Author Topic: Putting Tax return into a CD Ladder..... opinions?  (Read 8706 times)

nyxst

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Putting Tax return into a CD Ladder..... opinions?
« on: February 07, 2014, 10:08:37 AM »
I will get $5000 for my return this year.  Was looking at GE Capitol and thinking of using it to set up a CD ladder with $1000 for each year up to 5 years.  The five year rate is at 2%, so better than the rate in a savings account.  It seems like a good idea, but I don't have a full emergency fund yet, this would be supplemental to the $600 per month I am putting towards my emergency fund, and in addition to the $425 per month I am putting towards maxing my Roth.  I also put in 10% of my income to the company Simple IRA (no 401k available).

Any thoughts before I take the plunge will be much appreciated!!

Another Reader

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Re: Putting Tax return into a CD Ladder..... opinions?
« Reply #1 on: February 07, 2014, 10:18:55 AM »
Compare rates with Pentagon Federal Credit Union and research rates on www.depositaccounts.com if you decide to do this.  The other option would be to use some or all of the money to open a taxable brokerage or mutual fund account.  Consider what you want to do with this money and when as part of your decision.

nyxst

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Re: Putting Tax return into a CD Ladder..... opinions?
« Reply #2 on: February 07, 2014, 10:37:13 AM »
Honestly, I just want it out of my hands, but not far enough that I can't get to it in an emergency.  I don't make a ton of money, but am very ambitious.  I get a "free ride" for my own college courses for the most part (thanks everyone :).  Those expenses might go up a bit when I transfer to finish my BA.  I don't have any idea how much it will cost when I transfer.  That is one reason I want cash close by, so I have no excuse but to continue with college.   I own my home (not outright, I have a small mortgage) and don't have much else to save for except college for my kids and retirement.  It just seemed like it could earn me more interest than my CapitalOne 360 account without any additional risk and still rather liquid.  I guess I can't really answer the question what will I use it for later on since I don't know yet.

MustachianAccountant

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Re: Putting Tax return into a CD Ladder..... opinions?
« Reply #3 on: February 07, 2014, 11:54:18 AM »
Slightly more risky would be Vanguard Total Bond Market, Vanguard REIT Index, or another Vanguard Bond Index fund (e.g. Corp Intermediate Term). I have semi-emergency money in a few of these. By semi-emergency, I mean funds to cover a really big emergency that taps out my primary emergency fund. (The primary fund could cover a month or two of expenses, and the Vanguard Bond fund money would be the rest of my emergency fund.) The reason I do this is, I'm willing to take a little extra risk that I won't need that bigger chunk of money in the very near future for an increased reward (4-6ish % return).
For what it's worth, early last year, the Total Bond Index took a tumble, and hasn't quite recovered yet to pre-2013 levels. So it's on sale.

sheepstache

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Re: Putting Tax return into a CD Ladder..... opinions?
« Reply #4 on: February 07, 2014, 12:39:11 PM »
I would second checking out PenFed.  You can get closer to 3% for your 5-year.  You have to join a military-related organization for like 15 bucks to be eligible, but back of the envelope says it would be worth it.
I agree that a CD-ladder makes sense in your situation since it's a back up to a partial emergency fund.

madage

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Re: Putting Tax return into a CD Ladder..... opinions?
« Reply #5 on: February 07, 2014, 12:53:43 PM »
You have to join a military-related organization for like 15 bucks to be eligible, but back of the envelope says it would be worth it.

Not necessarily. I was eligible to join PenFed simply by contributing to the Red Cross.

To the OP - I would say adjust your W-4 withholdings so you don't get a $5,000 refund next year.

beltim

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Re: Putting Tax return into a CD Ladder..... opinions?
« Reply #6 on: February 07, 2014, 12:58:27 PM »
Slightly more risky would be Vanguard Total Bond Market, Vanguard REIT Index, or another Vanguard Bond Index fund (e.g. Corp Intermediate Term). I have semi-emergency money in a few of these. By semi-emergency, I mean funds to cover a really big emergency that taps out my primary emergency fund. (The primary fund could cover a month or two of expenses, and the Vanguard Bond fund money would be the rest of my emergency fund.) The reason I do this is, I'm willing to take a little extra risk that I won't need that bigger chunk of money in the very near future for an increased reward (4-6ish % return).
For what it's worth, early last year, the Total Bond Index took a tumble, and hasn't quite recovered yet to pre-2013 levels. So it's on sale.

With a yield of 2.2% I don't think the added 0.2% is worth the quite considerable risk that you could lose money on the vanguard total bond fund. With a duration of 5.5 years, an increase in interest rates of just 1% (which has happened over the last year) would knock out 2.5 years of interest.

