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Author: CuriousDonkey One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121179  
Subject: What to do with yearly bonus as a Fool Date: 8/3/2010 1:23 PM
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Greetings Fools,

First some background in case you haven't all seen it in other posts.

1) As far as I know, I make too much for Roth IRA's (110 base wtih 25k bonus)

2) I switched jobs mid-year so I don't have a solid idea of exactly what I will take in, rough estimates put me at 123,500 gross for the year (including bonus)

3) I own a home (less than 5 years) - not sure on the interest per year

Not 100% sure what else matters, but I'm fine with sharing it.

What I plan to do is save my yearly bonuses over the next 3-5 years as a down payment for a new home (likely rent the existing home). Where should that money go to make it most useful. If you suggest CD's, please give me an idea of where I can go to understand them a bit better.

Thanks!

The Dizzle
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Author: SRenaeP Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 110794 of 121179
Subject: Re: What to do with yearly bonus as a Fool Date: 8/3/2010 1:27 PM
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Greetings Fools,

First some background in case you haven't all seen it in other posts.

1) As far as I know, I make too much for Roth IRA's (110 base wtih 25k bonus)


You could contribute to a traditional IRA (non-deductible) and convert to a Roth IRA.

2) I switched jobs mid-year so I don't have a solid idea of exactly what I will take in, rough estimates put me at 123,500 gross for the year (including bonus)

This should be easy to estimate. Look at your last paystub from the previous and add to what you will make in the current job.

3) I own a home (less than 5 years) - not sure on the interest per year

Your mortgage statement from last year will show the interest paid.

Not 100% sure what else matters, but I'm fine with sharing it.

What I plan to do is save my yearly bonuses over the next 3-5 years as a down payment for a new home (likely rent the existing home). Where should that money go to make it most useful. If you suggest CD's, please give me an idea of where I can go to understand them a bit better.

Thanks!

The Dizzle


Before deciding hat to do with the bonus, I would consider whether or not you have an efund in place, what other debt you have (amounts and interest rates), cash flow and current level of retirement savings. There's no cut and dried answer.

-Steph

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Author: vkg Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 110795 of 121179
Subject: Re: What to do with yearly bonus as a Fool Date: 8/3/2010 2:15 PM
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Do you currently have IRAs? If you don't, then you can contribute to a non-deductible IRA and immediately convert it to a ROTH.

If you currently have IRAs, then the cost basis for the conversion is pro-rated across the total value of the IRAs.

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Author: foo1bar Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 110797 of 121179
Subject: Re: What to do with yearly bonus as a Fool Date: 8/3/2010 4:37 PM
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As far as I know, I make too much for Roth IRA's (110 base wtih 25k bonus)
As others have pointed out, you can make a non-deduc. contribution to a traditional IRA and convert traditional IRA funds to Roth.
BEWARE: If you already have some money in traditional IRA all of your traditional IRA accounts are considered by the IRS as one big pot of money - so if you had $9K already contributed pre-tax, contribute another $1K post-tax (non-deduc) this year, and you convert $1K from your IRAs to Roth IRA, you've converted $900 in pre-tax money and $100 in non-deduc money - so you have to pay taxes on that $900.

I mostly agree with Dave Ramsey's "baby steps" list:
http://www.daveramsey.com/new/baby-steps/
At least through step 5.
If you're through step 5 with your financial picture, then putting money for a new house downpayment into a CD or other savings account seems like a reasonable thing.
An explanation of CDs is at http://en.wikipedia.org/wiki/Certificate_of_deposit

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Author: CuriousDonkey One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 110798 of 121179
Subject: Re: What to do with yearly bonus as a Fool Date: 8/3/2010 5:36 PM
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My apologies, I left out some KEY info:

I have a traditional IRA with 30+ grand in it. I am not sure what, if any, i can contribute.

I'm 27 (i.e. - retirement is a ways away)

I save $1600 net per month

My house is at a rate of 5.69%, so I feel comfortable out-pacing it with aggressive investments over the short-ish run and I also intend to offset that cost with rental income (I presently receive partial mortgage coverage from my parents who live there). I am working to reduce this debt, but my bonus savings is presently set aside as 'future' and my monthly savings is both a safety net for months where I don't have my unit rented and/or other 'oops' items

I have 3 months savings and I am actively savign toward 6 months with the monthly savings

I 1 >6% debt from school, that I will be paying off this month.

Sorry for leaving that information off guys. Many thanks in anticipation.

