[Boomer]

I don’t think this is over.

Looks to me like when Congress voted in 2018 to soften bank regulations, they sent the fox to guard the chicken house.

Can someone here explain how things work when the FDIC insurance has to kick in? Could it become a convoluted mess that takes a long time to get your money back? I hope someone can enlighten me…..just in case.

(I understand the insured limits — for regular people. But those who ignored the limits willy-nilly are still getting paid by the FDIC. I know that decision was based on the potential for long range fallout because there was seriously big money on deposit for running businesses, and I guess there were certain banks that could supposedly handle those kinds of deposits. But how long can that kind of thing continue if the FDIC decides to pay out more to the technically uninsured?)

These sure are some weird, weird financial times.

Boomer

[retiredguy123]

I don't think you would need to wait a long time to get you money back, but, as I understand it, the FDIC only covers your principal, not the guaranteed future interest on a CD. I totally disagree with paying off investors who exceeded the insurance limits because I suspect that it will be at the expense of the taxpayers, even though they say it won't. I have never understood why you can increase the FDIC insurance limit by the way you name an account and by spreading your money around to different banks. But I never use a bank for investing. I would rather use Treasury bills and bonds and mutual funds. One thing that is causing banks to fail now is that people are moving their money out of the banks to get higher yields. Banks need to start competing with other available investments. Banks have been getting a free ride, and now the Government will be bailing them out. Yes, it is weird.

[rustyp]

Unfortunately the first one to have bad luck will be the winner. When the run gets big enough the rules will change. Want a guarantee ?Here is one. The ones who make the rules will get hurt the least.

[Carla B]

Someone on TOTV in another thread suggested that, when buying brokered CDs, invest in larger banks "too big to fail," as the government has deemed the three failures so far. There was a source named for the list of the larger banks by asset size, which I printed out. I also saw a list of half a dozen banks on the "watch list" published by a Detroit newspaper in March. Then I looked at the Fidelity CD site. Their list of offered CDs included several larger banks and several regional banks. And, surprisingly to me, it included some CDs from banks, either on the watch list or with similar names, such as Comerica, Intrust, UMB. This info helps filter the numerous choices in buying brokered CDs. And avoiding altogether those on the watch list could save a lot of angst in the short run.

[Caymus]

Originally Posted by Boomer

I don’t think this is over.

Looks to me like when Congress voted in 2018 to soften bank regulations, they sent the fox to guard the chicken house.

Can someone here explain how things work when the FDIC insurance has to kick in? Could it become a convoluted mess that takes a long time to get your money back? I hope someone can enlighten me…..just in case.

(I understand the insured limits — for regular people. But those who ignored the limits willy-nilly are still getting paid by the FDIC. I know that decision was based on the potential for long range fallout because there was seriously big money on deposit for running businesses, and I guess there were certain banks that could supposedly handle those kinds of deposits. But how long can that kind of thing continue if the FDIC decides to pay out more to the technically uninsured?)

These sure are some weird, weird financial times.

Boomer

I had a brokered CD with a bank (First Bank of Beverly Hills) that became insolvent in 2009. My account was credited with the principal the next day. I lost a small amount of interest.

I also had a similar experience with a savings account with the Bank of New England back in the early 1990's. The account was transferred to Fleet. I forgot how long that took.

[Boomer]

Part II: This is an additional question from me for this thread started a while back:

I am still buying short term, brokered CDs, along with a little bit of additional dividend stocks and some money market. (Yes. I know. I am a boring investor. Welcome to my snoozerama investment philosophy.)

Anyway……..I think I asked this additional question somewhere, someplace on TOTV in the past few months, but now I cannot find that thread……and I am just fine with saying I still don’t get it and asking again……..

So — can somebody please explain to me how interest on a brokered CD becomes taxable at the end of the calendar year in which it is bought, even though the interest income does not get paid until a lump sum at the very end, no compounding along the way.

So far, the CDs I am buying will pay off in 2023. But if I go longer term and all the interest is paid next year, why is that interest taxed before it actually appears in the account?

I am new to brokered CDs and, at first, thought I might have found a way to defer a little income or amount of the RMD until next year by going out longer term. But then I found out it does not work like that. I kept hoping I am wrong. Guess not. (sigh)

Here we are almost half way through 2023, so this question is back on my radar because very soon, 6 month+ CDs will throw interest into 2024 but that interest will still be taxable in 2023. Why?

(Well, I am obviously a woman who is quite secure in admitting that I know what I don’t know and not being the least bit embarrassed about asking questions. I cannot make this timing of taxable interest income thing make sense. Please, somebody explain it — or better yet, tell me where I am wrong in my understanding of how it works.)

Boomer

[retiredguy123]

Originally Posted by Boomer

Part II: This is an additional question from me for this thread started a while back:

I am still buying short term, brokered CDs, along with a little bit of additional dividend stocks and some money market. (Yes. I know. I am a boring investor. Welcome to my snoozerama investment philosophy.)

