CDs vs. Bonds in today's world

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J45
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CDs vs. Bonds in today's world

Post by J45 »

I had few CD accounts that were doing well before the pandemic. But since the interest rates became a flat line, it feels like I am losing money every month.

I have Fidelity account. Just wondering if it is relatively safe to put some in taxable account Fidelity Total Bond fund. Suggestions?

Thanks in advance
Call_Me_Op
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Re: CDs vs. Bonds in today's world

Post by Call_Me_Op »

J45 wrote: Mon Apr 12, 2021 7:21 am I had few CD accounts that were doing well before the pandemic. But since the interest rates became a flat line, it feels like I am losing money every month.

I have Fidelity account. Just wondering if it is relatively safe to put some in taxable account Fidelity Total Bond fund. Suggestions?

Thanks in advance
Relative to what? Total Bond is certainly safer than stocks but not as safe as a bank CD. You will find that there is no free lunch - that is, no way to achieve higher expected return in a single investment without accepting higher risk.

The above said, Total Bond is deemed perfectly acceptable for most here in terms of their fixed-income holdings. It is more tax-efficient if held in a tax-deferred account. You may also want to consider a low-cost intermediate muni fund, but note that they do not hold-up as well when the stock market becomes unhinged.

For the record, the approach I take for my "safe" money is to take very low risk, not worry about taxation, and hold my nose until rates improve. Taxes are not much of a consideration anyway when rates are so low.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
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Re: CDs vs. Bonds in today's world

Post by watchnerd »

J45 wrote: Mon Apr 12, 2021 7:21 am I had few CD accounts that were doing well before the pandemic. But since the interest rates became a flat line, it feels like I am losing money every month.

I have Fidelity account. Just wondering if it is relatively safe to put some in taxable account Fidelity Total Bond fund. Suggestions?

Thanks in advance
It has an ER = .45

That's pretty high for a total bond mark fund.

Duration: 6 Years

30 Day Yield: 1.91%

Current 5 Year Breakeven Inflation Rate: 2.51%

Real Yield: -.60%

So you're still getting a negative real yield....
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7eight9
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Re: CDs vs. Bonds in today's world

Post by 7eight9 »

Many conservative investors favor fixed annuities these days. They pay much better than bank accounts, money market funds, CD and other low-risk fixed income investments.

A fixed annuity is an insurance contract that pays a fixed rate of interest for a "set term", usually ranging from one to ten years. After the set term, a new fixed rate is offered for the next term. One popular form of a fixed annuity is a "multi-year guaranteed annuity", or "MYGA", also referred to as a "CD annuity".
Learn more about fixed annuities --- https://www.bogleheads.org/wiki/Fixed_annuity

There was a good thread recently titled Purchasing MYGAs - Blueprint Income vs. Gainbridge vs. Canvas that might be worth a look.
viewtopic.php?f=1&t=334589
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Call_Me_Op
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Re: CDs vs. Bonds in today's world

Post by Call_Me_Op »

7eight9 wrote: Mon Apr 12, 2021 8:25 am Many conservative investors favor fixed annuities these days. They pay much better than bank accounts, money market funds, CD and other low-risk fixed income investments.

A fixed annuity is an insurance contract that pays a fixed rate of interest for a "set term", usually ranging from one to ten years. After the set term, a new fixed rate is offered for the next term. One popular form of a fixed annuity is a "multi-year guaranteed annuity", or "MYGA", also referred to as a "CD annuity".
Learn more about fixed annuities --- https://www.bogleheads.org/wiki/Fixed_annuity

There was a good thread recently titled Purchasing MYGAs - Blueprint Income vs. Gainbridge vs. Canvas that might be worth a look.
viewtopic.php?f=1&t=334589
Yes, but to a large extent you are getting paid with your own money. I see fixed-annuities as valuable only for lifetime income as a form of longevity insurance. However, most are not inflation-adjusted, making them far inferior to Social Security.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
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Re: CDs vs. Bonds in today's world

Post by LongRoad »

watchnerd wrote: Mon Apr 12, 2021 7:34 am
J45 wrote: Mon Apr 12, 2021 7:21 am I had few CD accounts that were doing well before the pandemic. But since the interest rates became a flat line, it feels like I am losing money every month.

