Happy2BeFree wrote: ↑
Sun Oct 21, 2018 8:20 pm
Thanks so much, Kevin! I do pay state div/int tax on CDs, but I'm assuming I wouldn't pay it on Treasuries. I better find out for sure.
I've never bought individual Treasuries before, but have several large PenFed CDs maturing in Dec./Jan. and wondered if would be a better deal to buy Treasuries instead of CDs. My federal marginal tax rate is 12%, I believe, so with your formula:
TEY = 2.88% x (1-12%) / (1-12%-5%) = 2.88 x 0.88 / 0.83 = 3.053%
Do you have advice for the novice as to whether Treasuries or brokered CDs (at VG) are easier to buy and ladder? I prefer direct CDs, but am trying to consolidate at VG.
Again, many thanks for your help!
Your calculation is correct. Be sure you are using marginal tax rates, and not tax brackets. My federal tax bracket will be 12%, but my federal marginal tax rate will be 27%, due to marginal ordinary income pushing an equal amount of qualified dividends from 0% to 15% tax rate. There many other factors that can cause your marginal tax rate to be different than your tax bracket.
Buying Treasuries or brokered CDs is very similar. I would go with Treasuries if the TEY is higher than or even close to the CD yield, due to much better liquidity (will cost less to sell before maturity if you need to). CDs or Treasuries in taxable and CDs in IRAs have been quite competitive with direct CDs over the last year or so, so I've been consolidating at brokers with proceeds from maturing direct CDs.
You can buy new-issue CDs, which is similar to buying Treasuries at auction, except auctions for 1-year and 2-year Treasuries are only held once per month, while you can buy new-issue CDs at any time (although settlement might be as much as 1-2 weeks after you place the order).
Buying on the secondary market is a bit more complicated, and for Treasuries, you're going to get the best pricing at auction. No commission on any Treasury trades, nor on new-issue CDs. There is a $1 or $2 per secondary CD commission depending on whether you have $500K or more of assets at Vanguard (at least Voyager select). One CD = $1,000 face value, so the commission is 0.1% or 0.2%.
From your Vanguard brokerage, click Buy/Sell -> buy/sell bonds or CDs (or something like that). From the overview page, click on the yield/type you're interested in, e.g., 2-year CD or 2-year Treasury. The CD search results will show new issues only, but you can modify the search criteria to also show secondary CDs if you want. The default Treasury search screen will show secondary Treasuries of approximately the maturity selected, but you can modify the search criteria to see whatever Treasuries are currently open for auction.
Unfortunately, Vanguard is not the best either for secondary CDs or secondary Treasuries. I've found the best secondary CD deals at Fidelity, and they charge $1/CD for all customers. Schwab is the best for secondary Treasuries, as you usually get the best pricing for minimum quantity 10 ($10,000 face value), while at Fidelity and Vanguard you usually pay a bit more for less than 200 or more. If you buy new issue or at auction, it doesn't matter much, but Fidelity often has more CDs at the top rate.
Hope this helps.