Personal Finance Advice and Education! (3 Viewers)

[-OZ-]

If you can get 5% in a money market fund right now, why would you be a in hurry to buy iBonds?

1.3% fixed component for up to 30 years plus tax deferred interest are two reasons.

And we think that's going to be a valuable rate over the long term? Genuine questions here, that just seems pretty low.

It depends on inflation. But inflation is a key risk in retirement.
I wouldn’t throw all our funds into I bonds (there’s a limit anyway). But they’re a tool with a specific purpose, not to chase the highest possible return.

 

[Juxtatarot]

If you can get 5% in a money market fund right now, why would you be a in hurry to buy iBonds?

1.3% fixed component for up to 30 years plus tax deferred interest are two reasons.

And we think that's going to be a valuable rate over the long term? Genuine questions here, that just seems pretty low.

We don’t know. If rates stay “high” for many years, maybe not. However, there were a lot of times in the last 20 years that 1.3% (plus a possible variable component) would have sounded great!

 

[gianmarco]

So, if I already purchased ibonds in January of this year, I just wait until January 2024 and still get this new rate, right?

 

[Juxtatarot]

So, if I already purchased ibonds in January of this year, I just wait until January 2024 and still get this new rate, right?

That’s what I will do.

 

[matttyl]

So, if I already purchased ibonds in January of this year, I just wait until January 2024 and still get this new rate, right?

That’s what I will do.

What if you purchased the max at the high water mark in Q4 2022? Buy more in 2023, or wait till you can pull out the 2022 deposit after 15 months and out that money right back in and lock in the 1.3%?

 

[-OZ-]

So, if I already purchased ibonds in January of this year, I just wait until January 2024 and still get this new rate, right?

That’s what I will do.

What if you purchased the max at the high water mark in Q4 2022? Buy more in 2023, or wait till you can pull out the 2022 deposit after 15 months and out that money right back in and lock in the 1.3%?

follow the schedule.

Want to Cash in Your I Bonds? Here's the Best Time to Do It

If you bought I bonds in 2022, you're allowed to cash them in once they're a year old. But it's smarter to hold them just a bit longer to boost your return.

www.investopedia.com

 

[Runkle]

If you can get 5% in a money market fund right now, why would you be a in hurry to buy iBonds?

1.3% fixed component for up to 30 years plus tax deferred interest are two reasons.

And we think that's going to be a valuable rate over the long term? Genuine questions here, that just seems pretty low.

If rates do start to fall, you can always go with a 60-month CD and still catch some return higher than 1.3% for 5 years is my guess? IDK how many people are really playing the 30-year lock-up game.

 

[thecatch]

If you can get 5% in a money market fund right now, why would you be a in hurry to buy iBonds?

1.3% fixed component for up to 30 years plus tax deferred interest are two reasons.

And we think that's going to be a valuable rate over the long term? Genuine questions here, that just seems pretty low.

If rates do start to fall, you can always go with a 60-month CD and still catch some return higher than 1.3% for 5 years is my guess? IDK how many people are really playing the 30-year lock-up game.

That's kind of what I was thinking. And the worst-case difference between 0 and 1.3% isn't really massive for someone like me who is just trying to get the best return on cash I want to keep relatively liquid, so I'm not sure it's worth the short-term lockup of funds and the interest penalty when I do want to take it out.

 

[-OZ-]

If you can get 5% in a money market fund right now, why would you be a in hurry to buy iBonds?

1.3% fixed component for up to 30 years plus tax deferred interest are two reasons.

And we think that's going to be a valuable rate over the long term? Genuine questions here, that just seems pretty low.

If rates do start to fall, you can always go with a 60-month CD and still catch some return higher than 1.3% for 5 years is my guess? IDK how many people are really playing the 30-year lock-up game.

That's kind of what I was thinking. And the worst-case difference between 0 and 1.3% isn't really massive for someone like me who is just trying to get the best return on cash I want to keep relatively liquid, so I'm not sure it's worth the short-term lockup of funds and the interest penalty when I do want to take it out.

It’s only 1.3% if there’s zero inflation.
Which, while not impossible, seems really unlikely.
Very few people keep these for 30 years. But there’s no penalty after 5.

 

[thecatch]

If you can get 5% in a money market fund right now, why would you be a in hurry to buy iBonds?

1.3% fixed component for up to 30 years plus tax deferred interest are two reasons.

And we think that's going to be a valuable rate over the long term? Genuine questions here, that just seems pretty low.

If rates do start to fall, you can always go with a 60-month CD and still catch some return higher than 1.3% for 5 years is my guess? IDK how many people are really playing the 30-year lock-up game.

That's kind of what I was thinking. And the worst-case difference between 0 and 1.3% isn't really massive for someone like me who is just trying to get the best return on cash I want to keep relatively liquid, so I'm not sure it's worth the short-term lockup of funds and the interest penalty when I do want to take it out.

It’s only 1.3% if there’s zero inflation.
Which, while not impossible, seems really unlikely.
Very few people keep these for 30 years. But there’s no penalty after 5.