I have Fidelity account. Just wondering if it is relatively safe to put some in taxable account Fidelity Total Bond fund. Suggestions?

Thanks in advance
It has an ER = .45

That's pretty high for a total bond mark fund.

Duration: 6 Years

30 Day Yield: 1.91%

Current 5 Year Breakeven Inflation Rate: 2.51%

Real Yield: -.60%

So you're still getting a negative real yield....
The thing with Fidelity is that you'll find a mix of active and passive funds available in most categories.

If you're looking for a Total Bond fund at Fidelity, consider FXNAX with an ER of 0.025%:
https://fundresearch.fidelity.com/mutua ... /316146356
7eight9
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Re: CDs vs. Bonds in today's world

Post by 7eight9 »

Call_Me_Op wrote: Mon Apr 12, 2021 8:31 am
7eight9 wrote: Mon Apr 12, 2021 8:25 am Many conservative investors favor fixed annuities these days. They pay much better than bank accounts, money market funds, CD and other low-risk fixed income investments.

A fixed annuity is an insurance contract that pays a fixed rate of interest for a "set term", usually ranging from one to ten years. After the set term, a new fixed rate is offered for the next term. One popular form of a fixed annuity is a "multi-year guaranteed annuity", or "MYGA", also referred to as a "CD annuity".
Learn more about fixed annuities --- https://www.bogleheads.org/wiki/Fixed_annuity

There was a good thread recently titled Purchasing MYGAs - Blueprint Income vs. Gainbridge vs. Canvas that might be worth a look.
viewtopic.php?f=1&t=334589
Yes, but to a large extent you are getting paid with your own money. I see fixed-annuities as valuable only for lifetime income as a form of longevity insurance. However, most are not inflation-adjusted, making them far inferior to Social Security.
I'm afraid you are confusing SPIAs with fixed annuities. Fixed annuities work like CDs.
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Stinky
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Re: CDs vs. Bonds in today's world

Post by Stinky »

7eight9 wrote: Mon Apr 12, 2021 8:41 am
Call_Me_Op wrote: Mon Apr 12, 2021 8:31 am
7eight9 wrote: Mon Apr 12, 2021 8:25 am Many conservative investors favor fixed annuities these days. They pay much better than bank accounts, money market funds, CD and other low-risk fixed income investments.

A fixed annuity is an insurance contract that pays a fixed rate of interest for a "set term", usually ranging from one to ten years. After the set term, a new fixed rate is offered for the next term. One popular form of a fixed annuity is a "multi-year guaranteed annuity", or "MYGA", also referred to as a "CD annuity".
Learn more about fixed annuities --- https://www.bogleheads.org/wiki/Fixed_annuity

There was a good thread recently titled Purchasing MYGAs - Blueprint Income vs. Gainbridge vs. Canvas that might be worth a look.
viewtopic.php?f=1&t=334589
Yes, but to a large extent you are getting paid with your own money. I see fixed-annuities as valuable only for lifetime income as a form of longevity insurance. However, most are not inflation-adjusted, making them far inferior to Social Security.
I'm afraid you are confusing SPIAs with fixed annuities. Fixed annuities work like CDs.
I agree with the use of one type of fixed annuity as a possible CD replacement. That type of fixed annuity is a multi year guaranteed annuity, or MYGA.

I would not recommend another type of fixed annuity, a single premium immediate annuity (SPIA) as a CD alternative. Nor would I recommend other annuities, such as indexed or variable annuities.
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Re: CDs vs. Bonds in today's world

Post by Call_Me_Op »

7eight9 wrote: Mon Apr 12, 2021 8:41 am
Call_Me_Op wrote: Mon Apr 12, 2021 8:31 am
7eight9 wrote: Mon Apr 12, 2021 8:25 am Many conservative investors favor fixed annuities these days. They pay much better than bank accounts, money market funds, CD and other low-risk fixed income investments.

