Cash flow vs cap gains

Looked at CD rates for the first time, in a long time, last night. Found that one bank I deal with offers as much as 3.75% apr, for 13 months, and another is offering 4%. So, I added a stop at the bank to my list of errands for today.

Mosied into the bank, to grab a CD, and was informed of something. The bank’s brokerage division, where I also have an account, pimps CDs for other banks. One year CDs are on offer for 4.8% plus, with FDIC insurance. The FDIC limit applies to CDs at each bank individually, so you could have a quarter mil at Flagstar, another quarter mil at Ally, and so on, for all the banks they pimp for, and have FDIC insurance on all of it, without the hassle of actually having accounts at all those banks.



thanks Steve, scrubbed comments.

The disclosures on the brokerage web site say “Brokered CDs are FDIC insured, up to applicable limits, per depositor, per FDIC insured bank, per ownership category…Each CD is a direct obligation of the relevant issuer and is not, directly or indirectly, an obligation of Merrill. Merrill will not be obligated for amounts not covered by deposit insurance. Nor will Merrill be obligated to make any payments to satisfy a loss that might be incurred as a result of a delay in insurance payouts applicable to a CD, the receipt of a decreased interest rate on the reinvestment of the proceeds received as a result of the payment of the principal and accrued interest of the accreted value of a CD prior to the scheduled maturity in connection with the liquidation of an insured institution.”

Now, the issue is that, interest paid in my cash account will be taxed as earned income. I would rather hold CDs like this in my IRA, as money distributed from the IRA is taxed as earned income anyway. I looked at the brokerage that has my IRA, to see if they also pimp bank CDs. No such luck. What that brokerage offered is a “certificate” that yields 4.5%, the yield changes every three months, is explicitly not backed by the FDIC, and does have investment risk. I take that proposition as “you could lose most or all of your money, but your upside is limited to 4.5%”…count me for none of that.

I will be chewing through my taxes in a few weeks. I need to see how much headroom I have before I start paying extra Medicare premiums. It appears the income max to avoid extra premiums this year is $97K. It was quite a bit lower, a few years ago, when I ran afoul of it, and was very displeased with myself for being so careless with my income management.



Steve, you can also buy Treasury Bills in your brokerage account. Last week, for example, I bought a 26-week T-bill yielding just over 5%. They come in 4-week, 8-week, 13-week, 17-week, 26-week, and 52-week varieties. Or you can buy them on the secondary market with any period up to 52 weeks. The nice thing about T-bills is that they pay no interest until the end of the period, so when necessary, all their income can be shifted into the next year.

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In the summer of 2008, I sold everything in my IRA, and put it into 6 month Treasuries. They charged me fees to buy the Treasuries, but my priority right then was “return of my capital”, rather than “return on my capital”. Now, paying the fees might negate the APR advantage.

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For at least the last 23 years, I’ve never paid a fee to buy a treasury instrument! Not even once.


Steve, another big benefit of buying brokered CD’s through your online broker ( versus directly through a bank) is that you avoid the interest penalties usually associated with early redemption of bank CD’s.

As I was told by my online brokerage, you can sell your brokered CD’s at any time (and that can be at a profit or a loss, depending upon interest rates now versus then), but there is no interest penalty.