Right. The analysis, for my purposes at least, is basically whether 1.3% + inflation is materially better than the alternative relatively low risk rates of return available in other short term investment vehicles over the next couple of years such that iBonds' withdrawal restrictions are worth it. I'm leaning no but I appreciate reading the viewpoints in here (as always).

 

[-OZ-]

If you can get 5% in a money market fund right now, why would you be a in hurry to buy iBonds?

1.3% fixed component for up to 30 years plus tax deferred interest are two reasons.

And we think that's going to be a valuable rate over the long term? Genuine questions here, that just seems pretty low.

If rates do start to fall, you can always go with a 60-month CD and still catch some return higher than 1.3% for 5 years is my guess? IDK how many people are really playing the 30-year lock-up game.

That's kind of what I was thinking. And the worst-case difference between 0 and 1.3% isn't really massive for someone like me who is just trying to get the best return on cash I want to keep relatively liquid, so I'm not sure it's worth the short-term lockup of funds and the interest penalty when I do want to take it out.

It’s only 1.3% if there’s zero inflation.
Which, while not impossible, seems really unlikely.
Very few people keep these for 30 years. But there’s no penalty after 5.

Right. The analysis, for my purposes at least, is basically whether 1.3% + inflation is materially better than the alternative relatively low risk rates of return available in other short term investment vehicles over the next couple of years such that iBonds' withdrawal restrictions are worth it. I'm leaning no but I appreciate reading the viewpoints in here (as always).

It’s certainly a fair question and, at least IMO simply comes down to your goal for the funds.

 

[Juxtatarot]

Right. The analysis, for my purposes at least, is basically whether 1.3% + inflation is materially better than the alternative relatively low risk rates of return available in other short term investment vehicles over the next couple of years such that iBonds' withdrawal restrictions are worth it. I'm leaning no but I appreciate reading the viewpoints in here (as always).

If only holding for a few years and for someone who doesn’t already have them, I don’t think it’s worth the bother.

 

[matttyl]

So, if I already purchased ibonds in January of this year, I just wait until January 2024 and still get this new rate, right?

That’s what I will do.

What if you purchased the max at the high water mark in Q4 2022? Buy more in 2023, or wait till you can pull out the 2022 deposit after 15 months and out that money right back in and lock in the 1.3%?

follow the schedule.

Want to Cash in Your I Bonds? Here's the Best Time to Do It

If you bought I bonds in 2022, you're allowed to cash them in once they're a year old. But it's smarter to hold them just a bit longer to boost your return.

www.investopedia.com

Thanks for this. So purchased in October 22, you cash out Jan 2, 2023 or later. Can then repurchase at that time to lock in 1.3% floor if wanted.

 

[Nugget]

If you can get 5% in a money market fund right now, why would you be a in hurry to buy iBonds?

I keep the majority of my emergency fund in an MMF, but I’m going to transfer 10K a year into iBonds. I don’t have to pay interest on the gains each year, I do not have to pay state taxes on the gains. Inflation is the biggest risk to my retirement portfolio, so I can use these funds as a partial hedge. Ideally I will have $250-300K when I retire as a shock absorber for lumpy expenses or having to withdraw from retirement accounts in a down market. But with the 10K year limit, you have to play most years.

 

[-OZ-]

Right. The analysis, for my purposes at least, is basically whether 1.3% + inflation is materially better than the alternative relatively low risk rates of return available in other short term investment vehicles over the next couple of years such that iBonds' withdrawal restrictions are worth it. I'm leaning no but I appreciate reading the viewpoints in here (as always).

If only holding for a few years and for someone who doesn’t already have them, I don’t think it’s worth the bother.

I think that’s a fair assessment. Plus the site isn’t ideal or user friendly. I mean it is a government run site. Sufficient but not great.

 

[NutterButter]

People thinking long term that want some inflation protection without the yearly cap might want to look into Treasury Inflation Protected Securities (just the TIPS) as opposed to IBonds.

 

[dino259]

So wife’s new car just came in, we’ll pick up later this week or weekend by the latest. Can’t quite just write a check for entire amount, but can if I sell what will end up being out extra car after this (been offered $14.5k from a different local dealer, which is fair and eliminates headache of selling it personally - but adds complexity/timing issue as I can’t take that amount off purchase price of new car).

Anyway, any negative repercussions of financing half and paying that amount off in full in 30 days (once check clears from dealer)? Or sell extra car and be a single car household for a few days?

Is there any benefit in the sales tax on the new vehicle? In Kansas, you pay on the difference only if you trade into the dealer. In Missouri, you can sell the car to someone else and pay tax on the difference- not sure if there is a sequencing or timing component. I’d make sure to check your state rules.

If you are mostly thinking about your credit score, there maybe a tiny blip but nothing that you would even notice. I would do the financing and pay it when the easiest timing permits.

 

[thecatch]

Right. The analysis, for my purposes at least, is basically whether 1.3% + inflation is materially better than the alternative relatively low risk rates of return available in other short term investment vehicles over the next couple of years such that iBonds' withdrawal restrictions are worth it. I'm leaning no but I appreciate reading the viewpoints in here (as always).