Anyway……..I think I asked this additional question somewhere, someplace on TOTV in the past few months, but now I cannot find that thread……and I am just fine with saying I still don’t get it and asking again……..

So — can somebody please explain to me how interest on a brokered CD becomes taxable at the end of the calendar year in which it is bought, even though the interest income does not get paid until a lump sum at the very end, no compounding along the way.

So far, the CDs I am buying will pay off in 2023. But if I go longer term and all the interest is paid next year, why is that interest taxed before it actually appears in the account?

I am new to brokered CDs and, at first, thought I might have found a way to defer a little income or amount of the RMD until next year by going out longer term. But then I found out it does not work like that. I kept hoping I am wrong. Guess not. (sigh)

Here we are almost half way through 2023, so this question is back on my radar because very soon, 6 month+ CDs will throw interest into 2024 but that interest will still be taxable in 2023. Why?

(Well, I am obviously a woman who is quite secure in admitting that I know what I don’t know and not being the least bit embarrassed about asking questions. I cannot make this timing of taxable interest income thing make sense. Please, somebody explain it — or better yet, tell me where I am wrong in my understanding of how it works.)

Boomer

You pay tax on the interest earned every year, even if it doesn't show up on the statement. The reason is that you have access to the interest if you were to cash it in early, so it is earned income. Most banks will even allow you to withdraw the interest earned without penalty. Another reason is that the IRS says so.

[manaboutown]

I like to use T bills. I pay federal tax on interest when it matures unless I sell the bill before maturity which I have never needed to do. One now can choose to move interest into 2024 through buying a T bill maturing then. I have been buying 6 month bills and rolling them over since currently they pay the highest or near highest interest rate. Treasury Bills — TreasuryDirect

"The interest earned by a T-bill is taxable as investment income in the year the bill matures. It must be reported on your federal tax return, Form 1040, and is taxed at the investor's marginal tax rate."

From: How Are Treasury Bills (T-Bills) Taxed?


[CoachKandSportsguy]

Originally Posted by retiredguy123

You pay tax on the interest earned every year, even if it doesn't show up on the statement. The reason is that you have access to the interest if you were to cash it in early, so it is earned income. Most banks will even allow you to withdraw the interest earned without penalty. The early withdrawal penalty only applies to the principal. Another reason is that the IRS says so.

rg123 is correct again. Earned income, interest earned which may or may not have been paid out.

So the same goes for zero coupon (zero interest) bonds, where the interest is in the amortization of the price difference between purchase and return of face value at maturity.

The general intuition problem is that your/our tax returns are primarily on a cash basis, but earned income is on a GAAP accounting basis.

[ChrisTee]

Originally Posted by manaboutown

I like to use T bills. I pay federal tax on interest when it matures unless I sell the bill before maturity which I have never needed to do. One now can choose to move interest into 2024 through buying a T bill maturing then. I have been buying 6 month bills and rolling them over since currently they pay the highest or near highest interest rate. Treasury Bills — TreasuryDirect

+1 and TIPS. Yesterday, Treasuries were paying a higher rate than FDIC CDs of similar terms. Easy to buy on Treasury Direct via Manaboutown's link above. Fidelity, Vanguard and Schwab are also easy places to buy Treasuries and then you can very easily sell or buy them if needed on the secondary market. Easy to create a CD or bond ladder on any of those last 3 sites.

Good luck - it's a golden period for cash investors right now, and TIPS may offer you additional piece of mind with their inflation protection as you are right - strange financial times. Are we sure that inflation is truly tamed? Not I, and TIPS may be helpful inflation protection for some here.

[Boomer]

Originally Posted by ChrisTee

+1 and TIPS. Yesterday, Treasuries were paying a higher rate than FDIC CDs of similar terms. Easy to buy on Treasury Direct via Manaboutown's link above. Fidelity, Vanguard and Schwab are also easy places to buy Treasuries and then you can very easily sell or buy them if needed on the secondary market. Easy to create a CD or bond ladder on any of those last 3 sites.

Good luck - it's a golden period for cash investors right now, and TIPS may offer you additional piece of mind with their inflation protection as you are right - strange financial times. Are we sure that inflation is truly tamed? Not I, and TIPS may be helpful inflation protection for some here.

You are right about how now at least we have places to get a little ROI on cash. I have always “maintained the moat” — meaning cash kept to protect the stocks — never getting in the position of having to sell stocks to pay taxes or to pay bills. Now the moat makes a little money……

About inflation, who really knows. But I think there are areas where merchants are waaaaaaay over-pricing things — as in get while the gettin’ is good and call it inflation……..

Two Examples:

I am back in Ohio now at the house where I do some flower gardening…..

While I have no gripe with businesses giving hardworking employees more money, I was not born yesterday, so I know there is no reason for the price of perennials to nearly triple. Gas prices are down. Increasing paychecks is OK with me, but c’mon, I don’t think that should mean I am supposed to pay almost 30 bucks for a pot of ordinary perennials.