Best regards,

The Donk

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Author: TheTortoise One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 110799 of 121179
Subject: Re: What to do with yearly bonus as a Fool Date: 8/3/2010 5:49 PM
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What I plan to do is save my yearly bonuses over the next 3-5 years as a down payment for a new home (likely rent the existing home). Where should that money go to make it most useful. If you suggest CD's, please give me an idea of where I can go to understand them a bit better.

My favorite website for information about the best strategies for earning the most on short-term money is
http://www.depositaccounts.com/. It's a daily blog plus a forum for questions and comments.

Currently, one of the most flexible CD deals for money you might need in five years or less is at Ally Bank. Ally is unique in having only a 60-day early withdrawal penalty on their CDs. So you can buy a higher interest 5-year CD, and if you cash it out earlier and pay the penalty you’ve still received a better rate than if you had bought a 1, 2, 3, or 4 year CD -- as described here:

http://www.depositaccounts.com/blog/2010/07/update-on-ally-b...

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Author: foo1bar Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 110800 of 121179
Subject: Re: What to do with yearly bonus as a Fool Date: 8/3/2010 7:16 PM
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I have a traditional IRA with 30+ grand in it. I am not sure what, if any, i can contribute.
You are under 50, and made >$5000, so you can contribute $5000 to your traditional IRA for 2010. Possibly (probably) it is non-deductible contribution, but you can still contribute it.
http://www.irs.gov/retirement/participant/article/0,,id=1882...

And IF you want to, you can convert some or all of your IRA to a Roth IRA.
You'll pay tax now on the money - but presumably you won't have to in ~30 years when you are retired.

It may or may not be a good idea to convert - depends mostly on what tax bracket you are now / what you will be when you're withdrawing the money.

My house is at a rate of 5.69%,
I suggest you look at refinancing - 4.25% money is available.
(It may or may not be worthwhile for you - you'll have to spend a few hours researching it to find out if you can save money / how much you can save.)

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Author: CuriousDonkey One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 110802 of 121179
Subject: Re: What to do with yearly bonus as a Fool Date: 8/4/2010 9:51 AM
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Thanks for all the thoughtful responses. I am not sure how the traditional to roth IRA conversion would work.

1) I'm in the 28% bracket for a small chunk of my earnings (I manage to move down a decent amount because of the house and other deductables), that means paying taxes at 28% is not a great situation, but probably not as pad as it would be in 40 years after the govt has a chance to drastically increase entitlements. I thought the goal was to have some retirement funds pretax and some post tax.

2) I'd like to look specifically at use I have planned for my bonus - I'm basically locked in on saving it for a down payment in 3-5 years. Please assume I handle my money Foolishly, in that I have enough other money on my base to save what I should.

3) I would consider paying off my house, but then I would be out a good chunk of money when looking to buy.

I'm mostly looking for investment vehicles that limit my tax liability on my bonus, but that would be stable enough to withdraw in 3-5 years (bearing in mind that I'm willing to vary by 6-12 months on either side to withdraw).

Thanks,

TD

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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 110803 of 121179
Subject: Re: What to do with yearly bonus as a Fool Date: 8/4/2010 10:24 AM
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I'm mostly looking for investment vehicles that limit my tax liability on my bonus, but that would be stable enough to withdraw in 3-5 years (bearing in mind that I'm willing to vary by 6-12 months on either side to withdraw).

You have two issues that will be easier to examine separately.

1. What can you do to limit your tax liability on your bonus?

Nothing unless you can make additional contributions to your deferred compensation program at work. That will lower your 2010 income, which will lower your 2010 tax. But note that if you plan to use this money in 3 to five years, a retirement account is not the place to put it.

2. How should you invest the money you're going to need in 3 to 5 years?

Someplace where you know you can find it when you need it. IOW, guranteed deposits. Nothing is paying much interest right now, but at least your money will be safe.

Phil
Rule Your Retirement Home Fool

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Author: katiewa Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 110804 of 121179
Subject: Re: What to do with yearly bonus as a Fool Date: 8/4/2010 1:11 PM
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Don't know how to minimize your taxes, but to maximize your returns on a portion of your money, might want to check out this: https://www.kasasa.com/.

Don't know if different banks have slightly different rules, but I make 10 purchases/month with their debit card (small ones, because my other credit card pays me cash back), do an automated ACH transfer in each month from my primary checking account (enough to cover my debit card purchases), and get my statements electronically. They pay 3% on my account, up to $25000. (Started at 5%, dropped, went back up to 5% briefly at one point, but back down again.) Better than most CD's, totally flexible, FDIC insured. You can put another $25K or so into a savings account and get a little over 2%. I've used Bank of Idaho (http://www.bankofidaho.com/kasasa) for a little over 2 years now and have been pretty pleased.