If only holding for a few years and for someone who doesn’t already have them, I don’t think it’s worth the bother.

I think that’s a fair assessment. Plus the site isn’t ideal or user friendly. I mean it is a government run site. Sufficient but not great.

The UI is a hot mess but I was pleasantly surprised how quickly and smoothly I was able to pull money out.

 

[jm192]

I-Bonds at 5.27%, with 1.3% of that being fixed. I don't hate it.

Edit, saw it's already being talked about, gonna scroll up and read some thoughts.

 

[SFBayDuck]

I'm in sales, so comp can be pretty lumpy. My last really good stretch a couple of years ago I put $20K into iBonds, and during a dry spell earlier this year had to cash out half of them. Just finished up a really strong quarter so think I'll buy another $10K in December and $10K in January, I really like having that as a source of semi-liquid funds ($10K in there now I could tap into) that I can access if needed that will stay ahead of inflation. Ideally I wouldn't have to touch it and I could continue to build funds there year over year, but with rates likely to come down at some point next year seems like a good way to lock in some yield.

That said, I'm really trying to educate myself on other Fixed Income options - investment grade corporates, high-yield corporates, TIPS, or just some good ole t-bills. Other than iBonds I pretty much only own this stuff in my 401K and IRAs via funds. Sure seems like an opportunity over the next few months to lock in some yield. Anybody have good sources of education on the topic they can share?

 

[Desert_Power]

I'm in sales, so comp can be pretty lumpy. My last really good stretch a couple of years ago I put $20K into iBonds, and during a dry spell earlier this year had to cash out half of them. Just finished up a really strong quarter so think I'll buy another $10K in December and $10K in January, I really like having that as a source of semi-liquid funds ($10K in there now I could tap into) that I can access if needed that will stay ahead of inflation. Ideally I wouldn't have to touch it and I could continue to build funds there year over year, but with rates likely to come down at some point next year seems like a good way to lock in some yield.

That said, I'm really trying to educate myself on other Fixed Income options - investment grade corporates, high-yield corporates, TIPS, or just some good ole t-bills. Other than iBonds I pretty much only own this stuff in my 401K and IRAs via funds. Sure seems like an opportunity over the next few months to lock in some yield. Anybody have good sources of education on the topic they can share?

If your sales are lumpy and you are investing in an after tax account, not sure why you really want to go long duration. I would keep my liquid cash liquid in something like SHV and maybe add some duration in your 401k/IRAs if you think that is the play.

 

[Sand]

I'm in sales, so comp can be pretty lumpy. My last really good stretch a couple of years ago I put $20K into iBonds, and during a dry spell earlier this year had to cash out half of them. Just finished up a really strong quarter so think I'll buy another $10K in December and $10K in January, I really like having that as a source of semi-liquid funds ($10K in there now I could tap into) that I can access if needed that will stay ahead of inflation. Ideally I wouldn't have to touch it and I could continue to build funds there year over year, but with rates likely to come down at some point next year seems like a good way to lock in some yield.

That said, I'm really trying to educate myself on other Fixed Income options - investment grade corporates, high-yield corporates, TIPS, or just some good ole t-bills. Other than iBonds I pretty much only own this stuff in my 401K and IRAs via funds. Sure seems like an opportunity over the next few months to lock in some yield. Anybody have good sources of education on the topic they can share?

If your sales are lumpy and you are investing in an after tax account, not sure why you really want to go long duration. I would keep my liquid cash liquid in something like SHV and maybe add some duration in your 401k/IRAs if you think that is the play.

Something like VCSH (short term corporate bonds) is also something to look at. Yield is a bit juiced over SHV (so is risk), but maturity is short.

 

[Desert_Power]

I'm in sales, so comp can be pretty lumpy. My last really good stretch a couple of years ago I put $20K into iBonds, and during a dry spell earlier this year had to cash out half of them. Just finished up a really strong quarter so think I'll buy another $10K in December and $10K in January, I really like having that as a source of semi-liquid funds ($10K in there now I could tap into) that I can access if needed that will stay ahead of inflation. Ideally I wouldn't have to touch it and I could continue to build funds there year over year, but with rates likely to come down at some point next year seems like a good way to lock in some yield.

That said, I'm really trying to educate myself on other Fixed Income options - investment grade corporates, high-yield corporates, TIPS, or just some good ole t-bills. Other than iBonds I pretty much only own this stuff in my 401K and IRAs via funds. Sure seems like an opportunity over the next few months to lock in some yield. Anybody have good sources of education on the topic they can share?

If your sales are lumpy and you are investing in an after tax account, not sure why you really want to go long duration. I would keep my liquid cash liquid in something like SHV and maybe add some duration in your 401k/IRAs if you think that is the play.

This should read "taxable" instead of "after tax"

 

[The Z Machine]

Thoughts of money market type investments in work retirement accounts? (Currently paying 5%).

