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Old 01-08-2019, 10:45 AM   #1366
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If you're not going to be maxing out your 401(k) -- because you cannot afford to -- yes, that makes sense. Note that you and your spouse are still eligible for "backdoor" Roth IRAs, so the applicable maximum here is 401(k)+IRA. If you're anywhere below that total maximum contribution limit (due to affordability concerns), then the Traditional 401(k) is fine to start.

The New York 529 Direct plan isn't too exciting when the educational spending is immediate or near immediate. In that case you'd have to invest the funds in the Vanguard Short Term Reserves Account (the most conservative fund within that 529 plan), but the interest paid is miniscule, and thus the tax savings are also miniscule. It's really not worth doing in that "cash in, cash soon out" scenario. You're restricting those dollars too much for too little reward. A 529 plan is really for medium-term (or longer) time horizons, to give that money time to grow.

However, the I Bond, a type of U.S. Savings Bond, looks pretty good for these purposes. You can purchase up to US$10,000 per individual per year (so up to US$20,000 between you and your spouse), they're U.S. tax deferred while held, and if you cash them in and use the proceeds for qualified educational expenses then the interest is U.S. tax free. Also, I think they're U.S. tax free when you become an ex-U.S. person, and they're not restricted to educational spending -- no tax penalty if you need the cash for other purposes. And once you have a U.S. Social Security number and open a Treasury Direct account to buy them, I think you're able to buy savings bonds and Treasuries in the future, too, even if you're an ex-U.S. person. If you wish.

The only catch is that you have to hold them for at least one year (actually more like 11.1 months since you can buy them about 3 days before the end of the month and that counts as if you bought on the first of the month), and if you redeem them before 5 years you lose 3 months of interest. But that's still a good deal, and they'll track the U.S. inflation rate -- that's what the "I" means. They're also the safest place you can park U.S. dollars since they're U.S. federal government general obligation bonds. And it's quite possible New York State and New York City won't tax them either if you use the proceeds for qualified educational expenses -- or even that they won't tax them regardless, because they're federal debt. (I'd have to double check that.)
I read the the New York 529 College Savings plan will allow us to contribute up to $10,000 per annum. Given that the state tax for our joint filling would be 5.65% does that mean that by contributing to the account we can potentially "save" $565 before any interest returns? And any further returns would be a "upside"? Know that $565 may not be much hahah but every dollar counts i supposed especially since we are quite keen to do our further studies while working there.
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Old 01-08-2019, 02:03 PM   #1367
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BBC, how would you invest a sizable lump sum payout from your employer that represents 30% of your total NIA (the other 70% is fully in equities). Also note that you are a US Person in your late 40ís who has reached the limit of what can be excluded, deducted, exempted and credited on your US taxes.
Per your standard/ordinary investment program. You can take a few or several months to cycle the windfall through your program if you feel uncomfortable with slamming all the dollars in at once.

- on the tax relief vs 4% interest, I think it depends on the tax rate applicable to the person. If the tax rate is much more than 4%, it might be profitable. Also, I think it can stretch to more than just one year. Of course, the more years one is considering, the higher the tax rate needs to be, as the 7k topped up in later years suffer opportunity costs (the 4% interest) longer.
You have to withhold a *lot* of dollars from your RA that could be earning 4%/year in order to have much room below the Full Retirement Sum to claim $7,000/year tax relief increments. On the order of $100,000, give or take. It's hard for me to imagine that'd be a good idea in general, unless that ~$100,000 has a reliably better place to be.

I read the the New York 529 College Savings plan will allow us to contribute up to $10,000 per annum. Given that the state tax for our joint filling would be 5.65% does that mean that by contributing to the account we can potentially "save" $565 before any interest returns?
No. As I understand it, you contribute to a 529 from post-tax dollars, and the interest/dividends/capital gains are tax free when you spend the proceeds for qualified educational expenses. Check me on that, of course.

So you can see why I'm lukewarm on cycling dollars through a 529 plan on a short-term basis (if my understanding is correct). You won't get competitive interest on the short-term basis, and the tax savings on the interest income will be tiny. You'd be better off using conventional short-term savings outlets offering more competitive interest.
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Old 01-08-2019, 02:21 PM   #1368
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No. As I understand it, you contribute to a 529 from post-tax dollars, and the interest/dividends/capital gains are tax free when you spend the proceeds for qualified educational expenses. Check me on that, of course.

