CD ladder or Bond Fund in taxable account?

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MountainMiser
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Location: Northern Colorado

CD ladder or Bond Fund in taxable account?

Post by MountainMiser »

Been lurking for a few days, but this is my first post. Migrated Roth IRA and taxable MM accounts to Vanguard over the past couple months. I have many questions but, for now, I want to ask about investments in my Regular Taxable Vanguard Account.

This is a Joint Account (my partner and I). We have checking/savings accounts at a local bank, for our emergency funds and, as both of our Roths are already maxed (all in Target Retirement 2035 VTTHX) for 2011, these funds (just south of $30K) can be invested long term.

I'd like to get some growth, certainly more than whatever the MM is giving. We're both 41 years old, both firmly in the 15% fed tax bracket, filing single (as we've never been legally married). We don't make much, but we live well within our means, carry no debt aside from a 30-year/4.25% $100K mortgage and we're agressive savers, so the options for these funds, as I see them, are rather limitless.

Or aren't they? Tax efficient funds, Bonds or Stocks? Individual stocks or bonds? Even moving the funds out of VG altogether and into a series of CDs (or a Ladder?) at Ally would be an improvement over the MM.

Any suggestions would be most appreciated. I'm glad I stumbled upon this site and I look forward to learning more.

What do you think?
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NoRoboGuy
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Post by NoRoboGuy »

Have you looked at I-Bonds? They are the best risk-free investment available right now. Each of you can buy up to $10,000 worth each year ($5,000 electronically through treasurydirect, and $5,000 'paper' through your bank.) Currently they yield 4.6% (zero percent fixed and 4.6% variable with reset each six months). Carefully consider the minimum holding period. Then, I would use any remaining to pay down the 4.25% mortgage. You can also consider a CD ladder a good choice.
Miskatonic
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Post by Miskatonic »

I just did both.

Ibonds from Treasury Direct into my taxable account. CD ladder from 1 to 5 years from Ally online bank.

Seems like a reasonable, safe, semi-liquid method to keep smaller amounts working and accessible.
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Sammy_M
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Post by Sammy_M »

Why not five 5-year CDs at Ally and just terminate one early and forfeit 2 months interest if the money is needed sooner?
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kenyan
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Post by kenyan »

You stated that these are for the long term, so I would opt for stocks/bonds rather than cash instruments such as CDs. Vanguard Total Stock Market and Total International Stock Market are very viable options. You might consider your overall risk tolerance, and mentally merge these funds with your IRA portfolio so that you have one retirement portfolio split among a few different accounts. From that point, you determine your stock/bond asset allocation and buy funds accordingly.

The most tax-efficient manner to invest would be to buy the stock funds in your taxable account. Granted, you're in a low tax bracket, so the tax efficiency of your investments is not quite as important as it is for many others.

If by "long-term" you do not mean retirement, or a time frame 10+ years from now, then I would consider other options.
555
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Re: CD ladder or Bond Fund in taxable account?

Post by 555 »

[quote="MountainMiser""]...We don't make much, but we live well within our means, carry no debt aside from a 30-year/4.25% $100K mortgage and we're agressive savers, ..."[/quote]
This is easy. Pay down your mortgage.
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House Blend
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Re: CD ladder or Bond Fund in taxable account?

Post by House Blend »

MountainMiser wrote:I'd like to get some growth, certainly more than whatever the MM is giving. We're both 41 years old, both firmly in the 15% fed tax bracket, filing single (as we've never been legally married). We don't make much, but we live well within our means, carry no debt aside from a 30-year/4.25% $100K mortgage and we're agressive savers, so the options for these funds, as I see them, are rather limitless.

Or aren't they? Tax efficient funds, Bonds or Stocks? Individual stocks or bonds? Even moving the funds out of VG altogether and into a series of CDs (or a Ladder?) at Ally would be an improvement over the MM.
Welcome to the forum.

First, are the Roths and the taxable VG account all of your investment accounts? No 401k? Don't make the mistake of making decisions about one account in isolation. You need to look at the whole picture.

Second, learn about tax-efficient fund placement.
http://www.bogleheads.org/wiki/Principl ... _Placement

Did you know that the dividends from Vanguard Total Stock Market are 100% qualified? This means that for someone in the 15% bracket, these dividends are free of federal income tax. (Until Congress changes its mind.)

You should be putting stocks in your taxable account and bonds in your Roth, with some overlap depending on which account is too big or too small.