Currently with 50/50 split (Roth/traditional) in work retirement accounts. All index funds (age 35). Thinking of throwing in 15-20% allocation to money market type investments paying the 5%. (Then adjust accordingly based on rate / move the cash to index funds etc...)

TIA

I'm no investment guru, but dollar cost averaging means that you don't try to time the market...

 

[SFBayDuck]

I'm in sales, so comp can be pretty lumpy. My last really good stretch a couple of years ago I put $20K into iBonds, and during a dry spell earlier this year had to cash out half of them. Just finished up a really strong quarter so think I'll buy another $10K in December and $10K in January, I really like having that as a source of semi-liquid funds ($10K in there now I could tap into) that I can access if needed that will stay ahead of inflation. Ideally I wouldn't have to touch it and I could continue to build funds there year over year, but with rates likely to come down at some point next year seems like a good way to lock in some yield.

That said, I'm really trying to educate myself on other Fixed Income options - investment grade corporates, high-yield corporates, TIPS, or just some good ole t-bills. Other than iBonds I pretty much only own this stuff in my 401K and IRAs via funds. Sure seems like an opportunity over the next few months to lock in some yield. Anybody have good sources of education on the topic they can share?

If your sales are lumpy and you are investing in an after tax account, not sure why you really want to go long duration. I would keep my liquid cash liquid in something like SHV and maybe add some duration in your 401k/IRAs if you think that is the play.

This should read "taxable" instead of "after tax"

Yeah I got ya. I didn't share all the details, just the piece around fixed income, but in general I'm trying to determine 1) which buckets to fill and 2) what to fill them with (hence the bonds discussion). Other than hitting my annual 401K contribution for the year at the end of this month, this is obviously taxable with the exception that my company offers an after-tax 401K option which can then be instantly converted to Roth. I haven't been able to contribute to that to date, but will likely do at least some there as I'm underweight Roth+HSA to Traditional at about a 20/80 ratio.

Complicating this a bit further is that, like many, I'm way overweight in retirement accounts vs after tax accounts with 88% of my non-equity net worth sitting in them. I just turned 51 and would like to "retire" in the next 3-6 years if at all possible, and the only way I'd be able to to do that is to build up after-tax accounts significantly to serve as a bridge to 59 1/2 (the rule of 55 for 401Ks could come in to play as well, although ideally I would let that keep compounding). I do have my first bucket of RSUs vesting in two weeks and an ESPP purchase hitting in December, so that'll give me a nice boost in the after-tax bucket.

So once my savings account is topped off again (cash allocation in HYSA) and the tier 2 "emergency fund" (at least semi-liquid, iBonds can fit here) is filled back up, I'm willing to lock in a little duration (2-10 years) for some of these funds.

 

[NutterButter]

People thinking long term that want some inflation protection without the yearly cap might want to look into Treasury Inflation Protected Securities (just the TIPS) as opposed to IBonds.

Here's a really good video explaining a TIPS ladder if you're concerned about inflation and want to guarantee a certain amount of after-inflation income per year during retirement. This guy in general does a great job explaining investing in general.

 

[-OZ-]

FWIW

• Over 12% of American families, or over 16 million, are millionaires, per the WSJ.

I figure that has to be a LOT higher in this forum.

 

[The Z Machine]

FWIW

• Over 12% of American families, or over 16 million, are millionaires, per the WSJ.

I figure that has to be a LOT higher in this forum.

A lot of that is real estate wealth from their main residence though. I'm sure some is also 401k/403b savings.

 

[jm192]

Thoughts of money market type investments in work retirement accounts? (Currently paying 5%).

Currently with 50/50 split (Roth/traditional) in work retirement accounts. All index funds (age 35). Thinking of throwing in 15-20% allocation to money market type investments paying the 5%. (Then adjust accordingly based on rate / move the cash to index funds etc...)

TIA

https://www.whitecoatinvestor.com/asset-location-bonds-go-in-taxable/

 

[Redwes25]

Muni bonds are not a bad play right now if folks are in top tax brackets in high tax states. For my state (NY) yields are near 5 percent across the curve which is significant on an after tax basis (pushing 8 percent) and if you live in NYC and top tax bracket pushing near 10 percent. Here is article on it. Also, great to hold in taxable accounts.

New York, New Jersey Muni Bond Buyers Reap Net Yields Near 10%

(Bloomberg) -- UBS Financial Services Inc. is urging investors to buy the debt of states, whose credit quality is among the highest in the $4 trillion municipal bond market and whose bonds are offering sky-high after-tax yields. Most Read from BloombergSaudi Forces on Alert After Clash With...

finance.yahoo.com

 

[Sand]

FWIW

• Over 12% of American families, or over 16 million, are millionaires, per the WSJ.

I figure that has to be a LOT higher in this forum.

A lot of that is real estate wealth from their main residence though. I'm sure some is also 401k/403b savings.

Oz and I are in Alabama, so I can say with certainty that it takes a whopper of a property to get over 1M. I'm nowhere close. Oz has like 16 kids, so the chances he's in a palace are similarly slim.

