Father-in-law and I were fixing the stock market last night in between fireworks shows, and we realized that a ladder of five-year CDs might not compete with a ladder of I bonds. It depends on tax brackets, auction prices, & inflation rates.
I bonds have to be held for five years or longer before redemption to avoid a three-month loss of interest (although they can still be redeemed earlier if you're willing to suffer those consequences). And maybe they're worth holding on to if new auctions are lower.
I bond investors are limited to annual buys of $30K of I bonds in paper and another $30K on Treasury Direct for each Social Security number. So a married couple needing more than $60K I bonds each year would end up shuffling paper, and at more than $120K they'd have to seek other options.
CDs aren't protected against inflation, although hopefully five years isn't too long a period to get savaged by rising rates. Unlike I bonds, 5-year CDs expire at five years without extension. A five-year CD ladder would have only $20K/year before exceeding FDIC or NCUA insurance limits (unless split among joint & spouse accounts). And CDs have their own harsh early-redemption penalties.
NFCU is now paying 4.5% before taxes on a 5-year $20K CD. In our 15% tax bracket that's 3.8% after-tax (no state taxes). In the 25% bracket (for us IRA converters) it would be 3.38%. I bonds are at 3.39% through Oct 04 with an inflation-hedge kicker.
Any other thoughts on these musings?
I bonds have to be held for five years or longer before redemption to avoid a three-month loss of interest (although they can still be redeemed earlier if you're willing to suffer those consequences). And maybe they're worth holding on to if new auctions are lower.
I bond investors are limited to annual buys of $30K of I bonds in paper and another $30K on Treasury Direct for each Social Security number. So a married couple needing more than $60K I bonds each year would end up shuffling paper, and at more than $120K they'd have to seek other options.
CDs aren't protected against inflation, although hopefully five years isn't too long a period to get savaged by rising rates. Unlike I bonds, 5-year CDs expire at five years without extension. A five-year CD ladder would have only $20K/year before exceeding FDIC or NCUA insurance limits (unless split among joint & spouse accounts). And CDs have their own harsh early-redemption penalties.
NFCU is now paying 4.5% before taxes on a 5-year $20K CD. In our 15% tax bracket that's 3.8% after-tax (no state taxes). In the 25% bracket (for us IRA converters) it would be 3.38%. I bonds are at 3.39% through Oct 04 with an inflation-hedge kicker.
Any other thoughts on these musings?