8%
-3 yr: 3%
-5 yr: 3.35%

I like having my CD's with 1 broker. I would ladder your purchases.

I recently have had CD's mature and have bought 3 yr and 5 yr CD's with the proceeds. I have also have purchased BND with the 10 yr. treasury near 3%.
That is really great. Which BND/Treasury note you bought and from where? Also, for 10 years Treasury notes, if you need money before 10 years, can you get that out?

gmaynardkrebs
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Re: Help With CD's

Post by gmaynardkrebs » Sun Aug 05, 2018 11:00 am

jebmke wrote:
Sat Aug 04, 2018 4:17 pm
Kevin M wrote:
Sat Aug 04, 2018 4:11 pm
Exactly. Your taxable income is higher, but your marginal tax rate can decline once you've pushed all of your QD/LTCG into the 15% "bracket". Of course there are many other things that can affect your marginal tax rate as well, and cause it not to be the same as your tax bracket.
This is a not well understood phenomenon; there is a mental anchor on a generally progressive marginal rate curve. In my experience it is almost impossible to figure this out analytically except in the simplest cases. A heuristic approach works for me. There is a local maximum as you push up that stack dividend stack and then the marginal rate drops for a while. Eventually it starts to rise again to a global maximum. I made a miscalculation one year on a ROTH conversion. Fortunately, that was back when you could hit the "undo" button on ROTH conversions.
While it won't work for this year because of the new tax laws, what I usually do is take the previous year's TurboTax and my return as filed (make a copy called test), and add $1000 in whatever the income category, usually bonds and CDs, but also earned income or CG. I then look at the combined increase in my state and federal taxes, and see how much (little!) I get to keep.

mary1969
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Re: Help With CD's

Post by mary1969 » Thu Aug 09, 2018 6:10 pm

andy2012 wrote:
Sun Aug 05, 2018 10:39 am
mary1969 wrote:
Tue Jul 31, 2018 6:18 pm
vanguard brokered cd rates:
-1 yr: 2.35%
-2 yr: 2.8%
-3 yr: 3%
-5 yr: 3.35%

I like having my CD's with 1 broker. I would ladder your purchases.

I recently have had CD's mature and have bought 3 yr and 5 yr CD's with the proceeds. I have also have purchased BND with the 10 yr. treasury near 3%.
That is really great. Which BND/Treasury note you bought and from where? Also, for 10 years Treasury notes, if you need money before 10 years, can you get that out?
I have not purchased the 10 yr treasury. I have, however, purchased the etf BND below 79.00 (with the 10 yr yield near 3%). The BND is a long term holding. My portfolio is set up where i have on average around $200k of CD's that mature each year out to 2025. Each year my hope is just to reinvest the maturing CD's into BND or purchase new 3 to 5 yr. CD's.

If you did purchase the 10 year note, you could sell it at any time but you would suffer a gain or loss depending on the direction of long term interest rates. Do not purchase the 10 year note if you need the money in the next few years.

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