MustachianAccountant

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Re: Putting Tax return into a CD Ladder..... opinions?
« Reply #7 on: February 07, 2014, 01:05:54 PM »
Slightly more risky would be Vanguard Total Bond Market, Vanguard REIT Index, or another Vanguard Bond Index fund (e.g. Corp Intermediate Term). I have semi-emergency money in a few of these. By semi-emergency, I mean funds to cover a really big emergency that taps out my primary emergency fund. (The primary fund could cover a month or two of expenses, and the Vanguard Bond fund money would be the rest of my emergency fund.) The reason I do this is, I'm willing to take a little extra risk that I won't need that bigger chunk of money in the very near future for an increased reward (4-6ish % return).
For what it's worth, early last year, the Total Bond Index took a tumble, and hasn't quite recovered yet to pre-2013 levels. So it's on sale.

With a yield of 2.2% I don't think the added 0.2% is worth the quite considerable risk that you could lose money on the vanguard total bond fund. With a duration of 5.5 years, an increase in interest rates of just 1% (which has happened over the last year) would knock out 2.5 years of interest.

You can't look at the current SEC yield for those accounts; the 5 or 10 year is a better picture, since the idea is to put that money away for a while. 5 year for that fund is ~4.5%. The risk is that you'll need it sooner than 5 years. (BTW, that current SEC yield vs. the 5 or 10 year average is what tells you the fund is on sale...)

sheepstache

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Re: Putting Tax return into a CD Ladder..... opinions?
« Reply #8 on: February 07, 2014, 01:23:03 PM »
You have to join a military-related organization for like 15 bucks to be eligible, but back of the envelope says it would be worth it.

Not necessarily. I was eligible to join PenFed simply by contributing to the Red Cross.
Huh, so on the application did you say you "belong" to the Red Cross"?  I wasn't sure if just donating qualified you as belonging to it.  Currently the two military associations that you can donate to to qualify are what you get when you click on "help me join another way" but I understand it changes.

Quote
To the OP - I would say adjust your W-4 withholdings so you don't get a $5,000 refund next year.

+1

madage

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Re: Putting Tax return into a CD Ladder..... opinions?
« Reply #9 on: February 07, 2014, 01:39:19 PM »

Huh, so on the application did you say you "belong" to the Red Cross"? 

Yep.

beltim

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Re: Putting Tax return into a CD Ladder..... opinions?
« Reply #10 on: February 07, 2014, 01:39:57 PM »
Slightly more risky would be Vanguard Total Bond Market, Vanguard REIT Index, or another Vanguard Bond Index fund (e.g. Corp Intermediate Term). I have semi-emergency money in a few of these. By semi-emergency, I mean funds to cover a really big emergency that taps out my primary emergency fund. (The primary fund could cover a month or two of expenses, and the Vanguard Bond fund money would be the rest of my emergency fund.) The reason I do this is, I'm willing to take a little extra risk that I won't need that bigger chunk of money in the very near future for an increased reward (4-6ish % return).
For what it's worth, early last year, the Total Bond Index took a tumble, and hasn't quite recovered yet to pre-2013 levels. So it's on sale.

With a yield of 2.2% I don't think the added 0.2% is worth the quite considerable risk that you could lose money on the vanguard total bond fund. With a duration of 5.5 years, an increase in interest rates of just 1% (which has happened over the last year) would knock out 2.5 years of interest.

You can't look at the current SEC yield for those accounts; the 5 or 10 year is a better picture, since the idea is to put that money away for a while. 5 year for that fund is ~4.5%. The risk is that you'll need it sooner than 5 years. (BTW, that current SEC yield vs. the 5 or 10 year average is what tells you the fund is on sale...)

You have it backwards. If you think the average yield of that fund will be 4.5% over the next 5 years, that means the prices will go way down.  And then it would be a terrible investment.

beltim

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Re: Putting Tax return into a CD Ladder..... opinions?
« Reply #11 on: February 07, 2014, 01:55:02 PM »
With a yield of 2.2% I don't think the added 0.2% is worth the quite considerable risk that you could lose money on the vanguard total bond fund. With a duration of 5.5 years, an increase in interest rates of just 1% (which has happened over the last year) would knock out 2.5 years of interest.

You can't look at the current SEC yield for those accounts; the 5 or 10 year is a better picture, since the idea is to put that money away for a while. 5 year for that fund is ~4.5%. The risk is that you'll need it sooner than 5 years. (BTW, that current SEC yield vs. the 5 or 10 year average is what tells you the fund is on sale...)

You have it backwards. If you think the average yield of that fund will be 4.5% over the next 5 years, that means the prices will go way down.  And then it would be a terrible investment.