 

[-OZ-]

FWIW

• Over 12% of American families, or over 16 million, are millionaires, per the WSJ.

I figure that has to be a LOT higher in this forum.

A lot of that is real estate wealth from their main residence though. I'm sure some is also 401k/403b savings.

Oz and I are in Alabama, so I can say with certainty that it takes a whopper of a property to get over 1M. I'm nowhere close. Oz has like 16 kids, so the chances he's in a palace are similarly slim.

definitely not a palace but don’t tell my daughter that, she insists she’s a princess and wife and I are king and queen.

There are places here worth a million. But yeah they’re not all that common.
One of the identical homes in our neighborhood just sold for $600k. So a fair bit of NW is in the home.

 

[Desert_Power]

Thoughts of money market type investments in work retirement accounts? (Currently paying 5%).

Currently with 50/50 split (Roth/traditional) in work retirement accounts. All index funds (age 35). Thinking of throwing in 15-20% allocation to money market type investments paying the 5%. (Then adjust accordingly based on rate / move the cash to index funds etc...)

TIA

https://www.whitecoatinvestor.com/asset-location-bonds-go-in-taxable/

I disagree strongly with this analysis.

A lot of us are talking about investing in bonds or bond funds because we expect that rates will decline from the current levels. If those rates decline, the value of the bonds will rise. Paying capital gains on that price change will be a big hit to one's earnings.

This article is only focused on the actual coupon returns and is deeply flawed.

 

[jm192]

Not sure if anyone remembers, but A couple months back, I was sitting on some cash and unsure what to do with it. I was leaning towards opening a HYSA, but held off mostly because I was too lazy to open it. With I-Bonds having a solid fixed rate, I've kind of gotten back to thinking I need to get on with it.

Our Federal tax rate was 32% last year. Our State income tax is 5%. VMSXX is Federal Tax exempt. I-Bonds are state tax exempt.

Calculating the after tax yields of each, I've come out at the following

VMSXX: 3.74%
I-Bonds: 3.58%
VMFXX: 3.35%
HYSA: 3.18%

The numbers won't be the same for others. I-Bonds gain value in states with higher income tax. VMSXX gains value with higher federal tax rates.

I'm torn on VMSXX vs I-Bonds. I lean I-Bonds at the moment. VMSXX tends to fluctuate and could easily be performing less well than I-bonds over the next month or so. Locking in the fixed rate of 1.3 feels like a really nice play here. Giving up 0.16% today for the 1.3% cherry on top of future I-bonds feels like a win. We don't have to have the money back anytime soon, so we can handle the liquidity issues for another year.

We've got 40,000 in I-bonds from the last 2 years. I can flip them liquid whenever. The rates are good enough we're letting it ride presently.

 

[jm192]

Thoughts of money market type investments in work retirement accounts? (Currently paying 5%).

Currently with 50/50 split (Roth/traditional) in work retirement accounts. All index funds (age 35). Thinking of throwing in 15-20% allocation to money market type investments paying the 5%. (Then adjust accordingly based on rate / move the cash to index funds etc...)

TIA

https://www.whitecoatinvestor.com/asset-location-bonds-go-in-taxable/

I disagree strongly with this analysis.

A lot of us are talking about investing in bonds or bond funds because we expect that rates will decline from the current levels. If those rates decline, the value of the bonds will rise. Paying capital gains on that price change will be a big hit to one's earnings.

This article is only focused on the actual coupon returns and is deeply flawed.

To clarify,

I think the assumption here is that you're already maxing out the tax protected retirement accounts and putting some $$ into a taxable account. The article really dives deep into bonds, but it's premise is asset allocation between taxable and tax-protected accounts.

If someone isn't maximizing the taxable account--then that should be the first priority. There's no need in a taxable account--get the tax benefits. Do not put bonds in a taxable account when you've got room to invest more into a tax protected account.

But if someone is maximizing the contributions to the tax-protected accounts--you want your highest performing/highest potential assets in the tax protected. Sure, the bonds will have a tax hit. But, you're betting on your stocks to succeed. When they do, they'll have higher capital gains than bonds. Sure, stocks can lose. But in general, over time, they win. (I'm talking high quality index funds).

 

[jm192]

Thoughts of money market type investments in work retirement accounts? (Currently paying 5%).

Currently with 50/50 split (Roth/traditional) in work retirement accounts. All index funds (age 35). Thinking of throwing in 15-20% allocation to money market type investments paying the 5%. (Then adjust accordingly based on rate / move the cash to index funds etc...)

TIA

https://www.whitecoatinvestor.com/asset-location-bonds-go-in-taxable/

I disagree strongly with this analysis.

A lot of us are talking about investing in bonds or bond funds because we expect that rates will decline from the current levels. If those rates decline, the value of the bonds will rise. Paying capital gains on that price change will be a big hit to one's earnings.

This article is only focused on the actual coupon returns and is deeply flawed.