A fixed annuity is an insurance contract that pays a fixed rate of interest for a "set term", usually ranging from one to ten years. After the set term, a new fixed rate is offered for the next term. One popular form of a fixed annuity is a "multi-year guaranteed annuity", or "MYGA", also referred to as a "CD annuity".
Learn more about fixed annuities --- https://www.bogleheads.org/wiki/Fixed_annuity

There was a good thread recently titled Purchasing MYGAs - Blueprint Income vs. Gainbridge vs. Canvas that might be worth a look.
viewtopic.php?f=1&t=334589
Yes, but to a large extent you are getting paid with your own money. I see fixed-annuities as valuable only for lifetime income as a form of longevity insurance. However, most are not inflation-adjusted, making them far inferior to Social Security.
I'm afraid you are confusing SPIAs with fixed annuities. Fixed annuities work like CDs.
I don't think so. You are referring to one specific type of annuity (MYGA). All others do not return your principal and are unsuitable as CD alternatives. However, even a MYGA is not FDIC insured, and subject to insurance company solvency.
Last edited by Call_Me_Op on Mon Apr 12, 2021 8:53 am, edited 1 time in total.
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Re: CDs vs. Bonds in today's world

Post by cheese_breath »

Call_Me_Op wrote: Mon Apr 12, 2021 8:31 am
7eight9 wrote: Mon Apr 12, 2021 8:25 am Many conservative investors favor fixed annuities these days. They pay much better than bank accounts, money market funds, CD and other low-risk fixed income investments.

A fixed annuity is an insurance contract that pays a fixed rate of interest for a "set term", usually ranging from one to ten years. After the set term, a new fixed rate is offered for the next term. One popular form of a fixed annuity is a "multi-year guaranteed annuity", or "MYGA", also referred to as a "CD annuity".
Learn more about fixed annuities --- https://www.bogleheads.org/wiki/Fixed_annuity

There was a good thread recently titled Purchasing MYGAs - Blueprint Income vs. Gainbridge vs. Canvas that might be worth a look.
viewtopic.php?f=1&t=334589
Yes, but to a large extent you are getting paid with your own money....
That's not true with MYGAs. They work like CDs. Give them your money, and after the specified term they give it back plus interest.
The surest way to know the future is when it becomes the past.
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Re: CDs vs. Bonds in today's world

Post by Call_Me_Op »

cheese_breath wrote: Mon Apr 12, 2021 8:53 am
Call_Me_Op wrote: Mon Apr 12, 2021 8:31 am
7eight9 wrote: Mon Apr 12, 2021 8:25 am Many conservative investors favor fixed annuities these days. They pay much better than bank accounts, money market funds, CD and other low-risk fixed income investments.

A fixed annuity is an insurance contract that pays a fixed rate of interest for a "set term", usually ranging from one to ten years. After the set term, a new fixed rate is offered for the next term. One popular form of a fixed annuity is a "multi-year guaranteed annuity", or "MYGA", also referred to as a "CD annuity".
Learn more about fixed annuities --- https://www.bogleheads.org/wiki/Fixed_annuity

There was a good thread recently titled Purchasing MYGAs - Blueprint Income vs. Gainbridge vs. Canvas that might be worth a look.
viewtopic.php?f=1&t=334589
Yes, but to a large extent you are getting paid with your own money....
That's not true with MYGAs. They work like CDs. Give them your money, and after the specified term they give it back plus interest.
Agreed - but a MYGA was not clearly specified originally.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
dbr
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Re: CDs vs. Bonds in today's world

Post by dbr »

Total bond funds are "relatively safe."

You have also learned that CDs are not safe because the interest paid can't be counted on.

From the definition that investment risk is measured by the standard deviation of annual returns the risk in CDs is around +/-2% which is how much the return can fluctuate over extended time. That number for total bond is perhaps 6% and for stocks it is perhaps 20%. You can decide what is risky and what is not.

