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I Bonds are the New Cash – Kind of…

I Bonds are the New Cash –  Kind of…

According to the average yield for a 1 year CD is 0.68% and the average money market savings account is earning an annual rate of 0.39%.  Your safest money is losing purchasing power, which is unfortunate especially if an alternative can be found without any additional credit risk.

A very competent alternative exists – I Savings Bonds from the U.S. Treasury are currently yielding 1.38%.  Currently I Bonds are paying a base rate of 0.2% plus the inflation rate adjusted every 6 months.  The base rate can change for future bond issuances but inflation adjustment will be consistent across all I Bonds regardless of issue month.

  • Pluses
    The purchasing power of your cash is better protected against inflation
    Unlike CD’s taxes are not paid on interest income until the bond is redeemed
    State income tax free
    Bond proceeds used for education needs could make the interest earned tax-free (subject to various income and use constraints)
  • Minuses
    You are locked-in for a year, kind of like a 1 year CD
    If you redeem the bonds during the first 5 years, you lose 3 months interest
    There is a bit of hassle to get it all set up and possibly a little more work to get at your funds when needed
  • Logistics
    Invest online at
    Maximum of $10k a year can be purchased ($20K for married couples)

I am recommending younger clients to work towards keeping their 6 month emergency cash reserves in I bonds.  I am encouraging older clients to have 1 to 2 years of anticipated annual spending needs invested in I bonds by the time they retire. These funds can be used as part of their fixed income allocation and also be a source of funds during downward markets in order to prevent selling other investments at possibly depressed prices.

Good I Bond primer straight from the US Treasury:


Streamlining Monthly Bills

Streamlining Monthly  Bills

If you pay off your card in full every month, consider placing recurring bills on one dedicated card. Use a card which has frequent flyer miles or cash back. As opposed to having automatic withdrawals from your checking, you will not bounce a check, you build benefits, and you have recourse. We currently have our phone, gym membership, health insurance and Wall Street Journal billings on our credit card.

Taxes Do Matter

Taxes Do Matter

Key points I want you to take away from this post are:

• In a low return and increasing tax rate world, the tax drag is increasingly important

• Tax efficiency starts with initial portfolio design

• An effective tax strategy carries on for the life of the portfolio.

Where We Are At
The last several years have been extremely challenging for investors. We are currently in a very low interest rate environment. Many respected experts think long-term returns for several asset classes will continue to be lower going forward than historical norms. Given that so much is unknown regarding the future performance of a particular investment strategy, not taking advantage of what is known, i.e. the tax impact, is leaving valuable information on the table. If future investment returns continue to be lower than historical norms, working on maintaining a tax efficient process will help contribute to a larger portion of the real net return. Compounding this circumstance are the likely increases in tax rates at some point in time in the future which will be necessary to address Federal and State budget and debt needs.

Upon Inception
Tax efficiency starts upon portfolio inception. While it is difficult to predict future tax rates, steps can be taken at the point of starting a portfolio strategy which can help insulate against current and future taxes. For example most equity mutual funds are inherently tax inefficient and should be avoided for the most part in taxable accounts. (We do make an exception for a few tax managed equity funds we use in taxable accounts.) We prefer to use more tax efficient exchange traded funds (ETFs) in taxable accounts. If you have a Roth IRA, we should take advantage of the tax free aspect of that account to stock up on your highest expected return assets or perhaps some inherently tax inefficient assets which can be sheltered by the completely tax free nature of a Roth. We generally prefer to hold a larger portion of income producing bonds and high dividend paying REITs in tax deferred accounts like a traditional IRA or 401k plan. Once an asset allocation is determined, working on “asset location” or which investments go into which type of account, is the next logical step.

Carry On
Keeping a portfolio focused on providing suitable after-tax returns takes ongoing discipline. We work on rebalancing portfolios as tax efficiently as possible, often rebalancing the entire portfolio by trading assets within the tax sheltered accounts to avoid creating taxable capital gains. We are inclined to realize losses in taxable accounts in order use these captured losses at a later time to eliminate the tax burden of realized gains. We use specific tax lot identification in all taxable accounts which allows us to clearly identify the tax impact of any investment security sale in client taxable accounts and to seek the most tax efficient combination of tax lots when we do sell.