I think the growers are stickin’ it to the retail nurseries who are stickin’ it to the consumers. It would be naive to think that these out-of-control, much higher prices are all about paychecks and gas. Looks to me like it is probably half about the opportunity to blame the bogeyman known as inflation while reaping higher than ordinary profit.

And some restaurants sure have cranked up the price of beverages like iced tea. When I am not ordering wine or a cocktail in a restaurant, I always at least order iced tea……

Yeah. Yeah, I know I could do the “water with lemon” routine, but I never do……

Maybe that’s because of being mortified more than once when dining out in TV with groups and having people order “water with lemon — extra, extra lemon.” One time, there was someone in the group who ordered water with “a bowl of lemons!” (I wanted to crawl under the table.) And then there”s the “Villages Cocktail” crowd who order water and then whip Crystal Light out of their purses and stir it in…..

I guess I have been scarred for life from some of my dining in groups experiences in TV and am now destined to spend my life savings on over-priced iced tea in sit down restaurants…….

But, I digress, as I am wont to do around here on some mornings when I should be doing actual work.

Inflation? The real kind? Well, yeah, the Fed has been giving away money for almost this entire century. I knew those ridiculously low rates would eventually get us — again. The Fed put itself into the corner with too little too late — or maybe it’s too much too late. But whatever it was, now we all must pay for the Fed history of subsidizing instant gratification by giving away money. Housing is in another kind of mess now because of those stupidly low borrowing rates. Housing drives so many parts of the economy, and I am wondering now if housing can ever normalize again. (But that’s a rant for another morning. )

Boomer

[Boomer]

Originally Posted by retiredguy123

You pay tax on the interest earned every year, even if it doesn't show up on the statement. The reason is that you have access to the interest if you were to cash it in early, so it is earned income. Most banks will even allow you to withdraw the interest earned without penalty. Another reason is that the IRS says so.

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.

[retiredguy123]

Originally Posted by Boomer

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.

I don't buy any CDs, so I am not very familiar with how the interest works. But, it is definitely not imputed interest. I use short term bond funds and cash reserve funds for my cash investments. I assume that your investment company will track any taxable interest on your CDs and include it on the annual 1099-div form. I would trust their calculations, especially if it is Fidelity or Vanguard. I think you are going to pay taxes on any CD interest accrued during the year where the CD maturity date extends beyond the tax year, even if you did not receive any interest payments. Good luck.

[Boomer]

Originally Posted by retiredguy123

I don't buy any CDs, so I am not very familiar with how the interest works. But, it is definitely not imputed interest. I use short term bond funds and cash reserve funds for my cash investments. I assume that your investment company will track any taxable interest on your CDs and include it on the annual 1099-div form. I would trust their calculations, especially if it is Fidelity or Vanguard. I think you are going to pay taxes on any CD interest accrued during the year where the CD maturity date extends beyond the tax year, even if you did not receive any interest payments. Good luck.

Thanks. It is good to know we were talking about two different types of CDs. I was beginning to think my question was making no sense at all because I had not been clear enough or I was being a dingbat.

Turns out, we were just talking apples and oranges…..or maybe apples and apple pie.

Regarding imputed interest, I did not really think that was it either, but happened to derail a bit from the CD topic at hand because I think the 1990s must have called. That’s the last time I heard of imputed interest being a factor and that was only with mortgage papers held privately.

I think mortgages back then were somewhere in the 8% range. A person-to-person mortgage could be at more than the going CD rate but less than the market’s mortgage rate, but supposedly not by a whole lot. Don’t know why. Such a loan would certainly not be usury lending. That’s the opposite, of course.

Oh well, that was a long time ago and that part was way off track anyway. This thinking I do about taxes is a curse for me sometimes. Sends me down a rabbit hole.

Boomer

[retiredguy123]

Originally Posted by Boomer

Thanks. It is good to know we were talking about two different types of CDs. I was beginning to think my question was making no sense at all because I had not been clear enough or I was being a dingbat.

Turns out, we were just talking apples and oranges…..or maybe apples and apple pie.

Regarding imputed interest, I did not really think that was it either, but happened to derail a bit from the CD topic at hand because I think the 1990s must have called. That’s the last time I heard of imputed interest being a factor and that was only with mortgage papers held privately.

I think mortgages back then were somewhere in the 8% range. A person-to-person mortgage could be at more than the going CD rate but less than the market’s mortgage rate, but supposedly not by a whole lot. Don’t know why. Such a loan would certainly not be usury lending. That’s the opposite, of course.

Oh well, that was a long time ago and that part was way off track anyway. This thinking I do about taxes is a curse for me sometimes. Sends me down a rabbit hole.

Boomer

The reason that the IRS applies imputed interest to some low rate loans is to prevent high income taxpayers from avoiding income tax by making below market rate loans and receiving tax free compensation in another form. Where there is a way to avoid taxes, clever people will figure it out.