Good morning, rg123,
I usually do not do not write two posts in a row, but I wanted to continue this conversation with you. You always steer me in the correct direction with my money questions.
I completely understand what you are saying as it applies to regular, traditional bank CDs. I have always known about how those work — even when I was a little kid with a little passbook, going into the neighborhood bricks-and-mortar to have Mrs. Quigley, the teller, post my compounding by writing it in.
(Damn. I must be old.)
What I don’t get is brokered CDs. I am buying 3 and 6 months ones through Fidelity, but as I understand it, there is no compounding and no interest can get paid until the term is up. There is no access to interest on a brokered CD until the very end.
I buy call-protected. But because they are brokered, I understand that I can sell them on the market before the term is up, but I won’t get any interest at all and could lose principal.
Anyway, you know those green and red columns on the portfolio page. Well, those CDs pick up a red column almost immediately, but I know to just let them float around in cyberspace until the term ends or I would likely have to lock in a loss. Selling would also cost a brokerage fee that I think might be sort of high, considering……
So I just buy and wait and things turn out as expected.
So for the reasons above, under the circumstance of owning brokered CDs, how can I be taxed on money that I do not collect in the tax year when it cannot actually be collected, or if it is never collected at all because the CD gets sold before the term is up so no interest has compounded yet?
(Is this a version of imputed interest? I don’t really think it is. The only place I know of imputed interest applying is in the paperwork that should go with a privately held mortgage, like maybe within a family, where mortgage interest is charged but below the going rate…..
I think there are — or once were — some rules on how low the mortgage holder could go on the rate. But that had more to do with the days when more mortgages could at least get some tax advantage for the borrower and a private lender could make some money by going below the going mortgage rate. With rates so low this century, I doubt that private mortgages with imputed interest have been a thing…….But, I am digressing again, so never mind that part.)
Anyway, like I said, this brokered CD thing is completely new to me. And actually, my point is moot because I will probably gauge my terms to fit into the current year while I lazily wallow around in a money market fund with some of the sideline, even though those funds have a management fee.
Thanks for trying though. I think I might be coming off as a little hard-headed with this one.
But, yes, your last sentence is the answer I must get used to — no matter how unfair it appears to be on this thing. It just seems so weird, for the above reasons, that I keep thinking I must have been misinformed.
Boomer
PS: The last time I heard of that private mortgage imputed interest tax thing was in the 1990s when I think you had to stay within a certain limit below the going rate and not go too low. That one never made sense either. But with rates so high now, private mortgaging might become more of a thing. But it might not be a good idea to own a relative’s mortgage. Could be a good recycling of money, but could get awkward.