Ally 12-month CD 2%

Just noticed that Ally has a new 12month CD at 2% through Jan 2. I grabbed one to start building a CD "ladder", rather than have all my CDs expiring at the same time. 

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  • Great find.  

    Personally I'm going with a CD ladder that has a duration of 5 years. My plan, and hope, is to purchase one every 5 years, then will add to existing ones as they mature.  I'm also buying my first CD for my ladder this year.  It's not as great a deal as you found and Synchrony is giving 2.30% for a 5 year bond.  

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  • If anyone belongs, Navy Federal CU has a CD right now that is offering 2.25% for 15 months.   It also has a 32 month CD at 2.75% but that one is limited to IRA's or ESA's only.

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      • bevocat
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      • bevocat
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      Whereforart What about the 3% EasyStart?  I'm not seeing a good reason why not to open that one for the higher yield.  Please let me pick your brain?

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      • Whereforart
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      • whereforart
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      bevocat  The 3% Easy Start limits the maximum balance to $3,000, so that did not work for me.  If it had, I would certainly have gone for that.  As it is, I got the 15 month at 2.25% since that has a higher maximum.  Also, when I enrolled, I found out that every NCFU member is entitled to an extra one-time 1/4% interest rate - they give you the option of using it at that time, or waiting.  I chose to use it. :) 

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      • bevocat
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      • bevocat
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      Whereforart Cool, thank you! I won't be putting in more than $3K, so I went for it!  I also set up a small I-bond monthly purchase too.  I can't part with tons of money out of my budget, but hey, every dollar I put to work making me more dollars is better than not, or even worse, spending it on something frivolous!

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      • Whereforart
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      • whereforart
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      bevocat That's awesome!  I agree about putting your money to work!

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  • I thought about CD ladders, but then I realized it creates too many accounts to track I had 3 5-year ladders (15 CD accounts) and was about to add another ladder in December.  So I am moving to I Bonds. As my ladder rungs mature will move the money over.

    PROS: I Bonds are inflation protected and tax deferred until you cash out (or 30 years). Plus there is no state income tax on them so you can squeeze out a slightly higher Tax Equivalent Yield in states with income tax. You can break a bond in as little as $25 increments.

     

    You can buy a max of $10k in I Bonds per year per TIN.

    CONS: I Bonds have a 3 month EWP for the first 5 years and can't be redeemed at all in the first year, but I find that not to be much of a con as long as you're not moving your entire savings into I Bonds all at once.

    So instead of buying a 5 CD ladder last December, I just bought one I Bond for the total amount.

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    • nolesrule That sounds interesting. Are you talking about buying TIPS straight from the treasury? And could you elaborate on what a "3 month EWP for the first 5 years" means?

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      • nolesrule
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      • nolesrule
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      Magenta Stallion (d67ac9211827) No, not TIPS. I Bonds.*   It's one of the types of U.S. Savings Bonds, the other being EE (those are the ones that double their value at the 20 year mark).

      The only restrictions on I Bonds are you cannot redeem them during the first 12 months (all months start on the 1st regardless of when in the month you buy it). And during the first 5 years, there is a 3 month interest penalty. However the value shown on the Treasury Direct website will always include the penalty.

      *Note the font sucks on this site. I can't differentiate between I and l. The first is uppercase "eye" as in "is" and the second is lowercase "el" as in "lowercase".

      TIPS can have an actual negative return in periods of negative inflation. I Bonds have a floor interest rate based on their fixed interest component, and the semi-annual rate can never fall below zero. Rates are set every May and November. The fixed part of the rate is determined by when you buy the bons and stays for the life of the bond, while the inflation rate fluctuates every six months and applies to all I Bonds.

      https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_iratesandterms.htm#rate

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    • nolesrule Thanks for the detailed reply. Looks like the fixed rate portion right now is like 0.1% so you are essentially yielding exactly inflation. But then you pay federal taxes when you collect, and even in a low tax bracket that brings you below inflation. Kind of ironic you won't net an amount that matches inflation in an instrument designed to negate inflation.

      If i keep the money under a mattress, inflation reduces the value of that money, but I don't owe taxes on it. If I choose to try to protect my money from inflation by loaning it to the government, it's still guaranteed that the money I gave the government will be worth less when they give it back, because of taxes.