Kathleen

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Author: CuriousDonkey One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 110805 of 121179
Subject: Re: What to do with yearly bonus as a Fool Date: 8/4/2010 2:45 PM
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Hi Katie,

I considered this very seriously a while back.

I want to challenge you all and ask: what about equities? If I can be earning 6-12 percent on some stocks and have flexibility of a year on the back end for a good market opportunity, is it unwise to place it into stocks? This comes from an investor who has not been hit by terrible returns in his investing career (I pulled out most of my equities before 2008 on a feeling while I was taking a finance course).

Thanks!

CD

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Author: katiewa Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 110806 of 121179
Subject: Re: What to do with yearly bonus as a Fool Date: 8/4/2010 2:59 PM
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CD,

Nothing inherently wrong with stocks--all depends on what your needs are, what your time frame is, what your backup plans are, etc.

Might be that the Kasasa stuff would be useful for your emergency fund or something else where liquidity is critical. I was really just throwing out an alternative to standard CD's or MMA's, since most of the ones I've seen aren't paying all that well.

Kathleen

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Author: Watty56 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 110807 of 121179
Subject: Re: What to do with yearly bonus as a Fool Date: 8/4/2010 3:08 PM
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If you are really committed to moving in three to five years then I would look at buying and moving now even if it means that you have to sell your current house to have the down payment. In most areas of the country this is a great buyers market and mortgage interest rates are ridiculously low right now. You could consider getting a house that is in a great location and livable but needs some moderate work that can be spread out over the next few years. It is also a great time to hire contractors because so many of them are looking for work.

Managing a rental property can be time consuming and using a property management company eats up a lot of your rental income. At your income level I doubt that taking the afternoon off several times a year to meet with painters or renters is really a cost effective use of your time. The rental property could also trigger the ATM if you are not already paying it. If you are committed to keeping it as a rental then you should have professional tax advice to draw up a firm business plan before you save up for years to do something that may not be realistic when you finally crunch the numbers.

You also need to research how lenders will treat the rental income from your current house. The problem is that without a good rental history for the property they may not allow much of it to be counted when calculating the loan ratios so you may have difficulty in qualify for an additional mortgage when you are ready to buy.

Greg

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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 110808 of 121179
Subject: Re: What to do with yearly bonus as a Fool Date: 8/4/2010 3:29 PM
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If I can be earning 6-12 percent on some stocks and have flexibility of a year on the back end for a good market opportunity, is it unwise to place it into stocks? This comes from an investor who has not been hit by terrible returns in his investing career (I pulled out most of my equities before 2008 on a feeling while I was taking a finance course).

We had someone who was brighter than everyone else around here a few years ago. Parked his tens of thousands that he was going to need on April 15 to pay a sizeable tax balance due in a sure thing--Lucent. Do I need to finish the story?

You keep asking the same question and getting the same answer, which is clearly not the answer you want. I'll be so bold as to suggest that it's your money, do what you want with it.

Phil
Rule Your Retirement Home Fool

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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 110809 of 121179
Subject: Re: What to do with yearly bonus as a Fool Date: 8/4/2010 3:46 PM
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I want to challenge you all and ask: what about equities?

Do you want to be sure the money will be there or not?

You seem to be emphasizing 'stability in 3 - 5 years'. If you want to be sure the money's going to be there, then stocks are not your answer.

I can be earning 6-12 percent on some stocks and have flexibility of a year on the back end for a good market opportunity, is it unwise to place it into stocks?

Well, I guess we will see in 3 - 5 years.

If you want a sure thing, don't count on stocks. Even a one year timeframe isn't necessarily enough to recover from drops that many stocks have seen.

This comes from an investor who has not been hit by terrible returns in his investing career (I pulled out most of my equities before 2008 on a feeling while I was taking a finance course).

What if you're not taking a finance course next time? Or if you misinterpret the 'feeling'? Sorry, but pulling your money out of the market 'on a feeling' isn't a sustainable investment strategy, nor is it something that you should count on for money that needs to be there.

But, as Phil said, it's your money. You obviously want to invest it in equities, so go ahead. You don't need our validation. Just make sure you have a back up plan for 3 - 5 years from now if there isn't as much in your account as you had counted on.

