CD or munis: Compare the options

Conservative investors are often drawn to certificates of deposit (CDs) because of their stability. But investing too conservatively can expose your clients’ assets to the steady erosion of inflation and taxes. See if an investment in tax-free municipal bonds makes sense for your clients.

Answer a few questions:



or

After-tax income generated

Initial investment required


Redeploying assets into a combination of one or more municipal bond funds may generate an equivalent amount of income that is not subject to income taxes.

Answer the questions to find out.
For you, filing singly in Massachusetts, an investment in munis would generate an extra $593/year. For you, filing singly in Massachusetts, an investment in munis would give you $84000 left over to invest elsewhere.

CDs

Munis

This hypothetical example does not reflect the performance of any particular investment. Sources: Yields are from Bloomberg and Bloomberg Barclays, as of 12/31/18. The average rate on 6-month negotiable certificates of deposit (secondary market) was 2.82%, quoted on an investment basis; the Bloomberg Barclays Municipal Bond Index yield-to-worst was 2.69%. Tax information is from the Tax Foundation. State and federal tax rates are for the 2019 calendar year, as of 4/1/19.

  Safe, but slow

Risk-averse investors who choose guaranteed CDs often find comfort in the fact that their assets are not exposed to the ups and downs of the financial markets. But by investing too conservatively, your clients may be exposing their assets to the steady erosion of inflation and taxes.

Unlike bonds, which incur more risk, CDs offer a fixed rate of return, and the interest and principal on CDs generally are insured by the FDIC up to $250,000.

  A better alternative

By redeploying assets that are in fully taxable vehicles, such as CDs, into a combination of one or more municipal bond funds, your clients may be able to generate an equivalent amount of income that is not subject to income taxes. And because municipal bonds historically have generated higher returns than CDs, your clients may not have to invest as much to generate that income, leaving additional assets to invest in a conservatively managed stock fund with the goal of outpacing inflation.

For some investors, investment income may be subject to the federal alternative minimum tax and capital gains taxes. Income from federally tax-exempt funds may be subject to state and local taxes. Unlike CDs, municipal bonds are free from federal and, in some cases, state and local taxes.