While I did start by saying taxes do matter and that they are an integral part of the investment decision making process, I do think there are examples when the tax tail should not wag the investment dog. One clear example is when an investor has a concentrated holding with large embedded gains. While the investment industry has offered some (usually commission laden) strategies, most often selling a reasonable portion of the asset to reduce risk is the logical and prudent choice. Also, if a portfolio’s riskier assets have increased appreciably; taxable capital gains may have to be realized to keep a portfolio within acceptable risk tolerance levels.

What Can Be Done Now?
We believe tax efficient investing is an ongoing process. However given the likelihood of higher tax rates in the future, perhaps in the very near future, we think two specific options should be considered.

As touched upon above, investors holding large concentrated positions with embedded capital gains should seriously consider decreasing their positions in 2012 rather than deferring to a later date in order to capture current historically low capital gains tax rates. As an aside, if you are making a donation, consider donating your appreciated stocks rather than cash to avoid capital gains.

We are recommending young affluent investors and investors who have both the desire and the means to leave an estate to consider a Roth IRA conversion. Investors can convert their Traditional IRA into a Roth IRA, paying ordinary taxes on the pretax IRA contributions converted into a Roth IRA. For younger investors, this conversion can represent a tax free pool of assets which can potentially appreciate free of any tax burden over the next several years. For investors looking for a potentially effective estate transfer vehicle converting a Traditional IRA into a Roth and paying taxes up front could allow for an estate tax-free transfer of wealth with tax-free distributions over several years for the heirs. These examples are presented at a very high level.

A Roth conversion is a particularly good strategy if you think your overall tax rate will be higher later in life rather than now. This assumption goes against conventional wisdom that investors will likely be in a lower tax bracket when they retire. With the likelihood that tax rates will increase, we think that assumption is increasingly challenged. Also, we think there are ways to take advantage of the completely tax fee aspects of the Roth IRA and place higher expected return assets in the Roth. Finally, placing assets in the Roth, shelters your assets from future taxable required minimum withdrawals which can offer tax savings in the future.


What to Keep and What to Toss

What to Keep and What to Toss

The following link from Consumer Reports offers a good overview and summary table on basic record keeping and what to keep and what to toss –

IRS Publication 552 offers a fairly concise description of the manner and types of records individuals should keep for their tax returns –

IRS Publication 583, Starting a Business and Keeping Records is a clear consise referral source for those contemplating, starting and running a business –

I don’t think I will ever be able to toss out a personal or business tax return even if the often suggested 7 seven year time-frame has passed.  For those who can, you may want to consider plucking your old W-2s and filing those away which the IRS recommends keeping until you start collecting Social Security.

The IRS also recommends keeping the following forms for all years until all distribtuions are made from your IRA(s)  – Form 5498 IRA Contribution Information, Form 1099-R Distributions from Pensions and IRAs, etc, and Form 8606, Nondeductible IRAs.  Parsing these forms and filing them from older tax returns before tosing them is likely a good idea.

Keeping it Simple

Keeping it Simple

Welcome to my Carrick Bend Advisors LLC blog/journal.  I think one of the benefits I offer my clients is that I work to get all of their investments coordinated and following a well thought out cohesive strategy.  Assets are centralized, redundant accounts are closed and all investments are viewed in an overall portfolio context.  While the problem is complex, the answer becomes clearer with simplification.

Taking this logic into our daily lives, I have some suggestions of what you can do to simplify your daily life and to help manage much of the unsolicited clutter that incessantly bombards us.

Get rid of mail order catalogs –
Sign up for a free account which allows you to opt out of mail order catalogs.  I have done this religiously over the past few years and it has really worked.  It has not hindered the few catalogs I do like mailed to my home.

Prevent unsolicited credit card and insurance offerings –
Sponsored by the four major credit rating agencies, consumers are allowed to opt out for credit card and insurance solicitations for  5 years or permanently.  Your shredder will thank you.

Decrease unsolicited telemarketing –
Managed by the Federal Trade Commission.  Enter your home, cell and office phone numbers.  Charitable organizations and political groups are exempt as well as businesses which you have purchased from during the past 18 months.  Still very much worth the effort.