Example: $50K in a taxable account, $50K in a Roth.
Desired allocation: 60% equity/40% fixed income
Solution: Roth=$40K Bonds+$10K Stocks; taxable=$50K Stocks

You did say that you have emergency funds/cash elsewhere, and that the MMF can be invested for the long term, right?
staythecourse
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Post by staythecourse »

Sammy_M wrote:Why not five 5-year CDs at Ally and just terminate one early and forfeit 2 months interest if the money is needed sooner?
Many, many folks miss an important aspect of cash and that is LIQUIDITY. Read the fine print on Ally's depositor agreement. They have no legal obligation to honor an early withdrawal (with or without penality). That uncertainty in a superasset class like cash essentially strips away one of its biggest advantages.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle
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Sammy_M
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Withdrawal Terms

Post by Sammy_M »

staythecourse wrote:
Sammy_M wrote:Why not five 5-year CDs at Ally and just terminate one early and forfeit 2 months interest if the money is needed sooner?
Many, many folks miss an important aspect of cash and that is LIQUIDITY. Read the fine print on Ally's depositor agreement. They have no legal obligation to honor an early withdrawal (with or without penality). That uncertainty in a superasset class like cash essentially strips away one of its biggest advantages.

Good luck.
What fine print are you referring to? This is what I see.
Early Withdrawals — You may not make a partial withdrawal of funds you deposit in a CD prior
to the maturity date. If you withdraw all of the funds you have deposited in a CD prior to the
maturity date, we will close your CD, add the accrued interest to date to the balance and impose
a penalty on your early withdrawal. The penalty imposed will equal sixty (60) days of interest.

This penalty does not apply in the case of death or legal incapacity of any owner or in the case
of the Ally No Penalty CD, which does not allow withdrawals on the date you fund your account
or during the first six (6) days following the date you fund your account (except for the death or
legal incapacity of any owner). If you have a Raise Your Rate CD, the 60-day interest penalty will
be calculated using the interest rate that applies to your Raise Your Rate CD at the time of your
early withdrawal
http://www.ally.com/files/pdf/ally-bank ... -10-22.pdf

"If you withdraw" implies that you can withdraw. I saw nothing else that states that they reserve the right to deny, but perhaps I'm missing it.
joebruin77
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Re: Withdrawal Terms

Post by joebruin77 »

Sammy_M wrote:
staythecourse wrote:
Sammy_M wrote:Why not five 5-year CDs at Ally and just terminate one early and forfeit 2 months interest if the money is needed sooner?
Many, many folks miss an important aspect of cash and that is LIQUIDITY. Read the fine print on Ally's depositor agreement. They have no legal obligation to honor an early withdrawal (with or without penality). That uncertainty in a superasset class like cash essentially strips away one of its biggest advantages.

Good luck.
What fine print are you referring to? This is what I see.
Early Withdrawals — You may not make a partial withdrawal of funds you deposit in a CD prior
to the maturity date. If you withdraw all of the funds you have deposited in a CD prior to the
maturity date, we will close your CD, add the accrued interest to date to the balance and impose
a penalty on your early withdrawal. The penalty imposed will equal sixty (60) days of interest.

This penalty does not apply in the case of death or legal incapacity of any owner or in the case
of the Ally No Penalty CD, which does not allow withdrawals on the date you fund your account
or during the first six (6) days following the date you fund your account (except for the death or
legal incapacity of any owner). If you have a Raise Your Rate CD, the 60-day interest penalty will
be calculated using the interest rate that applies to your Raise Your Rate CD at the time of your
early withdrawal
http://www.ally.com/files/pdf/ally-bank ... -10-22.pdf

"If you withdraw" implies that you can withdraw. I saw nothing else that states that they reserve the right to deny, but perhaps I'm missing it.
And Ally does not limit the number of CD accounts you can open. So if you have say $25K to deposit, you could theoretically open 25 different CD accounts with $1,000 in each one. If you unexpectedly needed cash, you would close only the number of accounts needed at the time. So if you needed $5K, you would only have to close 5 accounts and the other 20 can remain open.

I do believe Ally has the right to alter the terms of the CD. But if they do, they are obliged to inform you in advance and give you the opportunity to close the account without penalty within a reasonable time period.

I have a few 5-year CD's earning 2.4% and have had no issues or problems.
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archbish99
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Post by archbish99 »

A previous version of their depository agreement gave them the right to refuse a withdrawal. Their most recent update removed that.
Topic Author
MountainMiser
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Location: Northern Colorado

Post by MountainMiser »

Thanks for the suggestions, warnings, counter-warnings and best wishes.

If it weren't so darn sunny outside, I'd have already started to review my situation with hopes of posting details of my rather small portfolio, for further analysis.

I am especially intrigued by House Blend's Total Stock Market idea, given the tax-free nature of the dividends. One of the benefits of being in the 15% tax-bracket. Hell, if we didn't have a mortgage and investments, we'd each still be filing the 1040-EZ!

You'll be hearing back from me.

Thanks again.
Topic Author
MountainMiser
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Joined: Mon Jun 06, 2011 9:15 pm
Location: Northern Colorado

Re: CD ladder or Bond Fund in taxable account?

