Fixed Income Investing Question

[ShokWaveRider]

In Canada, they have a financial instrument called a GIC (Basically the equivalent of a CD). They have an option whereby the interest is paid fully at the end of the GIC period. 2,3, 4, 5, 7 & 10 years. So taxes are not incurred until the instrument expires.

Is there such a thing available in the USA? Whether it be a CD or . I need to keep our income low for another 5 years and I think this may be an answer. Yes I know taxes will need to be paid at the end of the period, and they will be a little higher than if incurred monthly/annually.

Any insight would be appreciated.

 

[jazz4cash]

The Garanteed Income Contract was an option within our 401k many years ago when Megacorp's finance division ran their own funds. It was replaced by Stable Value Funds which are also only available within 401k plans AFAIK.

 

[OldShooter]

In the US AFIK, "GIC" refers to a Guaranteed Investment Contract. Not equivalent to a CD, more equivalent to a short-term bond since they are issued by insurance companies. I had one in a 401K during the 70s/80s excitement, AFIK at 17%(!). Insurance company went bust, California insurance guarantee fund eventually kicked in (after a year IIRC) and I think I got most of my principal back. No interest though.

See also: https://en.wikipedia.org/wiki/Guaranteed_investment_contract

Not something I would even consider these days. Maybe a zero-coupon or a stripped bond would work for you? I"m not sure what the tax deal is with those. I've never messed with them.

 

[pb4uski]

Sounds like Executive Life.

 

[OldShooter]

Sounds like Executive Life.

Yup. You win the giant virtual stuffed teddy bear. I had forgotten the name.

 

[ShokWaveRider]

GIC is Guaranteed Investment Certificate, not Insurance. Google is your friend.

https://www.cibc.com/en/personal-banking/investments/gics.html

 

[VanWinkle]

In the US AFIK, "G
IC" refers to a Guaranteed Investment Contract. Not equivalent to a CD, more equivalent to a short-term bond since they are issued by insurance companies. I had one in a 401K during the 70s/80s excitement, AFIK at 17%(!). Insurance company went bust, California insurance guarantee fund eventually kicked in (after a year IIRC) and I think I got most of my principal back. No interest though.

See also: https://en.wikipedia.org/wiki/Guaranteed_investment_contract

Not something I would even consider these days. Maybe a zero-coupon or a stripped bond would work for you? I"m not sure what the tax deal is with those. I've never messed with them.

From The Street-

Whether the bond is taxable or tax exempt, you have to accrue interest on the bond. That means you have to calculate the portion of the difference between the purchase price and face value that accrued to you each tax year, even though you didn't receive any payment.

Taxable zero coupons are taxed based on accrued value each year it appears.

 

[sengsational]

You don't need to calculate it... they send you a 1099 for the money you won't get until the bond matures. Quite annoying.

 

[pb4uski]

.....Is there such a thing available in the USA? Whether it be a CD or . I need to keep our income low for another 5 years and I think this may be an answer. Yes I know taxes will need to be paid at the end of the period, and they will be a little higher than if incurred monthly/annually.

Any insight would be appreciated.

To my knowledge, retail GICs (guaranteed investment contracts) are no longer available in the US... or if they are it is a very thin market. As others have mentioned, some insurers still issue GICs in the institutional space.

However, a single premium deferred annuity or SPDA, has a lot of similarities to a GIC.

We keep our income low by holding equity mutual funds in taxable accounts... not only is the income low, it is also tax preferenced and 0% tax if your income is below $101,200 for a married couple.

 

[VanWinkle]

To my knowledge, retail GICs (guaranteed investment contracts) are no longer available in the US... or if they are it is a very thin market. As others have mentioned, some insurers still issue GICs in the institutional space.

However, a single premium deferred annuity or SPDA, has a lot of similarities to a GIC.

We keep our income low by holding equity mutual funds in taxable accounts... not only is the income low, it is also tax preferenced and 0% tax if your income is below $101,200 for a married couple.

Good points pb4uski.

He did not mention why he needed to keep income low, but if it is the ACA Health plan, both muni bond interest and dividends/capital gains count as income even though there is 0 tax due in the lower tax brkts. He/she did
not state the reason for the low income preference.

 

[pb4uski]

If it was ACA he could go with a no or low dividend equity fund.

 

[VanWinkle]

If it was ACA he could go with a no or low dividend equity fund.

Berkshire Hathaway

 

[pb4uski]

That would be one candidate... I'm sure there are others.

 

[gcgang]

Series E/EE US Treasury Savings Bonds. You can elect to defer tax on interest until you cash the bonds in.

 

[audreyh1]

Series E/EE US Treasury Savings Bonds. You can elect to defer tax on interest until you cash the bonds in.

And iBonds

 

[ShokWaveRider]

Does a Fixed Deferred annuity act the same as a CD, but hold tax liability till maturity?

 

[OldShooter]

As I mentioned in Post #3 I am not familiar with the tax treatment of zeros and stripped bonds. So now I understand that interest on zeros is taxes basically on a accrual basis. How about strips? Also on an accrual basis or all at the end?

Re EE- and I-bonds IIRC you can only buy $10K per year. So not really an option for serious money.

 

[Independent]

Does a Fixed Deferred annuity act the same as a CD, but hold tax liability till maturity?

Pretty much. A couple comments...

A fixed interest deferred annuity doesn't really "mature". They are typically sold with surrender charges that grade down to zero. Many people buy them with the intent of surrendering when the surrender charge hits zero. For them, that is the "maturity". But, you can hold them for a much longer period, after the surrender charge disappears.

The CD competitor design has a fixed, guaranteed interest rate for the life of the surrender charge. They will have a guaranteed interest rate after that, but it's likely to be lower.

The surrender charge calculation on a single premium annuity is likely to be different from a CD. In my experience, SPDA surrender charges start out much higher.

 

[pb4uski]

+1 Interest aka inside build-up is tax-deferred until you withdraw but surrender charges can be steep depending on the product design.

Can you elaborate on what you are trying to do and why?

 

[ShokWaveRider]

Can you elaborate on what you are trying to do and why?

Reduce income for ACA purposes.

 

[pb4uski]

Then the SPDA may be a good choice depending on your time horizon. The premium will grow with interest tax-deferred.

If you can tolerate some income then you might consider a stock index fund... they typically generate taxable income of 1.5 to 2% towards ACA (so $2k on $100k invested) and at ACA levels the income would be tax-free.

Or a growth equity fund would pay even less in dividends and you could balance it off with a value fund in your tax-deferred accounts.

 

[Clone]

Purchase a piece of capital equipment. For example, a backhoe. Rent it long-term to somebody that needs a backhoe. Depreciate the backhoe on a 7 year schedule. The depreciation should about cancel out the income.

After the 5 year period, sell the piece of equipment. Pay capital gains on any difference between sale value and depreciated value.

I would need to put a pencil to better numbers to see if the rent would be enough to make this worthwhile.

 

[sengsational]

As I mentioned in Post #3 I am not familiar with the tax treatment of zeros and stripped bonds. So now I understand that interest on zeros is taxes basically on a accrual basis. How about strips? Also on an accrual basis or all at the end?

The same.

In both cases, you are issued a 1099-OID (Original Issue Discount) annually. I happen to know this because my grandmother bought one of my kids a zero and one a strips, with me or DW as custodian. Both types of bond involved getting the 1099-OID every year. I always put it as a nominee distribution, and they didn't need to file, so it turned out to be tax-free growth for them, but that wouldn't be the case, of course, for someone trying to limit AGI.