Also,

I'm happy to be proven wrong, but I'm of the belief that just because the "value" of the bond increases--you don't owe capital gains on that. You can sell the bond for more than you bought it for. And you'll pay capital gains if you do so. But simply holding it while it's secondary market has increased doesn't hit you. You're taxed on the distributions.

 

[Redwes25]

Thoughts of money market type investments in work retirement accounts? (Currently paying 5%).

Currently with 50/50 split (Roth/traditional) in work retirement accounts. All index funds (age 35). Thinking of throwing in 15-20% allocation to money market type investments paying the 5%. (Then adjust accordingly based on rate / move the cash to index funds etc...)

TIA

https://www.whitecoatinvestor.com/asset-location-bonds-go-in-taxable/

I disagree strongly with this analysis.

A lot of us are talking about investing in bonds or bond funds because we expect that rates will decline from the current levels. If those rates decline, the value of the bonds will rise. Paying capital gains on that price change will be a big hit to one's earnings.

This article is only focused on the actual coupon returns and is deeply flawed.

Also,

I'm happy to be proven wrong, but I'm of the belief that just because the "value" of the bond increases--you don't owe capital gains on that. You can sell the bond for more than you bought it for. And you'll pay capital gains if you do so. But simply holding it while it's secondary market has increased doesn't hit you. You're taxed on the distributions.

This is correct.

 

[Redwes25]

Thoughts of money market type investments in work retirement accounts? (Currently paying 5%).

Currently with 50/50 split (Roth/traditional) in work retirement accounts. All index funds (age 35). Thinking of throwing in 15-20% allocation to money market type investments paying the 5%. (Then adjust accordingly based on rate / move the cash to index funds etc...)

TIA

https://www.whitecoatinvestor.com/asset-location-bonds-go-in-taxable/

I disagree strongly with this analysis.

A lot of us are talking about investing in bonds or bond funds because we expect that rates will decline from the current levels. If those rates decline, the value of the bonds will rise. Paying capital gains on that price change will be a big hit to one's earnings.

This article is only focused on the actual coupon returns and is deeply flawed.

Also,

I'm happy to be proven wrong, but I'm of the belief that just because the "value" of the bond increases--you don't owe capital gains on that. You can sell the bond for more than you bought it for. And you'll pay capital gains if you do so. But simply holding it while it's secondary market has increased doesn't hit you. You're taxed on the distributions.

Though would add a few things for clarity. If buying a bond mutual fund you will likely get capital gains distributions which are taxable. If buying an ETF (when you sell the EFT) that gain would be taxable.

If buying actual bonds (e.g. building a ladder) and you just let them mature (other than if you bought the bond at a discount) then no taxable gains. If you bought them at a discount and the discount is considered de minimis under the tax rules (0.25% x the number of full years to maturity - so 10 year bond de minimis test = 2.5%) then at maturity you will have capital gains on that amount but it wouldn't be much since gain would just be 2.5% in my example. Of course you will get paid back at par so you will have made back that discount at maturity so will have cash to pay the small capital gains tax.

If you bought bond at a greater discount then de minimis then the accreted value of the bond over time would be treated as ordinary income (not capital gains income). So you would be recognizing income even though you didn't get cash during life of the bond. I would try to avoid buying bonds at more than de minimis discount.

If you bought the bond at a premium (so above par) then you actually get a tax benefit. The bond premium would be amortizable and the premium can be tax-deductibe amortized over the life of the bond on a pro-rata basis. Of course your yield on the bond is less then the interet rate when buying with premium.

Muni bonds have different rules generally and this is just covering taxable bonds such as US treasuries or corporate bonds.

 

[Sand]

Thoughts of money market type investments in work retirement accounts? (Currently paying 5%).

Currently with 50/50 split (Roth/traditional) in work retirement accounts. All index funds (age 35). Thinking of throwing in 15-20% allocation to money market type investments paying the 5%. (Then adjust accordingly based on rate / move the cash to index funds etc...)

TIA

https://www.whitecoatinvestor.com/asset-location-bonds-go-in-taxable/

I disagree strongly with this analysis.

A lot of us are talking about investing in bonds or bond funds because we expect that rates will decline from the current levels. If those rates decline, the value of the bonds will rise. Paying capital gains on that price change will be a big hit to one's earnings.

This article is only focused on the actual coupon returns and is deeply flawed.

Also,

I'm happy to be proven wrong, but I'm of the belief that just because the "value" of the bond increases--you don't owe capital gains on that. You can sell the bond for more than you bought it for. And you'll pay capital gains if you do so. But simply holding it while it's secondary market has increased doesn't hit you. You're taxed on the distributions.

Though would add a few things for clarity. If buying a bond mutual fund you will likely get capital gains distributions which are taxable. If buying an ETF (when you sell the EFT) that gain would be taxable.

If buying actual bonds (e.g. building a ladder) and you just let them mature (other than if you bought the bond at a discount) then no taxable gains. If you bought them at a discount and the discount is considered de minimis under the tax rules (0.25% x the number of full years to maturity - so 10 year bond de minimis test = 2.5%) then at maturity you will have capital gains on that amount but it wouldn't be much since gain would just be 2.5% in my example. Of course you will get paid back at par so you will have made back that discount at maturity so will have cash to pay the small capital gains tax.