Note the above mentioned MYGAs are variable in the terms available over time and therefore also have risk defined as variation in annual return. At this time MYGA rates are relatively attractive compared to some alternatives but are still historically low. That is also true of options such as stable value funds in 401k's.

if safety is concerned with incidence of fraud or default then the hierarchy is probably Treasuries (including E and I bonds), FDIC CDs and accounts and agency bonds, money market funds, stable value funds, muni bond funds, corporate bond funds, junk bond funds, etc. Excepting Treasuries, CDs accounts and agency bonds, individual bonds of any kind are risky. This list stands open to correction.
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Re: CDs vs. Bonds in today's world

Post by whereskyle »

J45 wrote: Mon Apr 12, 2021 7:21 am I had few CD accounts that were doing well before the pandemic. But since the interest rates became a flat line, it feels like I am losing money every month.

I have Fidelity account. Just wondering if it is relatively safe to put some in taxable account Fidelity Total Bond fund. Suggestions?

Thanks in advance
There are much cheaper bond funds that I would consider. What do you want the money to do? How long do you want it to stay invested? Do you want it to hedge equity risk?

If you just want the money to be there whenever you'll need it, the answer is a HYS account. If you want the money to have a good chance of keeping up with inflation over the next 6 years, I'd choose BND, Vanguard's Total US Bond etf. If you want the money to produce slightly less yield but have a very good chance of going up in value during a flight to safety during a stock market crash, I'd put it in VGIT, Vanguard's Intermediate Treasury ETF.

Decide what you want the money to do for you.
"I am better off than he is – for he knows nothing and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle
7eight9
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Re: CDs vs. Bonds in today's world

Post by 7eight9 »

Call_Me_Op wrote: Mon Apr 12, 2021 8:50 am
7eight9 wrote: Mon Apr 12, 2021 8:41 am
Call_Me_Op wrote: Mon Apr 12, 2021 8:31 am
7eight9 wrote: Mon Apr 12, 2021 8:25 am Many conservative investors favor fixed annuities these days. They pay much better than bank accounts, money market funds, CD and other low-risk fixed income investments.

A fixed annuity is an insurance contract that pays a fixed rate of interest for a "set term", usually ranging from one to ten years. After the set term, a new fixed rate is offered for the next term. One popular form of a fixed annuity is a "multi-year guaranteed annuity", or "MYGA", also referred to as a "CD annuity".
Learn more about fixed annuities --- https://www.bogleheads.org/wiki/Fixed_annuity

There was a good thread recently titled Purchasing MYGAs - Blueprint Income vs. Gainbridge vs. Canvas that might be worth a look.
viewtopic.php?f=1&t=334589
Yes, but to a large extent you are getting paid with your own money. I see fixed-annuities as valuable only for lifetime income as a form of longevity insurance. However, most are not inflation-adjusted, making them far inferior to Social Security.
I'm afraid you are confusing SPIAs with fixed annuities. Fixed annuities work like CDs.
I don't think so. You are referring to one specific type of annuity (MYGA). All others do not return your principal and are unsuitable as CD alternatives. However, even a MYGA is not FDIC insured, and subject to insurance company solvency.
Below are the definitions in the wiki which I quoted and linked (for fixed annuity which is what I recommended as a CD alternative). Fixed annuities and fixed immediate annuities are considered two different products.

Fixed annuity: The money you put in a fixed annuity earns interest at a rate that is guaranteed for a specific period of time—ranging from one to five years or more, depending on the terms of the contract. When that period ends, a new rate may take effect—or the old rate may be offered again.

Immediate (Income) annuities are used to convert a lump sum into an income stream (regular payments), typically for the life of the annuitant. If the income stream is fixed, it is considered a fixed immediate annuity; also known as a Single Premium Immediate Annuity (SPIA).
https://www.bogleheads.org/wiki/Category:Annuities
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Call_Me_Op
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Re: CDs vs. Bonds in today's world

Post by Call_Me_Op »

7eight9 wrote: Mon Apr 12, 2021 9:04 am
Call_Me_Op wrote: Mon Apr 12, 2021 8:50 am
7eight9 wrote: Mon Apr 12, 2021 8:41 am
Call_Me_Op wrote: Mon Apr 12, 2021 8:31 am
7eight9 wrote: Mon Apr 12, 2021 8:25 am Many conservative investors favor fixed annuities these days. They pay much better than bank accounts, money market funds, CD and other low-risk fixed income investments.