So you can see why I'm lukewarm on cycling dollars through a 529 plan on a short-term basis (if my understanding is correct). You won't get competitive interest on the short-term basis, and the tax savings on the interest income will be tiny. You'd be better off using conventional short-term savings outlets offering more competitive interest.
If I read the rules correctly, the contribution would be from post-tax dollars, however i am able to file a IT-195 to reclaim the New York State Taxes that were paid. Noted your point on the I Bonds, will look deeper in it to see if i can potentially save some money.
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Old 01-08-2019, 04:51 PM   #1369
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Per your standard/ordinary investment program. You can take a few or several months to cycle the windfall through your program if you feel uncomfortable with slamming all the dollars in at once.
Unfortunately I do not have a standard/ordinary investment program for non-equity holdings. This defined benefit program was my sole risk hedge. I have never touched bonds in my entire my life.

The only idea I have come up with so far is to dump the entire thing into MUB. But my reasons for doing so seem rather flimsy:

1. It is the most popular muni bond ETF
2. Expense ratio is extremely low 0.07%
3. Historical price has been fairly stable
4. The yield is around 2.5%
5. It is US tax free

Any advice you can give would be appreciated.
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Old 01-08-2019, 09:48 PM   #1370
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Hi BBCWatcher

I've noticed that the SSB interest rates have been on a downward trend for the past few months, with this month's interest rate being the lowest I've seen in a while.

1. Do you think this downward trend will continue in the coming months?
2. What needs to happen in order for bonds to increase their interest rate?

Thanks.
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Old 02-08-2019, 01:34 AM   #1371
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If I read the rules correctly, the contribution would be from post-tax dollars, however i am able to file a IT-195 to reclaim the New York State Taxes that were paid.
OK, I dug into this a bit more, and yes, you can take a deduction of up to US$10,000 on your joint New York State income tax return. So if you put US$10,000 into the New York 529 Direct plan, and assuming you're in the 6.57% tax bracket, you save $657 on your state income tax. You aren't required to itemize deductions to take this particular deduction, and there doesn't seem to be any impediment to "laundering" money, i.e. making a qualified 529 plan withdrawal (direct payment to a qualified higher educational institution) immediately after contributing. New York hasn't accepted the recent federal change for secondary school tuition, so this has to be post-secondary education. Also, I haven't checked to see whether there are any "gotchas" for part year New York residence, so do a little more checking to see what happens during your "entry" year and your "exit" year.

I don't think you need Form IT-195. I believe that form is simply if you want to deposit any state income tax refund into your New York 529 Direct plan, which is a different matter. The 529 deduction is available on the main tax return form.

Unfortunately I do not have a standard/ordinary investment program for non-equity holdings. This defined benefit program was my sole risk hedge. I have never touched bonds in my entire my life.
OK, so the defined benefit program is being "cashed out" (whether by choice or not), and you were/are 100% invested in equities otherwise. Have I got that right?

The only idea I have come up with so far is to dump the entire thing into MUB. But my reasons for doing so seem rather flimsy:

1. It is the most popular muni bond ETF
2. Expense ratio is extremely low 0.07%
3. Historical price has been fairly stable
4. The yield is around 2.5%
5. It is US tax free

Any advice you can give would be appreciated.
VWLUX is another possibility if you want long bonds. The expense ratio is 2 basis points higher, but there's no broker commission in/out. If you don't have the $50,000 minimum for VWLUX then Vanguard offers an Investor Class which has a higher (but still reasonable) expense ratio until you get up to the $50,000 level.

Municipal bonds and bond funds are really for those in higher U.S. tax brackets and if you need some bond holdings. But it looks like you tick both boxes.

On the other hand, if you're looking for a more like-for-like replacement then you could shop for a deferred annuity from a high quality life insurer, perhaps even an escalating one. It could also be joint/survivor or joint/contingent if you want to stretch it out further, effectively. That'd give you tax deferral and restore a defined benefit.

Or some of both.

I've noticed that the SSB interest rates have been on a downward trend for the past few months, with this month's interest rate being the lowest I've seen in a while.

1. Do you think this downward trend will continue in the coming months?
I really don't have a good forecast for that.

2. What needs to happen in order for bonds to increase their interest rate?
Some more Singapore dollar inflation would be nice.