If you bought bond at a greater discount then de minimis then the accreted value of the bond over time would be treated as ordinary income (not capital gains income). So you would be recognizing income even though you didn't get cash during life of the bond. I would try to avoid buying bonds at more than de minimis discount.

If you bought the bond at a premium (so above par) then you actually get a tax benefit. The bond premium would be amortizable and the premium can be tax-deductibe amortized over the life of the bond on a pro-rata basis. Of course your yield on the bond is less then the interet rate when buying with premium.

Muni bonds have different rules generally and this is just covering taxable bonds such as US treasuries or corporate bonds.

This is why I've bought single bonds in tax sheltered accounts. Just easier not worrying about this stuff. In taxable CDs work fine.

 

[Redwes25]

Thoughts of money market type investments in work retirement accounts? (Currently paying 5%).

Currently with 50/50 split (Roth/traditional) in work retirement accounts. All index funds (age 35). Thinking of throwing in 15-20% allocation to money market type investments paying the 5%. (Then adjust accordingly based on rate / move the cash to index funds etc...)

TIA

https://www.whitecoatinvestor.com/asset-location-bonds-go-in-taxable/

I disagree strongly with this analysis.

A lot of us are talking about investing in bonds or bond funds because we expect that rates will decline from the current levels. If those rates decline, the value of the bonds will rise. Paying capital gains on that price change will be a big hit to one's earnings.

This article is only focused on the actual coupon returns and is deeply flawed.

Also,

I'm happy to be proven wrong, but I'm of the belief that just because the "value" of the bond increases--you don't owe capital gains on that. You can sell the bond for more than you bought it for. And you'll pay capital gains if you do so. But simply holding it while it's secondary market has increased doesn't hit you. You're taxed on the distributions.

Though would add a few things for clarity. If buying a bond mutual fund you will likely get capital gains distributions which are taxable. If buying an ETF (when you sell the EFT) that gain would be taxable.

If buying actual bonds (e.g. building a ladder) and you just let them mature (other than if you bought the bond at a discount) then no taxable gains. If you bought them at a discount and the discount is considered de minimis under the tax rules (0.25% x the number of full years to maturity - so 10 year bond de minimis test = 2.5%) then at maturity you will have capital gains on that amount but it wouldn't be much since gain would just be 2.5% in my example. Of course you will get paid back at par so you will have made back that discount at maturity so will have cash to pay the small capital gains tax.

If you bought bond at a greater discount then de minimis then the accreted value of the bond over time would be treated as ordinary income (not capital gains income). So you would be recognizing income even though you didn't get cash during life of the bond. I would try to avoid buying bonds at more than de minimis discount.

If you bought the bond at a premium (so above par) then you actually get a tax benefit. The bond premium would be amortizable and the premium can be tax-deductibe amortized over the life of the bond on a pro-rata basis. Of course your yield on the bond is less then the interet rate when buying with premium.

Muni bonds have different rules generally and this is just covering taxable bonds such as US treasuries or corporate bonds.

This is why I've bought single bonds in tax sheltered accounts. Just easier not worrying about this stuff. In taxable CDs work fine.

Actually not that complicated (just don't buy a bond at a big discount). Also, with Munis, IBonds and other tax exempt bonds you don't need to worry about all this stuff.

 

[Desert_Power]

Buying bonds at a big discount is fun though.

 

[pecorino]

I have a buddy who uses a financial advisor. He knows I use and endorse Vanguard but he is less open to managing his own money. In trying to get a handle on his fees, he told me that the outfit charges him 1% annually to manage his money. Question: when these folks invest a client's funds in an ETF or mutual fund that carries an expense ratio (they have him in JAHYX, for instance, which reports an expense ratio of 0.88%), those fees stack, is that right? I assume that he doesn't get a reduced or eliminated expense ratio since they're already hitting him with 1%. He is thinking about dumping them if they're costing him upwards of 2% per year to have him invested in ETFs or other equities that he could just as well buy and hold for himself. Thanks for any info.

 

[Redwes25]

I have a buddy who uses a financial advisor. He knows I use and endorse Vanguard but he is less open to managing his own money. In trying to get a handle on his fees, he told me that the outfit charges him 1% annually to manage his money. Question: when these folks invest a client's funds in an ETF or mutual fund that carries an expense ratio (they have him in JAHYX, for instance, which reports an expense ratio of 0.88%), those fees stack, is that right? I assume that he doesn't get a reduced or eliminated expense ratio since they're already hitting him with 1%. He is thinking about dumping them if they're costing him upwards of 2% per year to have him invested in ETFs or other equities that he could just as well buy and hold for himself. Thanks for any info.

Yup, they would stack

 

[Chadstroma]

MSN

No more Mint.

