Financial question: delaying taxes on interest earned

[Plinker]

I have I-Bonds and several MYGA’s that accumulate interest but tax on the interest is delayed until I choose to cash out. These are non-qualified accounts. Are there other products available that offer a guaranteed fixed rate of return and are insured against loss that pay above 4%?

[retiredguy123]

You can earn as much as 5.1 percent on a Fidelity brokered CD. But, the taxes on the interest must be paid annually, even for a multi-year CD. Go to Fidelity.com to view the available CDs.

My Vanguard money market account is currently paying 4.78 percent interest.

[Plinker]

You can earn as much as 5.1 percent on a Fidelity brokered CD. But, the taxes on the interest must be paid annually, even for a multi-year CD. Go to Fidelity.com to view the available CDs.

My Vanguard money market account is currently paying 4.78 percent interest.

I have two Vanguard brokered CD’s paying 5% but is a qualified account. I also have a Vanguard money market account, as you suggest. However, I am curious if there are other products that are guaranteed that will specifically delay interest paid. In other words, I don’t want to pay taxes on the interest annually on some non-qualified accounts. I would prefer to wait a few years to pay those taxes.

[Badger 2006]

I have I-Bonds and several MYGA’s that accumulate interest but tax on the interest is delayed until I choose to cash out. These are non-qualified accounts. Are there other products available that offer a guaranteed fixed rate of return and are insured against loss that pay above 4%?

You can report I Bond interest yearly, even though it’s accumulating, if you choose. With an I Bond there is a 3 month interest penalty if cashed in prior to 5 years. When you go online to check interest earned, the amount shown in the first 5 years, is less the 3 month penalty you incurred if cashed in.

[retiredguy123]

I have two Vanguard brokered CD’s paying 5% but is a qualified account. I also have a Vanguard money market account, as you suggest. However, I am curious if there are other products that are guaranteed that will specifically delay interest paid. In other words, I don’t want to pay taxes on the interest annually on some non-qualified accounts. I would prefer to wait a few years to pay those taxes.
You can buy low interest rate bonds at a discount. For example, buy a bond that is paying 1 percent or less, and will mature in about 5 years. You will get a price that is significantly lower than the face value of the bond. Then, when the bond matures, you collect the face value and you will owe a capital gains tax that will probably be lower than your ordinary tax rate. You will need to pay interest annually on the 1 percent, but you will delay most of the taxes that you will eventually owe.

[Plinker]

You can report I Bond interest yearly, even though it’s accumulating, if you choose. With an I Bond there is a 3 month interest penalty if cashed in prior to 5 years. When you go online to check interest earned, the amount shown in the first 5 years, is less the 3 month penalty you incurred if cashed in.

I chose I-Bonds for that reason plus the great interest rates the last two issues. However, are there any other investments that will delay interest with non qualifying monies and provide guaranteed returns? The new issue I-Bonds next month are forecast to be around 3.75%.

[daniel200]

You can buy low interest rate bonds at a discount. For example, buy a bond that is paying 1 percent or less, and will mature in about 5 years. You will get a price that is significantly lower than the face value of the bond. Then, when the bond matures, you collect the face value and you will owe a capital gains tax that will probably be lower than your ordinary tax rate. You will need to pay interest annually on the 1 percent, but you will delay most of the taxes that you will eventually owe.

👍👍👍

This is an excellent method to delay taxes on US treasury bonds. Not only are you delaying the taxes, but the there is a tax savings due to the capital gains rate. And under current rules you pay zero tax on your first $41,675 in longterm capital gains if filing as single or $83,350 in long term gains if married filing jointly

This results in more total money in your pocket.

[Plinker]

You can buy low interest rate bonds at a discount. For example, buy a bond that is paying 1 percent or less, and will mature in about 5 years. You will get a price that is significantly lower than the face value of the bond. Then, when the bond matures, you collect the face value and you will owe a capital gains tax that will probably be lower than your ordinary tax rate. You will need to pay interest annually on the 1 percent, but you will delay most of the taxes that you will eventually owe.

Thank you. This is the type of suggestion I was looking for. I will look into it.