As an aside, I really wish central banks would target a 3% inflation rate, and I don't mean a 3% cap. Somebody pulled the 2% target (which seems to be widely interpreted as a cap) out of his/her ass, and it was oh so well demonstrated during the Global Financial Crisis that that 2% target left nowhere near enough maneuvering room for monetary policy. An inflation rate bobbing around the 3% mark would be perfectly fine.

Last edited by BBCWatcher; 02-08-2019 at 01:38 AM..
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Old 02-08-2019, 10:21 AM   #1372
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Yes, you are 100% correct... I’m being cashed out of my defined benefit program - and I have no choice in the matter.

And yes, 100% equities outside of this. So I now need a safe non-equity vehicle, preferable one that is US tax free.

I noticed there are also high yield muni ETFs like HYD (current yield = 4.2%) but these are riskier. But if it just risk of default, does that even matter since they are holding such wide array of bonds?

Last edited by celtosaxon; 02-08-2019 at 10:23 AM..
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Old 02-08-2019, 11:29 AM   #1373
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With respect to the New York 529 Direct plan, I think this'd work:

1. Save conventionally first, for example through a high yield savings account;

2. Within the calendar year, deposit those conventionally saved funds into the New York 529 Direct plan, and into the savings account-like fund that Vanguard provides (short-term reserves). This can be up to US$10,000.

3. Then request the 529 plan to pay the tuition bill. That could be mere days later.

4. Loop, repeat.

This approach generates a higher yield in step #1 and collects the New York State tax deduction in steps #2 and #3. Yes, this is silly (as The New York Times among others pointed out years ago), but the rules seem to allow it.

Yes, you are 100% correct... Iím being cashed out of my defined benefit program - and I have no choice in the matter.

And yes, 100% equities outside of this. So I now need a safe non-equity vehicle, preferable one that is US tax free.
So did you/do you value the defined benefit nature of this asset? If so, I think you go shopping for a deferred annuity.

I noticed there are also high yield muni ETFs like HYD (current yield = 4.2%) but these are riskier. But if it just risk of default, does that even matter since they are holding such wide array of bonds?
If your time horizon is long enough -- and it seems to be -- then you'd probably just go for the long-term municipal bond fund before you go for the high-yield variant. Both will be somewhat more volatile than alternatives, and both should be higher yielding (over long enough or longer time horizons), but the former has less portfolio risk and should do reasonably well across GFC-style events. Of course you can mix them if you want, and if it's via Vanguard it'll be minimum US$50,000 per fund to get the "Admirals" lower expense ratio.
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Old 02-08-2019, 02:37 PM   #1374
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So did you/do you value the defined benefit nature of this asset? If so, I think you go shopping for a deferred annuity.
I do value the guaranteed nature of a DB, but not the inflexibility. I’m a little leery of annuities because they are typically expensive, but I’ve heard Vanguard has low cost versions with reasonable terms. To be honest, my knowledge of annuities is pretty weak. I’m guessing deferred means all income & gains generated do not get taxed until the annuity starts paying out? That seems attractive, but one concern — if something happens to me and my nonresident alien spouse gets the annuity... are there tax implications? So long as my $11.4m lifetime exemption applies, and the annuity is liquidated upon my death, then maybe it’s ok — but if the annuity continues after my dealth, I suspect the 30% nonresident rate would apply on the outflow.
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Old 02-08-2019, 07:43 PM   #1375
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BBC, when you mentioned that I am going to be getting into some long duration bonds if I go with MUB+HYD... that unsettled me a bit. Maybe I need to add some MEAR, just to balance out my interest rate risk. That seems like an important dimension that I was overlooking.

In fact, I’m now thinking 45% MEAR, 30% MUB, 25% HYD, so the average duration will be cut down to 3.57, the average yield is still 2.5% and the average expense ratio 0.2%. What say you? Or am I overthinking this?
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Old 03-08-2019, 01:32 AM   #1376
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I do value the guaranteed nature of a DB, but not the inflexibility. Iím a little leery of annuities because they are typically expensive, but Iíve heard Vanguard has low cost versions with reasonable terms.
Itís what you seem to value given that youíre 100% invested in equities otherwise. It doesnít hurt to get a quote or two.