AJ

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Author: CuriousDonkey One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 110810 of 121179
Subject: Re: What to do with yearly bonus as a Fool Date: 8/4/2010 4:16 PM
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Phil and AJ,

Let's not get testy here. I'm a new guy. I am going to push a bit before simply accepting any advice. My intent has been and continues to be CDs, and I thought the last post should have indicated my tenuous thought of going down the equity road (everything after the original question states - 'this comes from a guy who has never been burned... I realize my returns probably have not been reflective of the majority of investors and that my luck isn't infinite').

I am not familiar with an IOW - can you help me understand what it is, I don't mind doing the research if I know the TLA.

It's frustrating that sacrificing liquidity cannot garner me more returns than a high interest checking out... that's the only thing that's causing me to continue to probe.

I appreciate all the advice everyone, it's really fantastic and I am very pleased to be a beneficiary of all of your knowledge. I hope to feedback to the community as well.

Many thanks,

CD

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Author: foo1bar Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 110811 of 121179
Subject: Re: What to do with yearly bonus as a Fool Date: 8/4/2010 4:25 PM
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I am not familiar with an IOW - can you help me understand what it is, I don't mind doing the research if I know the TLA.

IOW = In Other Words

guaranteed deposits (the next phrase in that sentence) include:
CDs
Savings accounts
FDIC insured money markets
Checking accounts
- all things where you're guaranteed that your balance will never go down.


It's frustrating that sacrificing liquidity cannot garner me more returns than a high interest checking out... that's the only thing that's causing me to continue to probe.

Understandable - there's not much to do about that though...
less liquidity gains you a little in return, but not much.
Volatility may gain you more - but then you're in something more volatile - and if you're sure of your 3-5 year timeframe, you can easily wind up regretting that you put your money where you might lose some of it.
(Speaking as someone who had been planning on cashing in some stock but wanted to wait until it became long-term instead of short-term gains - and in those few months it dropped much much more than what I would have had to pay extra to the IRS)

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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 110812 of 121179
Subject: Re: What to do with yearly bonus as a Fool Date: 8/4/2010 5:39 PM
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Speaking as someone who had been planning on cashing in some stock but wanted to wait until it became long-term instead of short-term gains - and in those few months it dropped much much more than what I would have had to pay extra to the IRS

Hey, where's my royalty check? That's my method.

Phil
Rule Your Retirement Home Fool

...who can tell you from experience how cap loss carryovers work

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Author: 0x6a74 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 110813 of 121179
Subject: Re: What to do with yearly bonus as a Fool Date: 8/4/2010 5:44 PM
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Speaking as someone who had been planning on cashing in some stock but wanted to wait until it became long-term instead of short-term gains - and in those few months it dropped much much more than what I would have had to pay extra to the IRS

---------
Hey, where's my royalty check? That's my method.




?? doesn't that come under "don't let the Tax tail wag the Money Dog"?


(>,


...has other ways to get slammed by the market

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Author: foo1bar Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 110814 of 121179
Subject: Re: What to do with yearly bonus as a Fool Date: 8/4/2010 8:43 PM
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Hey, where's my royalty check? That's my method.

It's in the mail.
:D

doesn't that come under "don't let the Tax tail wag the Money Dog"?
Yes - with a cross reference to "Don't be a <bleep> idiot. Take the money and run."

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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 110815 of 121179
Subject: Re: What to do with yearly bonus as a Fool Date: 8/4/2010 10:18 PM
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doesn't that come under "don't let the Tax tail wag the Money Dog"?

Why do you think I'm such a fan of our board motto? Unfortunately I didn't learn everything I know from books.

Phil
Rule Your Retirement Home Fool

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Author: 0x6a74 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 110816 of 121179
Subject: Re: What to do with yearly bonus as a Fool Date: 8/4/2010 10:50 PM
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<I.doesn't that come under "don't let the Tax tail wag the Money Dog"?

Why do you think I'm such a fan of our board motto?



but i thought you invented the Motto .. not that you stumbled over it in the dark.


(>,

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Author: stockmover Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 110818 of 121179
Subject: Re: What to do with yearly bonus as a Fool Date: 8/5/2010 2:32 AM
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Hi Dizzle

This is not an investment board but here is something you might want to consider.

Open a 5 year CD with Ally bank which is yielding 2.94% APY at this moment. There you will be covered by FDIC insurance up to $250K.