Post by MountainMiser »

House Blend wrote:
MountainMiser wrote: Did you know that the dividends from Vanguard Total Stock Market are 100% qualified? This means that for someone in the 15% bracket, these dividends are free of federal income tax. (Until Congress changes its mind.)
I'm combining my and my wife's Roth with our Taxable Joint Account, and spreading an 80 Stock (80 US/20 Ix)/20 Bond allocation across the lot. I'd like to keep the Roths nearly identical to one another going International in the Joint allows me to keep every thing in the Admiral Class.

Are dividends from the Total International Fund taxed in the same way? I'd read in the Wiki about a tax credit? Anything else of which I should be aware?

Thanks for the helpful suggestions.



Thanks.
Topic Author
MountainMiser
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Joined: Mon Jun 06, 2011 9:15 pm
Location: Northern Colorado

Re: CD ladder or Bond Fund in taxable account?

Post by MountainMiser »

House Blend wrote:
MountainMiser wrote: Did you know that the dividends from Vanguard Total Stock Market are 100% qualified? This means that for someone in the 15% bracket, these dividends are free of federal income tax. (Until Congress changes its mind.)
I'm combining my and my wife's Roth with our Taxable Joint Account, and spreading an 80 Stock (80 US/20 Ix)/20 Bond allocation across the lot. I'd like to keep the Roths nearly identical to one another going International in the Joint allows me to keep every thing in the Admiral Class.

Are dividends from the Total International Fund taxed in the same way? I'd read in the Wiki about a tax credit? Anything else of which I should be aware?

Thanks for the helpful suggestions.



Thanks.
Topic Author
MountainMiser
Posts: 20
Joined: Mon Jun 06, 2011 9:15 pm
Location: Northern Colorado

Re: CD ladder or Bond Fund in taxable account?

Post by MountainMiser »

House Blend wrote:
MountainMiser wrote: Did you know that the dividends from Vanguard Total Stock Market are 100% qualified? This means that for someone in the 15% bracket, these dividends are free of federal income tax. (Until Congress changes its mind.)
I'm combining my and my wife's Roth with our Taxable Joint Account, and spreading an 80 Stock (80 US/20 Ix)/20 Bond allocation across the lot. I'd like to keep the Roths nearly identical to one another going International in the Joint allows me to keep every thing in the Admiral Class.

Are dividends from the Total International Fund taxed in the same way? I'd read in the Wiki about a tax credit? Anything else of which I should be aware?

Thanks for the helpful suggestions.



Thanks.
Topic Author
MountainMiser
Posts: 20
Joined: Mon Jun 06, 2011 9:15 pm
Location: Northern Colorado

Re: CD ladder or Bond Fund in taxable account?

Post by MountainMiser »

House Blend wrote:
MountainMiser wrote: Did you know that the dividends from Vanguard Total Stock Market are 100% qualified? This means that for someone in the 15% bracket, these dividends are free of federal income tax. (Until Congress changes its mind.)
I'm combining my and my wife's Roth with our Taxable Joint Account, and spreading an 80 Stock (80 US/20 Ix)/20 Bond allocation across the lot. I'd like to keep the Roths nearly identical to one another going International in the Joint allows me to keep every thing in the Admiral Class.

Are dividends from the Total International Fund taxed in the same way? I'd read in the Wiki about a tax credit? Anything else of which I should be aware?

Thanks for the helpful suggestions.



Thanks.
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House Blend
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Re: CD ladder or Bond Fund in taxable account?

Post by House Blend »

MountainMiser wrote:
House Blend wrote: Did you know that the dividends from Vanguard Total Stock Market are 100% qualified? This means that for someone in the 15% bracket, these dividends are free of federal income tax. (Until Congress changes its mind.)
I'm combining my and my wife's Roth with our Taxable Joint Account, and spreading an 80 Stock (80 US/20 Ix)/20 Bond allocation across the lot. I'd like to keep the Roths nearly identical to one another going International in the Joint allows me to keep every thing in the Admiral Class.

Are dividends from the Total International Fund taxed in the same way? I'd read in the Wiki about a tax credit? Anything else of which I should be aware?
MM,

Not quite. Some percentage of the dividends of Total International are qualified, but the rest is not. The exact percentage varies from year to year; last year it was about 70% qualified.

So if you were in the 15% Federal bracket last year, and had $1000 in dividends from Total international, then you would have paid 15% of $300 = $45 in tax.

But you would have also claimed a foreign tax credit. This percentage also varies from year to year; last year it was about 8.8% of the dividend. So you would have claimed an $88 tax credit, more than enough to offset the extra tax.

So for you, Total International would have been a better deal in a taxable account than TSM.
Topic Author
MountainMiser
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Joined: Mon Jun 06, 2011 9:15 pm
Location: Northern Colorado

Post by MountainMiser »

Thanks, HB. It seemed to make sense when I set it up this way, but it's good to have some backup!

Next year, maybe I'll be able to use some of that money I'm saving to pay someone to prepare my taxes! I might be outgrowing the Free DIY options available online.

Thanks again, for clearing things up for me.
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