To be honest, my knowledge of annuities is pretty weak. Iím guessing deferred means all income & gains generated do not get taxed until the annuity starts paying out?
Yes, and not on principal (premium) since thatís after tax, presumably.

That seems attractive, but one concern ó if something happens to me and my nonresident alien spouse gets the annuity... are there tax implications? So long as my $11.4m lifetime exemption applies, and the annuity is liquidated upon my death, then maybe itís ok ó but if the annuity continues after my dealth, I suspect the 30% nonresident rate would apply on the outflow.
On the taxable portion only, and a lower treaty rate may apply if your surviving spouse lives in a treaty country. The tax is still deferred. In addition, deferred annuities are available with refund of premium if you die before payout start, if you wish.

BBC, when you mentioned that I am going to be getting into some long duration bonds if I go with MUB+HYD...
Did I? I suggest(ed) you consider a high quality long-term municipal bond fund since this isnít going to be a short-term parking place. On the contrary, itíll be something you carry through to and beyond retirement, and add to.

MUB, for example, holds munis with a weighted average maturity of between 5 and 6 years. Isnít that too short (if anything) for what youíre trying to do rather than too long?
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Old 03-08-2019, 10:05 AM   #1377
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It’s what you seem to value given that you’re 100% invested in equities otherwise. It doesn’t hurt to get a quote or two.
True — I will check with Vanguard.

On the taxable portion only, and a lower treaty rate may apply if your surviving spouse lives in a treaty country. The tax is still deferred. In addition, deferred annuities are available with refund of premium if you die before payout start, if you wish.
Sounds like the future tax situation might be ok. I’m always a little wary when it comes to nonresident taxation of my spouse. I would definitely go with the refund option since there is a chance my spouse would be resident in Singapore, and could redeploy the refund to generate income far more tax efficiently.

Did I? I suggest(ed) you consider a high quality long-term municipal bond fund since this isn’t going to be a short-term parking place. On the contrary, it’ll be something you carry through to and beyond retirement, and add to.

MUB, for example, holds munis with a weighted average maturity of between 5 and 6 years. Isn’t that too short (if anything) for what you’re trying to do rather than too long?
That was it — the words “long-term” spooked me, because interest rates are still historically low, and even though the fed just dropped .25 there is still a risk longer term that interest rates will rise, and with a duration of 6, I will lose roughly 6% for every 1% rise.

Now, if I was holding individual bonds, I could just hold them to maturity and get back my principle in full (I like that idea even better).

I downloaded the free copy of Brinker Fixed Income Advisor newsletter and on the last page there are sample bond portfolios, these also have a mix of long-term, short-term and high-yield.

I also looked at how to calculate the taxable equivalent yield — looks like 2.5% = 3.6-3.8% in the 32-35% bracket.
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Old 04-08-2019, 10:36 AM   #1378
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I feel like there is a lot of conflicting information on the web about the differences between investing in individual bonds vs bond funds. In my opinion, this article is more honest about the realities:

https://www.cnbc.com/2014/04/10/bond...-know-now.html
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Old 05-08-2019, 08:25 AM   #1379
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Hi BBCWatcher,

With the decrease in yield of the SSB, would this still be an option that you would recommend to buy and hold investors for their bond holdings?

I had started building the SSB ladder (started with SGD500) in July 2019 to qualify for a higher savings interest rate under DBS multiplier. Current holdings in SSB is SGD36,500.

I do not have any holdings in bonds and am not comfortable with topping up my CPF OA/SA, in case I need cash urgently and have to liquidate my investment as a last resort (which may be at a loss).

Thank you!
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Old 05-08-2019, 08:36 AM   #1380
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With the decrease in yield of the SSB, would this still be an option that you would recommend to buy and hold investors for their bond holdings?
SSBs are still useful, but they’ve never been the most likely bond/bond-like choice for long-term investing.

I do not have any holdings in bonds and am not comfortable with topping up my CPF OA/SA, in case I need cash urgently and have to liquidate my investment as a last resort (which may be at a loss).
About that: get over it! You only need sufficient, adequate liquidity. And I don’t think “all three” CPF top ups make sense for most people. Directed MA, SA, and RA top ups are more interesting.

Somehow loss of liquidity doesn’t seem to be an impediment when people buy houses.
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