Here is the rare benefit you have in opening this CD. Ally Bank (which btw was formerly a GM bank) has a policy of charging you only 2 months interest as an early withdrawal penalty .... therefore you can leave your money there for up to 5 years earning 2.94% yet have the ability to withdraw your funds anytime you want only losing 2 months interest should you find a better investment in the future
To me it's a win/win situation.

http://www.ally.com/bank/high-yield-cd/?INTCMPID=SavingsMenu...

Best Regards,

Rich

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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 110819 of 121179
Subject: Re: What to do with yearly bonus as a Fool Date: 8/5/2010 9:04 AM
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My intent has been and continues to be CDs, and I thought the last post should have indicated my tenuous thought of going down the equity road (everything after the original question states - 'this comes from a guy who has never been burned... I realize my returns probably have not been reflective of the majority of investors and that my luck isn't infinite').

Sorry if you thought I was being testy. If you had stated it the way you just did, then you probably would have gotten a different response, at least from me. The way your post came across to me was "this comes from a guy who has managed to not be burned in one of the biggest market drops on record, so I'm expecting that 6% - 12% returns should be pretty easy to count on."

It's frustrating that sacrificing liquidity cannot garner me more returns than a high interest checking out...

The high interest checking accounts generally force you into other requirements, like making x debit card purchases a month out of the money you are 'saving'. So unless you add money other than your bonus money to the account, you won't be saving your entire bonus - the cost of the x transactions per month will be dribbling out of it. So these accounts aren't free, either - it's just a different cost. And that doesn't even count the potential cost of debit card fraud for accounts that force you to use a debit card to transact each month, since debit cards have less consumer protection enforced by law than credit cards do.

AJ

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Author: CuriousDonkey One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 110820 of 121179
Subject: Re: What to do with yearly bonus as a Fool Date: 8/5/2010 9:21 AM
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So these accounts aren't free, either - it's just a different cost. And that doesn't even count the potential cost of debit card fraud for accounts that force you to use a debit card to transact each month, since debit cards have less consumer protection enforced by law than credit cards do.

Good point!

I'm resolved on CD's. My financial advisor is telling me to go into mutual funds... I've never been a fan of mutual funds except for retirement, even then I'd rather manage it myself or use an ETF. (Just some random information on what other folks are saying, I think the financial advisor is just trying to tell me what he thinks I want to hear).

Thanks for all the Foolish advice!

Best regards,

The Donkey

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Author: vkg Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 110821 of 121179
Subject: Re: What to do with yearly bonus as a Fool Date: 8/5/2010 10:13 AM
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Tax Free Municipal Bonds can be bought for different maturities. It is always necessary to verify if the interest is also exempt from AMT. There is a brokerage fee, but they might provide a higher rate of return than CDs. It all depends on what currently available in your state. They aren't FDIC insured, but are lower risk that equities.

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Author: CuriousDonkey One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 110822 of 121179
Subject: Re: What to do with yearly bonus as a Fool Date: 8/5/2010 10:51 AM
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Hey VKQ - where can I learn about rating and evaluating municipal bonds? I'm unlikely to take that direction, but it's worth understanding the vehicle...

Best regards,

The donk

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Author: vkg Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 110823 of 121179
Subject: Re: What to do with yearly bonus as a Fool Date: 8/5/2010 11:58 AM
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I am only starting with municipal bonds. My broker is Fidelity. They provide online access to the inventory of current bonds and prospectus for each. I am currently connected through a unsecure wireless and won't logon to check, but believe that the bond ratings are also provided.

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Author: Crosenfield Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 110824 of 121179
Subject: Re: What to do with yearly bonus as a Fool Date: 8/5/2010 5:22 PM
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"where can I learn about rating and evaluating municipal bonds?"

We have a board called "Bonds and Fixed Income Investements". Folks over there with much knowledge in the area.

There are bonds, and GE issues many of them, that are called "step-up" bonds. They are issued with a fairly low rate of interest--maybe 3 or 4%. Every few years, according to a schedule which is different for each bond, the interest rate "steps up" to a higher rate. If the bond were to go to final maturity maybe in 15 or 20 years or more, it would be paying 8 or 10%--or whatever the schedule calls for. The rub is that the issuer has the right to call the bond at any point, usually on an interest-paying date. Typically just before the bond is supposed to increase the interest rate to something quite juicy, the issuer will call it in.

My strategy has been to buy these, picking one that will step up in the next year or so. Then, just before the interest rate is to go to maybe 5.75%, the issuer calls it.

Meanwhile I've enjoyed the 3 or 4% rate for a year or so and am back to choosing another bond.