[Plinker]

Where can I go to find such an investment?

[retiredguy123]

Where can I go to find such an investment?
Fidelity Investments. They have an office at Lake Sumter.

You can also buy bonds through Vanguard.

[Babubhat]

Be sure to check the markups on price and factor in lack of liquidity should you not hold to maturity. Bonds are not guaranteed like a cd. Bond holders have little protection from corporate actions that adversely affect you. Lumping interest can affect your Medicare premium in the future. Run tax consequences models

[daniel200]

Where can I go to find such an investment?

If you have an account at Fidelity, go to

Fidelity.com is Temporarily Unavailable (https://fixedincome.fidelity.com/ftgw/fi/FILanding)

Then browse either US treasuries or US Treasury zeros. The zeros pay no interest … but are priced at a discount so when the bond matures you have a capital gain.

Find the bonds with the time frame you want (more than 12 months so any gains are long term). Identify the bonds with zero or very low interest rates. Compare the yield to maturity and yield to worst for the different bonds. Pick the highest. Since all are US treasuries, the risk is the same.

Vanguard has similar offerings.

And to be clear, I am only talking about US Treasury ot US Treasury zeros. Corporate bond have the same potential, but requires much more expertise to avoid pifalls. US treasuries are always have great liquidity.

[john352]

You can earn as much as 5.1 percent on a Fidelity brokered CD. But, the taxes on the interest must be paid annually, even for a multi-year CD. Go to Fidelity.com to view the available CDs.

My Vanguard money market account is currently paying 4.78 percent interest.

I purchased CDs in the Fidelity IRA account and therefore avoid paying taxes on the CD interest.

[Caymus]

👍👍👍

This is an excellent method to delay taxes on US treasury bonds. Not only are you delaying the taxes, but the there is a tax savings due to the capital gains rate. And under current rules you pay zero tax on your first $41,675 in longterm capital gains if filing as single or $83,350 in long term gains if married filing jointly

This results in more total money in your pocket.

Are you sure that is correct?

[dewilson58]

Are you sure that is correct?

What was posted is not correct...............U R right to question.

"For example, in 2022, individual filers won't pay any capital gains tax if their total taxable income is $41,675 or below. "

[daniel200]

Are you sure that is correct?

Absolutely correct. If you purchase a bond with a maturity greater than 1 year, the gains are taxed as long term capital gains at bond maturity. Any interest is taxed as ordinary income. So buying a zero coupon bond effectively transfers interest to capital gains. Call any tax planner if you want to verify.

This is the updated 2023 long term capital gains brackets from the IRS:

[Badger 2006]

I chose I-Bonds for that reason plus the great interest rates the last two issues. However, are there any other investments that will delay interest with non qualifying monies and provide guaranteed returns? The new issue I-Bonds next month are forecast to be around 3.75%.

With the I Bond the rates change every three months. If you keep the bond for a few years and cash it in prior to 5 years, at what rate is the 3 month interest penalty calculated? The current rate or a melded rate since purchased?

[retiredguy123]

Absolutely correct. If you purchase a bond with a maturity greater than 1 year, the gains are taxed as long term capital gains at bond maturity. Any interest is taxed as ordinary income. So buying a zero coupon bond effectively transfers interest to capital gains. Call any tax planner if you want to verify.

This is the updated 2023 long term capital gains brackets from the IRS:
You Post No. 7 implied that the first $41,675 of long term capital gains had no tax. However, the rule is that if a single person's income (including ordinary income and capital gain income) is less than $41,675, then there is no capital gains tax on long term capital gains. But, if the person has other income, such as a pension, exceeding $41,674, then their capital gains tax rate would be 15 percent or higher, depending on their income.

[daniel200]

You Post No. 7 implied that the first $41,675 of long term capital gains had no tax. However, the rule is that if a single person's income (including ordinary income and capital gain income) is less than $41,675, then there is no capital gains tax on long term capital gains. But, if the person has other income, such as a pension, exceeding $41,674, then their capital gains tax rate would be 15 percent or higher, depending on their income.

Yes, i agree it is your tax bracket that determines which tax rate is applied and your tax bracket includes ordinary income such as pensions