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      • nolesrule
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      • nolesrule
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      Magenta Stallion (d67ac9211827) The yield is better than CDs, much better than bank accounts. You don't owe state taxes in a state with taxes, and you don't owe taxes until it is cashed in, and since taxes on a dollar now are worth more than taxes on a dollar in 5, 10, 20 or 30 years, you get an inflation break on the taxes by being able to defer them. With bank accounts and CDs, you still have to pay taxes on interest. Do you choose to put money in a mattress or keep it in a bank?

      If you expect interest rates and inflation to go up in the future (and I do), then I expect the return on the bonds to go up. But you don't have to sell a bond to take advantage. You'd have to break a CD to get a better rate.

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      • nolesrule
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      • nolesrule
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      And personally I find the tax deferral to be more useful than chasing yield these days. I mean, we're talking a measly $10 difference in interest per $10,000 between an I Bond and a 5-year CD. Not really a huge difference one way or the other.

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    • nolesrule Does the bond interest compound? If not, then when you defer taxes on a dollar earned today, you are also deferring receiving that dollar (and giving up the earnings you would have made by reinvesting it). If you receive that dollar 5, 10, 15 years from now, that dollar has decreased in value. Thus even though the deferred 24 cents you will pay in taxes on that dollar won't be as much as it is today, the remaining 76 cents you will receive is also not worth as much as today. In a bank account, you receive the dollar before you owe taxes on it, so even though you only get to keep a portion of that dollar you received today, that portion is worth more today than if you received that same dollar 10 years from now.

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      • nolesrule
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      • nolesrule
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      Magenta Stallion (d67ac9211827) Interest accrues monthly and compounds semi-annually.

      You are confusing when you receive it vs. when you pay taxes on it. My I Bonds are part of my budget, so when I get the interest, the interest is part of my budget, even though I don't have the cash. That money is working for me in that I can free up "unrestricted dollars" held elsewhere to do other things, whether for spending or sending money off-budget to invest. And that's because I can cash them in at any time. The I Bond interest is fungible. (To be fair I do the same with my CDs also).

      And again, the choice becomes more clear if you live in a state with an income tax. My state marginal tax rate is 6.37%, so that makes a big difference. The after tax return of a  2.45% APY CD yields 1.71% after taxes, while the I Bond at 2.58% yields 1.96% after taxes. The Tax Equivalent Yield of the I Bond at 2.58% is 2.756%... that means I would need a fully taxable return of 2.756% to match the 2.58%.

      But the bottom line is I've grown weary of maintaining CD ladders and chasing interest rates, and I Bonds are competitive rate-wise, pretty much as safe as an FDIC insured account,  and it simplifies the budget because it's one account instead of 5 accounts per CD ladder.

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    • nolesrule 

      My point was if the interest isn't compounding, and you wait 10 years to actually collect the earnings you made today, your earnings would be subject to inflation over those 10 years while it sits there doing nothing, which would erase any tax-deferred inflation advantage.

      Since it compounds semi-annually, those earnings will also be protected against inflation as they stay uncollected, so in this case there is an inflation advantage to deferring taxes, assuming you aren't in a higher tax bracket when you decide to collect.

      In order to include the earnings in your budget, you would have to accurately account for taxes so you know how much of those earnings are actually yours, and that's harder to do the further down the road you intend to collect. It's not like the taxes would be dramatically different, but it does add a level of inaccuracy in your budget numbers.

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      • nolesrule
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      • nolesrule
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      Magenta Stallion (d67ac9211827) The  interest in my budget is a rounding error and taxes on it moreso. If it ever becomes a significant source of income in my budget then my tax rate will be pretty low that year. 

      I'm also hyperaware of our tax liability and plan accordingly by adjusting withholding. 

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      • nolesrule
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      Magenta Stallion (d67ac9211827) said:
      In order to include the earnings in your budget, you would have to accurately account for taxes so you know how much of those earnings are actually yours, and that's harder to do the further down the road you intend to collect.

       I don't see how that's different from any other interest in my budget that comes in monthly. At least with cashing a bond (or a partial bond, in $25 increments) I am aware of the amount of interest I am getting at the time I cash it in and can account for any taxes in my planning. It's not like there's going to be a huge windfall of interest.
      And if there is a huge windfall of interest, that's awesome. I won't have to break CDs with an EWP to get more interest to take advantage of those higher rates of return.
      Money is fungible.

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