A fixed annuity is an insurance contract that pays a fixed rate of interest for a "set term", usually ranging from one to ten years. After the set term, a new fixed rate is offered for the next term. One popular form of a fixed annuity is a "multi-year guaranteed annuity", or "MYGA", also referred to as a "CD annuity".
Learn more about fixed annuities --- https://www.bogleheads.org/wiki/Fixed_annuity

There was a good thread recently titled Purchasing MYGAs - Blueprint Income vs. Gainbridge vs. Canvas that might be worth a look.
viewtopic.php?f=1&t=334589
Yes, but to a large extent you are getting paid with your own money. I see fixed-annuities as valuable only for lifetime income as a form of longevity insurance. However, most are not inflation-adjusted, making them far inferior to Social Security.
I'm afraid you are confusing SPIAs with fixed annuities. Fixed annuities work like CDs.
I don't think so. You are referring to one specific type of annuity (MYGA). All others do not return your principal and are unsuitable as CD alternatives. However, even a MYGA is not FDIC insured, and subject to insurance company solvency.
Below are the definitions in the wiki which I quoted and linked (for fixed annuity which is what I recommended as a CD alternative). Fixed annuities and fixed immediate annuities are considered two different products.

Fixed annuity: The money you put in a fixed annuity earns interest at a rate that is guaranteed for a specific period of time—ranging from one to five years or more, depending on the terms of the contract. When that period ends, a new rate may take effect—or the old rate may be offered again.

Immediate (Income) annuities are used to convert a lump sum into an income stream (regular payments), typically for the life of the annuitant. If the income stream is fixed, it is considered a fixed immediate annuity; also known as a Single Premium Immediate Annuity (SPIA).
https://www.bogleheads.org/wiki/Category:Annuities
Yes, but except for the MYGA, you don't get your principal back at the end of the period.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
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Re: CDs vs. Bonds in today's world

Post by Broken Man 1999 »

Call_Me_Op wrote: Mon Apr 12, 2021 8:54 am
cheese_breath wrote: Mon Apr 12, 2021 8:53 am
Call_Me_Op wrote: Mon Apr 12, 2021 8:31 am
7eight9 wrote: Mon Apr 12, 2021 8:25 am Many conservative investors favor fixed annuities these days. They pay much better than bank accounts, money market funds, CD and other low-risk fixed income investments.

A fixed annuity is an insurance contract that pays a fixed rate of interest for a "set term", usually ranging from one to ten years. After the set term, a new fixed rate is offered for the next term. One popular form of a fixed annuity is a "multi-year guaranteed annuity", or "MYGA", also referred to as a "CD annuity".
Learn more about fixed annuities --- https://www.bogleheads.org/wiki/Fixed_annuity

There was a good thread recently titled Purchasing MYGAs - Blueprint Income vs. Gainbridge vs. Canvas that might be worth a look.
viewtopic.php?f=1&t=334589
Yes, but to a large extent you are getting paid with your own money....
That's not true with MYGAs. They work like CDs. Give them your money, and after the specified term they give it back plus interest.
Agreed - but a MYGA was not clearly specified originally.
It was early in the discussion. You missed it, easy to do.
Re: CDs vs. Bonds in today's world
Unread post by 7eight9 » Mon Apr 12, 2021 9:25 am

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Re: CDs vs. Bonds in today's world

Post by Woot! »

I'm 5 to 7 years away from retirement with about 50% of my portfolio in fixed income, 50% in equities or equity-like assets. I'll probably not increase my FI allocation for another 10 years, if I do it at all. I hope and expect to be around for another 25 years, and could conceivably be around another 40.