 

[Chadstroma]

A colleague on my team is doing a loan for a financial advisor of a large bank. He brought up the file on our team call... we all came to the conclusion that we are in the wrong business. A sizable amount of the income was not W2 income from the bank but appeared to be out commission payouts from third parties.

 

[The Z Machine]

A sizable amount of the income was not W2 income from the bank but appeared to be out commission payouts from third parties.

Like, he's getting kickbacks from the companies where he's investing his clients' money?

Does he have a fiduciary responsibility to his clients in his role?

 

[pecorino]

I have a buddy who uses a financial advisor. He knows I use and endorse Vanguard but he is less open to managing his own money. In trying to get a handle on his fees, he told me that the outfit charges him 1% annually to manage his money. Question: when these folks invest a client's funds in an ETF or mutual fund that carries an expense ratio (they have him in JAHYX, for instance, which reports an expense ratio of 0.88%), those fees stack, is that right? I assume that he doesn't get a reduced or eliminated expense ratio since they're already hitting him with 1%. He is thinking about dumping them if they're costing him upwards of 2% per year to have him invested in ETFs or other equities that he could just as well buy and hold for himself. Thanks for any info.

Yup, they would stack

Thanks, that’s what I assumed.

 

[Mitchie]

I have a buddy who uses a financial advisor. He knows I use and endorse Vanguard but he is less open to managing his own money. In trying to get a handle on his fees, he told me that the outfit charges him 1% annually to manage his money. Question: when these folks invest a client's funds in an ETF or mutual fund that carries an expense ratio (they have him in JAHYX, for instance, which reports an expense ratio of 0.88%), those fees stack, is that right? I assume that he doesn't get a reduced or eliminated expense ratio since they're already hitting him with 1%. He is thinking about dumping them if they're costing him upwards of 2% per year to have him invested in ETFs or other equities that he could just as well buy and hold for himself. Thanks for any info.

essentially yes, but a lot of ETFs are pretty cheap, some of bigger equity ones are 10 bps (0.10%) or less

 

[-OZ-]

I have a buddy who uses a financial advisor. He knows I use and endorse Vanguard but he is less open to managing his own money. In trying to get a handle on his fees, he told me that the outfit charges him 1% annually to manage his money. Question: when these folks invest a client's funds in an ETF or mutual fund that carries an expense ratio (they have him in JAHYX, for instance, which reports an expense ratio of 0.88%), those fees stack, is that right? I assume that he doesn't get a reduced or eliminated expense ratio since they're already hitting him with 1%. He is thinking about dumping them if they're costing him upwards of 2% per year to have him invested in ETFs or other equities that he could just as well buy and hold for himself. Thanks for any info.

Yeah, that 1% plus the higher fees in those funds will crush him long term.
Like, if he has $100k today and just adds $1,000 monthly for 20 years at 8% that’s over a million. Add that 1% fee plus the higher expense ratio of 0.88%, that’s about $780k. It gets worse if he has more now or adds more monthly which I’d assume he does.
Is his “advisor” worth almost 1/4 million over 20 years?

 

[pecorino]

I have a buddy who uses a financial advisor. He knows I use and endorse Vanguard but he is less open to managing his own money. In trying to get a handle on his fees, he told me that the outfit charges him 1% annually to manage his money. Question: when these folks invest a client's funds in an ETF or mutual fund that carries an expense ratio (they have him in JAHYX, for instance, which reports an expense ratio of 0.88%), those fees stack, is that right? I assume that he doesn't get a reduced or eliminated expense ratio since they're already hitting him with 1%. He is thinking about dumping them if they're costing him upwards of 2% per year to have him invested in ETFs or other equities that he could just as well buy and hold for himself. Thanks for any info.

Yeah, that 1% plus the higher fees in those funds will crush him long term.
Like, if he has $100k today and just adds $1,000 monthly for 20 years at 8% that’s over a million. Add that 1% fee plus the higher expense ratio of 0.88%, that’s about $780k. It gets worse if he has more now or adds more monthly which I’d assume he does.
Is his “advisor” worth almost 1/4 million over 20 years?

I hear you. It has already been a couple decades. He is 52 and looking to retire soon (I'm trying to convince him that that is a bad idea but that's another story.) Since I have some knowledge and manage my own money, he and I have been talking for the past couple of years. He had me look over his portfolio and I noted two holdings that made up an inordinate percentage of his portfolio given his risk tolerance. My understanding is that they mostly leave his portfolio on auto-pilot, to the point where they may be accused of "reverse churning." Anyway, when I told him about these two individual stocks buried within two dozen ETFs, mutual funds and bonds (he is a 60/40 guy), he contacted his advisor. They said, "why yes, we agree that you should liquidate those holdings and spread the funds around through your more conservative holdings." Thankfully, those two names boomed over the past five years but the question is: what are they doing to earn their fees? There is a degree of loyalty here because this same outfit manages his parents holdings which are probably 10x his. I assume they pay more attention to mom and dad's portfolio than the relatively poorer son. He is leaning towards pulling the plug and moving to Vanguard. Seems obvious to me but that family history is deep and he is not very knowledgeable about these things.