Here's a back of the envelope calculation (obviously not accurate because of simplifying assumptions, but it illustrates my point):

Year     Yield    Principal      Interest Received
2014   2.2%   1000          22.00
2015   2.5%   983.5          24.60
2016   3.0%   956.5          28.70
2017   4.0%   903.9          36.16
2018   5.0%   854.2          42.71

So at the end of five years, with a final yield of 5.0% (but an average yield of 3.34%), your principal has gone down ~15% and you've received about 15.4% in dividends.

That means you've only barely been profitable over those five years.

Dicey

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Re: Putting Tax return into a CD Ladder..... opinions?
« Reply #12 on: February 07, 2014, 01:58:20 PM »
CD ladders used to be a useful tool and may be again one day, but that day is not today or even this week.

Furthermore, access to 1K per YEAR isn't really all that helpful. As a mustachian, if you need a thousand dollars, it is generally not considered an emergency. Also, since interest rates are at historical lows, logic dictates that they are likely to go up. I wouldn't lock in any savings dollars into anything more than short term. Look around for as good a rate as you can find on a one-year option and park it all there. You can do what I used to call a sideways ladder. Open two 1-year CD's and put 2500 in each. That way if you need one, you won't forfeit the interest on the other. Finally, read the fine print! I have noticed that now that interest rates are so low, you don't just lose the interest when you withdraw money. Some CD's contain flat fees for early withdrawal, which could result in loss of principal.

PS Great question!

foobar

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Re: Putting Tax return into a CD Ladder..... opinions?
« Reply #13 on: February 07, 2014, 02:46:37 PM »
You realize that when you say bond funds are on sale what your really saying is that I expect to return to 50 year lows in interest rates and not climb back up to their historic levels that are about twice the current rates:) I like the REITs but the are a couple of orders of magnitude up on the risk scale.


Slightly more risky would be Vanguard Total Bond Market, Vanguard REIT Index, or another Vanguard Bond Index fund (e.g. Corp Intermediate Term). I have semi-emergency money in a few of these. By semi-emergency, I mean funds to cover a really big emergency that taps out my primary emergency fund. (The primary fund could cover a month or two of expenses, and the Vanguard Bond fund money would be the rest of my emergency fund.) The reason I do this is, I'm willing to take a little extra risk that I won't need that bigger chunk of money in the very near future for an increased reward (4-6ish % return).
For what it's worth, early last year, the Total Bond Index took a tumble, and hasn't quite recovered yet to pre-2013 levels. So it's on sale.

nyxst

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Re: Putting Tax return into a CD Ladder..... opinions?
« Reply #14 on: February 07, 2014, 10:42:53 PM »
CD ladders used to be a useful tool and may be again one day, but that day is not today or even this week.

Furthermore, access to 1K per YEAR isn't really all that helpful. As a mustachian, if you need a thousand dollars, it is generally not considered an emergency. Also, since interest rates are at historical lows, logic dictates that they are likely to go up. I wouldn't lock in any savings dollars into anything more than short term. Look around for as good a rate as you can find on a one-year option and park it all there. You can do what I used to call a sideways ladder. Open two 1-year CD's and put 2500 in each. That way if you need one, you won't forfeit the interest on the other. Finally, read the fine print! I have noticed that now that interest rates are so low, you don't just lose the interest when you withdraw money. Some CD's contain flat fees for early withdrawal, which could result in loss of principal.

PS Great question!

Thanks! That might be the best way for me to go right now... Buy two 12 month CDs and see how things look next year :) i t is definitely better than putting it into my Roth. ( I'm afraid I will need it for school and loose that contribution forever by taking it out...) I'd just leave it in my emergency fund, but I've already got such a nice plan for filling that account with fancy auto payments and what not :) I want to stay the course and go slow and steady to build it up... You know, lots of reps with my new mustache muscles to make them stronger..

I already had my exemptions increased for this year, so I shouldn't have as much of a return next year. I am trying to be as proactive as possible, but I'm glad I asked you all about this first :)

LibraTraci

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Re: Putting Tax return into a CD Ladder..... opinions?
« Reply #15 on: February 08, 2014, 12:41:13 AM »
I guess the thing you need to consider pretty carefully is whether you'd like to lock money away where you can't get to it (CDs for example), OR whether you'd like your money parked somewhere where you can get at it pretty easily if you should want to (savings account). 

Personally, I *do* like to lock money away, where I can't get to it.  If I decided tomorrow that I wanted to impulse-buy something (say, a car), I simply wouldn't be able to access enough money to do it--there would be an inherent waiting period on any large purchases.  (There are big advantages to this for me!  But I can see that it has its disadvantages too from another point of view.) 