For years I've had the vast majority of my fixed income in a CD ladder. Recently, as CDs have matured and yields dropped to nothing, I've begun adding in MYGA rungs while minding safety and choosing insurers with AM Best A- or higher ratings, staying under my state guarantee association's coverage limit, and so far choosing MYGA durations of 3 - 4 years.

For me, and I hope Stinky corrects me if I have this wrong, MYGAs offer an additional benefit. Unfortunately, the majority of my portfolio is taxable. Since MYGAs are tax-deferred, I should be able to use 1035 exchanges to prolong into retirement the tax deferment of my MYGA-invested assets. So MYGAs allow me to take funds that would otherwise be taxable had I invested them in CDs or a bond fund in a taxable brokerage account, and make those funds tax-deferred. Magic? Or do I have that wrong?

I've also just bought my first $10k in i-Bonds (yes, I'm late to the game) and will do the same every year going forward, but this ultimately will make up a relatively small portion of my retirement portfolio.

Is the above sensible, or is there a reason I should be investing in other fixed-income options? FWIW, I should have my mortgage paid off in 10 - 12 years.
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Re: CDs vs. Bonds in today's world

Post by Stinky »

Woot! wrote: Sat Apr 24, 2021 2:42 pm For me, and I hope Stinky corrects me if I have this wrong, MYGAs offer an additional benefit. Unfortunately, the majority of my portfolio is taxable. Since MYGAs are tax-deferred, I should be able to use 1035 exchanges to prolong into retirement the tax deferment of my MYGA-invested assets. So MYGAs allow me to take funds that would otherwise be taxable had I invested them in CDs or a bond fund in a taxable brokerage account, and make those funds tax-deferred. Magic? Or do I have that wrong?
You’ve got it pegged. :D

Tax deferral is one of the historic reasons that annuities were sold in taxable accounts. And, a person can make unlimited 1035 exchanges into new annuities, rolling the tax deferred gain of the old contracts into the new.

If your current insurer happens to offer an attractive rate on a new MYGA when your existing contract matures, you can re-up with the current insurer.

Of course, taxes will eventually be paid. There is no step up in basis on death. When withdrawals are made from annuities, they are treated for tax purposes as accumulated income first, and basis last. Finally, if you make a withdrawal from a taxable annuity prior to age 59.5, you’ll pay a 10% tax penalty on any earnings withdrawn, plus regular income tax.

Yes, it’s some form of magic. With several limitations and caveats. But magic nonetheless.
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Re: CDs vs. Bonds in today's world

Post by Woot! »

Stinky wrote: Sat Apr 24, 2021 3:40 pm You’ve got it pegged. :D

Tax deferral is one of the historic reasons that annuities were sold in taxable accounts. And, a person can make unlimited 1035 exchanges into new annuities, rolling the tax deferred gain of the old contracts into the new.

If your current insurer happens to offer an attractive rate on a new MYGA when your existing contract matures, you can re-up with the current insurer.

Of course, taxes will eventually be paid. There is no step up in basis on death. When withdrawals are made from annuities, they are treated for tax purposes as accumulated income first, and basis last. Finally, if you make a withdrawal from a taxable annuity prior to age 59.5, you’ll pay a 10% tax penalty on any earnings withdrawn, plus regular income tax.

Yes, it’s some form of magic. With several limitations and caveats. But magic nonetheless.
Thanks, Stinky.

Now as to whether I should be moving most of my FI into a MYGA ladder still looms.
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Re: CDs vs. Bonds in today's world

Post by tomsense76 »

If this was in short term CDs and one needs liquidity, how about moving to a HYSA? The yields are basically the same, but the liquidity is better. If you decide you don't need some of the money for several years, could move it to a bond fund of appropriate duration. Alternatively if this money won't be needed for a decade or more, could move it to stocks. Could also choose amongst these based on how much is needed when.

The proposed bond fund has a very high expense ratio. Would avoid that as that will eat into the returns (which are relatively low anyways due to the low yielding environment).

Also would be mindful of where bonds are held. In general these are better in tax-deferred accounts as they generate ordinary income in taxable and are relatively low yielding vs. stocks so don't make sense in tax-free accounts.
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