Laddering- CD's vs Treasuries

[Gearhead Jim]

Typical for a new retiree, I'll be putting some of my money in laddered fixed income securities. Many financial advisors use high quality corporate bonds, but the small yield gain over treasuries and CD's does not seem worth the combination of risk and fees.

Treasuries are probably as risk-free as you can get, but I'm told the IRS won't allow me to buy them directly for my retirement account. Low yields, too.

CD's seem like a good compromise, with yields that are around .5% higher than treasuries and similar (but not quite identical) security. The August issue of Consumer Reports Money Advisor recommends CD's now, and even says not to worry about depositing in weaker banks, the FDIC will take care of things.

Well, I'm not so confident in the government and so I would use only the higher rated banks. But it would be done on the internet. Any problems with fraud?

With the laddering strategy, we will be able to access money every six months if we need it, and we also have other investments that could be sold if we needed more than our normal emergency money.

So, are CD's the way to go for us? Or am I missing something?

 

[greg]

Gearhead: You could do your own mix and match: SHY IEF TLT--all exchange traded funds.

--Greg

 

[brewer12345]

Sounds about right to me. You will have to decide if you are willing to deal with more than one bank in order to get the best yield, or just give up a few basis points to keep it simple.

Definately do not go with weak banks. The FDIC will eventually return your principal, but it could be a looooong wait.

If I were doing this today, I probably would split the money up between a 6 month or 1 year CD and perhaps an I-Bond. You won't get extra yield from longer maturities, so you ony want a longer ladder if you are convinced that rates will fall.

 

[Gearhead Jim]

Greg-
Right now I want to stay away from bond FUNDS because rising interest rates tend to produce capital losses that reduce or eliminate the gains from interest.  I plan to use a buy-and-hold-to-maturity strategy for individual fixed income securities.  Laddering should smooth out the fluctuations in rates.

Or did I misunderstand what you were saying?

 

[SteveR]

Jim,

I am doing some of what you are talking about also. I have some cash off the table that I plan on living off of before I start on other assets. I don't want to tie it up for too long as interest rates will continue to go up for quite a while as I see it. I have a couple locked in at 3 months (Jumbo) and a couple at 6 months and one at 1 year. I am not going longer for a while. I have several bond ladders in my IRA and a couple of Muni-bonds in my after tax that will mature in 3 years and 4 years. This combination will fund me until I get to 59.5 when I can kick in my IRA withwrawls at the amount I want to take out (which will vary each year) so I don't have to get locked into either too much or too little under a 72(t). If I wait until 70.5 I will have a HUGE tax issue that I do not want to have so I plan on spending more earlier from it and less later. That may seem lopsided but it works for me due to other income streams and my desire to keep my taxes low.

Good luck and welcome to the site.

 

[Gearhead Jim]

SteveR-
Yep, sounds similar.
Perhaps I'm misunderstanding your other comment, but I believe that the annual Minimum Distribution at age 70.5 is based on how much money is in the account at that date; not how much was in the account when you started initial distributions. If so, taking money out earlier would help only if your annual total taxable income before 70.5 is much less than what it would be after 70.5
Uhh, I think...

 

[SteveR]

Jim,

The IRA distribution rules use the year end balance at age 70 for calculation of your required withdrawls; not the balance prior to that. If you are already spending it when you hit 70.5 there is no minimum distribution. The rule is to force you to start spending from it so the IRS gets their money back (deferred taxes since this is NOT a tax free account).

If you wait until you are 70.5 to start your IRA withdrawls then you are forced to use the IRS withdrawl methods which can result in BIG withdrawls with BIG taxes. Even if you do a 72(t) prior to age 59.5 and you stop for a while and start back up before age 70 you are not forced to use the IRS IRA withdrawl rules.

 

[OldAgePensioner]

SteveR,
So could a person defer withdrawal ( ) until 70 and withdraw whatever they choose. Doesn't all the money have to be withdrawn at 83.

I'm hoping to let my 401k grow until the last minute and buy a Funeral in Space package. Blasted into orbit to join my old friends.

 

[SteveR]

OAP,

As I understand it, you have to start in the age you reach 70.5 and you keep going until either you or your money runs out.

I am not aware of any maximum age to spend it all since the IRS formulas all use a standardized table of life expectancies in the calculations for the amount to withdrawl.

Even if you don't spend it all, the beneficiary must keep it going.

If you want to use it for your Space Funeral, then I suggest you take it out now and put it into a different account type. But, be aware that any withdrawls are treated as income and as investments for tax purposes.

Live long and prosper!

 

[Brat]

Can't he move money from the IRA to a Roth, spend down the IRA then use the Roth if need be?

 

[SteveR]

Brat,

Good question. Maybe some of the experts here can address this one.

 

[Gearhead Jim]

For me, the biggest issue is making sure that I have enough money that the IRS even cares about me. So for now, I'm not going to worry about minimum dsitribution.

Any more comments about the CD laddering idea? It sounds like I would need to establish an IRA at each bank where i place a CD. Any other issues?

 

[SteveR]

For me, the biggest issue is making sure that I have enough money that the IRS even cares about me.  So for now, I'm not going to worry about minimum dsitribution.

Any more comments about the CD laddering idea?  It sounds like I would need to establish an IRA at each bank where i place a CD.  Any other issues?

Why would you want to establish and IRA at each bank where you have CDs? I am not sure what you would gain by that. All IRAs would have to be drawn upon at age 70.5. Roth may be a much better choice than IRAs for many people. "Pay (tax) now....use when you want."

 

[Gearhead Jim]

Right now I'm still partially employed (age 60, working a different job) and in a fairly high marginal tax bracket.  The money is currently in a qualified employer retirement plan, and I want to keep the money tax deferred until I actually need to spend it.

In order to do that, I THINK that it will be necessary to establish a separate IRA at any bank, brokerage house, etc that has some of my qualified retirement money.

 

[SteveR]

Jim,

You can move your tax deferred $$ into an IRA anywhere; it does not have to be in the same place as your employer's account....in fact, many times you will have much better choices at another institution.