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CD alternatives
Old 07-31-2008, 10:53 AM   #1
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CD alternatives

I have a CD of 45k which is maturing shortly. I do not require this money for the next 4 or 5 years. At the same time, I like to take minimum risk.

I am in texas and in high tax bracket.

I am thinking to open an JOINT account with Vanguard and invest the proceedings in Target retirement fund 2010 (VTENX). I never had any account with Vanguard.

I understand this is not FDIC insured, but i hope investing with Vanguard is safe!

Is this a good choice? Anyone please suggest other alternatives?
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Old 07-31-2008, 11:19 AM   #2
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Why not a new CD? Here is a site with 5% APY for 5 years. Capital One Direct Banking: Certificates of Deposit - Rates
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Old 07-31-2008, 11:33 AM   #3
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I have a CD of 45k which is maturing shortly. I do not require this money for the next 4 or 5 years. At the same time, I like to take minimum risk.

I am in texas and in high tax bracket.

I am thinking to open an JOINT account with Vanguard and invest the proceedings in Target retirement fund 2010 (VTENX). I never had any account with Vanguard.

I understand this is not FDIC insured, but i hope investing with Vanguard is safe!

Is this a good choice? Anyone please suggest other alternatives?
For this duration and low risk your choices are CD's or Money Market funds. Keep your CD's + the interest they will generate below $100,000 to maintain FDIC insurance. Vanguard funds, in general, are good mutual funds but they bear the same market risks as everyone else.

Also if this is a taxable account then target funds are usually not a good idea unless you are retired already and using the dividends and CG's to live on.

DD
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Old 07-31-2008, 11:43 AM   #4
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You said JOINT account so you can have $200K fully protected in CD's at a single institution. See the EDIE Calculator on the FDIC Site. Here is a link: http://www4.fdic.gov/EDIE/
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Old 07-31-2008, 12:00 PM   #5
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Why not a new CD? Here is a site with 5% APY for 5 years. Capital One Direct Banking: Certificates of Deposit - Rates
He's in a high tax bracket, how does MORE ordinary income help??:confused:
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Old 07-31-2008, 01:30 PM   #6
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How about a muni or two? You could probably get a very attractive tax effective yield and take virtually no risk.
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Old 07-31-2008, 01:52 PM   #7
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He's in a high tax bracket, how does MORE ordinary income help??:confused:
Don't know since he already has that problem. Better than less income, I guess.
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Old 07-31-2008, 01:57 PM   #8
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Thanks for the suggestions. Looks like one more CD is the way to go. However, can you suggest any good Muni. I don't know any thing about it.
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Old 07-31-2008, 02:05 PM   #9
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Municipal bonds are available from all 50 states, some territories, many municipalities, and many other issuers. They are generally exempt from state, local and federal taxes, so if you are in a high tax bracket they can offer some very solid after-tax yields. If you want to go this route, you could buy a general obligation bond ("GO") from pretty much any of the states and just ignore ratings, since they pretty much never default and since TX has no state income tax you could pick any state with a juicy yield. I would stick with whatever maturity you would otherwise pick for a CD.

Any brokerage firm should be able to help you with this, and some states and municipalities even sell direct to consumers.
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Old 07-31-2008, 02:18 PM   #10
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Texas doesn't have any state income taxes if I am not mistaken. This may make the choice for CDs or corporate bonds a little more attractive than the munis being offered in TX. Not sure though, just something to keep in mind.
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Old 07-31-2008, 02:43 PM   #11
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If TX does not tax income from other states' muni bonds, feel free to buy muni bonds from other states.

I was just comparing the muni bond yields on 1-5 yr AAA and AA rated munis with similar maturity FDIC insured CD, and even in the 33 and 35% tax brackets, the CDs come out slightly ahead [assuming I'm doing my math correctly].
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Old 07-31-2008, 03:18 PM   #12
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If TX does not tax income from other states' muni bonds, feel free to buy muni bonds from other states.

I was just comparing the muni bond yields on 1-5 yr AAA and AA rated munis with similar maturity FDIC insured CD, and even in the 33 and 35% tax brackets, the CDs come out slightly ahead [assuming I'm doing my math correctly].
What is the cost (Fee), if any, to buy CD's from VANGUARD and early redemption costs? I have always purchased directly from a Bank or CU.
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Old 07-31-2008, 06:00 PM   #13
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What is the cost (Fee), if any, to buy CD's from VANGUARD and early redemption costs? I have always purchased directly from a Bank or CU.
From VBS's brokerage fees and commission schedule:

Quote:
A commission is charged for each security bought or sold through Vanguard Brokerage Services®. This commission schedule is effective March 27, 2008, and is subject to change. You may receive a discount from standard commissions and fees if you are an enrolled member in one of Vanguard's enhanced services: Voyager Services®, Voyager Select Services™, or Flagship Services™. Other discounts and fee waivers may be available. If you'd like to estimate the commission for Vanguard Brokerage Services' stock and option trades, log on to use our Commission Calculator.

Account maintenance fee


Schedule Amount Charged annually Standard fee: $30 per account.
Voyager™, Voyager Select™, and Flagship™ clients: no charge.*
In addition to the acct maintenance fee, for Bonds and CDs:

Quote:
Vanguard Brokerage Services may act as an agent, executing your order at cost plus a commission, or Vanguard Brokerage may act as a principal and add markups to purchase prices or subtract markdowns from sales prices. When Vanguard Brokerage acts as a principal on a primary market issue, Vanguard Brokerage receives a fee concession from the issuer. In the event that a concession is not available, Vanguard Brokerage reserves the right to charge a commission.
For new issue CDs, there's no commission, but there is a min purchase of $10,000, "subject to dealer minimum." For selling CDs through VBS, looks like a flat charge of $35.

Fidelity and Schwab most likely sell similar CDs, so if the transaction costs are cheaper there, go with Fidelity of Schwab.

I've never bought or sold CDs through VBS, so buyer beware.

- Alec
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Old 07-31-2008, 06:05 PM   #14
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I looked at them several times and never could find any competitive rates vs what I could get buying them directly.

http://www.fatwallet.com/forums/finance/682884/

5.25% on both 4 and 5 year cd's available in that thread, which is updated by a brazillion people very frequently.
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