1. Money
Dana Anspach

Safely Losing Money

By December 12, 2012

Follow me on:

Last week I was on the phone with a client, in the midst of reviewing their investment choices. This client is married and as a couple their income is in excess of $500,000 a year. That puts them in the 35% federal tax rate at today's rates. They pay state taxes of about 5%. Next year they will also pay the Medicare surtax on investment income.

In their non-retirement accounts they own over $1 million in CDs, some of them paying only 2 - 3%. They said they wanted their money to be safe.

Sometimes I just don't know when to keep my mouth shut. This was one of those times. Before I could think about what I was saying I blurted out, "Well, you're very safely losing money."

Luckily for me, they didn't hang up.

Here's the thing. Starting next year they will be paying about 45 cents in taxes on every dollar of CD interest they earn. That leaves them with an after-tax return of 1.65% on a CD paying 3%. Assume inflation is 3%... and there you have a situation where you very safely and consistently lose purchasing power over time.

High tax payers ought to look at CD alternatives like fixed annuities, and certainly municipal bonds.

I provide some alternatives and more in Are CDs a Good Investment?

No comments yet. Leave a Comment
Leave a Comment

Line and paragraph breaks are automatic. Some HTML allowed: <a href="" title="">, <b>, <i>, <strike>

©2014 About.com. All rights reserved.