If life is unpredictable enough for you to need real short-term access to your money (say, if you might be offered a job in the next year that would require buying plane tickets, or buying a car), then perhaps it is good to keep some of your money (say, $2,0000) in an out-of-the-way savings account, and only sock away part of the money.

As for CDs and getting a good return on your investment, I think there are many here who could steer you toward options that have better return without much more risk (mutual funds, etc.)  But personally, being very risk-averse, I like CDs because they are just a step above keeping your money under your mattress.  As time goes on, perhaps I will reconsider but for now, I like the security of it all.     


soccerluvof4

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Re: Putting Tax return into a CD Ladder..... opinions?
« Reply #16 on: February 08, 2014, 04:50:48 AM »
I'm a 100% With Mustachian Accountant on this one. You said you just want to get the money away from you.  I too would put into the same 2 funds he mentioned.

dragoncar

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Re: Putting Tax return into a CD Ladder..... opinions?
« Reply #17 on: February 08, 2014, 01:26:24 PM »
Another option is to put it in I-Bonds

Dicey

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Re: Putting Tax return into a CD Ladder..... opinions?
« Reply #18 on: February 08, 2014, 05:52:06 PM »
Another option is to put it in I-Bonds

Dragoncar, I'm curious about your answer. Not being critical, I really want to know. Everything I've read says to avoid any bonds of more than a 1 year duration, due to the fact that interest rates have virtually nowhere to go but up and the 7/1 ratio. Do I-Bonds allow you that flexibility?

dragoncar

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Re: Putting Tax return into a CD Ladder..... opinions?
« Reply #19 on: February 09, 2014, 08:37:03 PM »
Another option is to put it in I-Bonds

Dragoncar, I'm curious about your answer. Not being critical, I really want to know. Everything I've read says to avoid any bonds of more than a 1 year duration, due to the fact that interest rates have virtually nowhere to go but up and the 7/1 ratio. Do I-Bonds allow you that flexibility?

This is something you should google.

sheepstache

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Re: Putting Tax return into a CD Ladder..... opinions?
« Reply #20 on: February 09, 2014, 09:08:42 PM »
Another option is to put it in I-Bonds

Although they're less than 2% right now (and I don't think the lack of state tax would make enough of a difference), plus they're totally not redeemable before a year and the OP seemed like he wanted more flexibility.  Unless I am misunderstanding, which is quite possible?
But yes!  It is an option!  And everyone should consider I-bonds.
Also, I feel like you might like Let Me Google That For You.  An invaluable service.
http://lmgtfy.com/?q=i-bonds


edit: In hindsight the link looked like I was piling on DianeC and I should have just PM'd it to dragoncar.
« Last Edit: February 11, 2014, 01:36:34 PM by sheepstache »

Sweet Betsy

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Re: Putting Tax return into a CD Ladder..... opinions?
« Reply #21 on: February 10, 2014, 07:46:08 AM »
I also agree that you may want to look into i-bonds.  The funds would be totally inaccessible for the 1st year but after that you'll only pay a 3-month interest penalty to withdraw the funds (up to 5 years, then you have full access at any time).  You can use ibonds for college costs for your kids interest free. 

We have a chunk of our emergency fund in i-bonds.  It's earning a bit more than our regular savings account and has zero risk of loss of principle. 


Dicey

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Re: Putting Tax return into a CD Ladder..... opinions?
« Reply #22 on: February 12, 2014, 12:28:02 AM »
Another option is to put it in I-Bonds

Dragoncar, I'm curious about your answer. Not being critical, I really want to know. Everything I've read says to avoid any bonds of more than a 1 year duration, due to the fact that interest rates have virtually nowhere to go but up and the 7/1 ratio. Do I-Bonds allow you that flexibility?

This is something you should google.

Thanks, dragoncar! Excellent suggestion. How stupendously stupid of me not to thnk of that ;-)

dragoncar

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Re: Putting Tax return into a CD Ladder..... opinions?
« Reply #23 on: February 12, 2014, 01:08:33 AM »
Another option is to put it in I-Bonds

Dragoncar, I'm curious about your answer. Not being critical, I really want to know. Everything I've read says to avoid any bonds of more than a 1 year duration, due to the fact that interest rates have virtually nowhere to go but up and the 7/1 ratio. Do I-Bonds allow you that flexibility?

This is something you should google.

Thanks, dragoncar! Excellent suggestion. How stupendously stupid of me not to thnk of that ;-)

Sometimes it makes sense to type out a long response containing information already on the internet.... sometimes... not.  :-P  Hopefully you weren't too offended at my suggestion.

edit: also thanks to sheepstache for the link.  I'm well aware of LMGTFY but I find that sometimes it is interpreted as too flippant, even when not intended as such
« Last Edit: February 12, 2014, 01:10:42 AM by dragoncar »