Note that the issuer is NOT required to call the bond, making my investment effectively short-term. They can accept the increase in rate and continue. As a practical matter, observing when the bond goes to 8% or some such rate--not gonna happen. The issue will call the bond. Unless, of course, something REALLY happens to interest rates in the meantime.

FNMA and other government agencies issue these; also JPMorgan, and as mentioned, GE. The interest is taxable. If you buy a muni bond issued in your state, and if it is not subject to AMT (you have to ask) then you do not pay federal or state income tax. You do pay tax on any capital gains realized if you buy the bond at a discount.

I get these bonds through E-trade, but you could ask your Fidelity broker about step-up bonds.

Best wishes, Chris

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Author: vkg Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 110825 of 121179
Subject: Re: What to do with yearly bonus as a Fool Date: 8/5/2010 9:17 PM
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I get these bonds through E-trade, but you could ask your Fidelity broker about step-up bonds.

Best wishes, Chris


Step-up bonds are available through Fidelity.

The prospectus for all bonds are available. It isn't necessary to ask if a bond is subject to AMT, the prospectus states it.

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Author: Crosenfield Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 110826 of 121179
Subject: Re: What to do with yearly bonus as a Fool Date: 8/5/2010 10:13 PM
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If you have the prospectus available, yes, it will tell whether the bond is subject to AMT.

The prospectus for new issues must always be provided to the bond buyer. When bonds are sold on the secondary market, in the past that has not been true. Was there a change in the law? E-trade provides the information one wants to know, but not a 20-page document. Probably they'd get it for me if I asked for it.

When buying a municipal bond, whether it is subject to AMT is on my check-list of questions I will ask.

Best wishes, Chris

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Author: Crosenfield Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 110827 of 121179
Subject: Re: What to do with yearly bonus as a Fool Date: 8/5/2010 10:42 PM
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If you buy a newly issued equity at the IPO, you get a prospectus.

If you make routine trades of issues that have been around for a long time, you never see the original prospectus.

If my broker knows I am searching for a bond with certain parameters, and one shows up that meets these parameters, he will call me. I must then decide on the basis of available information. "Send me a prospectus and I will think about it." won't fly. By the time I get the prospectus in the mail and read it, the bond will be gone. Even if it is e-mailed to me, the bonds may be all gone by the time I get back to the broker. So we have to have already decided whether the issuer is credit-worthy, and know the questions to ask to know at what price and whether we want the bond. The AMT question is a part of that decision process. It is not something you find out about later, after you have purchased the bond and the broker then sends you the prospectus.

Best wishes, Chris

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Author: vkg Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 110828 of 121179
Subject: Re: What to do with yearly bonus as a Fool Date: 8/5/2010 11:19 PM
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When bonds are sold on the secondary market, in the past that has not been true. Was there a change in the law?

You are right. I haven't yet ventured in the secondary market and wasn't thinking about that case.

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Author: reallyalldone Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 110829 of 121179
Subject: Re: What to do with yearly bonus as a Fool Date: 8/6/2010 10:03 AM
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The high interest checking accounts generally force you into other requirements, like making x debit card purchases a month out of the money you are 'saving'. So unless you add money other than your bonus money to the account, you won't be saving your entire bonus - the cost of the x transactions per month will be dribbling out of it. So these accounts aren't free, either - it's just a different cost. And that doesn't even count the potential cost of debit card fraud for accounts that force you to use a debit card to transact each month, since debit cards have less consumer protection enforced by law than credit cards do.

I have more than one of these accounts because of the account maximums and can present the other side. One of them requires a direct deposit so I use my personal escrowing of property taxes and insurance for that. The debit card transactions for me usually total maybe $30/ month of things I would be buying anyway. If I was concerned about replacing that $30, I would set an automatic deposit for that(which wouldn't be unlike paying a credit card bill).

For this I get 4% APR. I can handle this risk because the next alternative for me is dividend-producing stocks in a taxable account. That is where money over these account maximums heads.

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Author: Patzer Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 110830 of 121179
Subject: Re: What to do with yearly bonus as a Fool Date: 8/6/2010 10:55 AM
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Tax Free Municipal Bonds can be bought for different maturities. It is always necessary to verify if the interest is also exempt from AMT.

It is also necessary to evaluate whether the lower yield on a tax free muni makes sense at your marginal tax rate. If you aren't in the highest bracket, it could make more sense to pay taxes on a higher yield.

Tax tail, investment dog, yada yada.

Patzer

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