The chart below provides a quick comparison of several different asset classes that produce income for investors. It includes assets deemed to be almost totally safe, such as FDIC-insured savings and CD accounts and U.S. Treasury Securities, to assets that introduce more risk, such as dividend stocks.
| INVESTMENT | Advantages | Disadvantages | Best Current Interest Rate* | Risk to Principal | Tax Attributes |
|---|---|---|---|---|---|
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Many accounts require only $1; very liquid. |
No guarantee of rate stability if short term rates decline. |
Rates as high as 5.35% APY in nationally available online accounts. Savings and money market rates from banks where you live may also be competitive. |
For FDIC insured banks, the standard deposit insurance amount is $250,000 per depositor, per insured bank, for each account ownership category. |
Fully taxable in the year of accrual. |
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Provides a guarantee of income should short term rates fall. Rates for longer term CDs are higher than savings accounts. |
Not liquid for term of CD (without significant penalty). |
APY rates may be higher than online savings accounts for terms of 1-year and longer. |
For FDIC insured banks, the standard deposit insurance amount is $250,000 per depositor, per insured bank, for each account ownership category. |
Fully taxable in year of accrual. |
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May be operated similar to online savings accounts or CDs |
Can be difficult to find a FCU for which you qualify with the products you want. |
Depends on particular credit unions, but credit union savings rates are ordinarily higher than big banks, but lower than online savings rates. |
For NCUA insured credit unions the standard deposit insurance amount is $250,000 per depositor, per insured bank, for each account ownership category. |
Fully taxable in year of accrual. |
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Fully Taxable Money Market Funds |
Usually very liquid. |
Lacked any competitiveness from 2020 to 2022, but rates have recovered over the course of 2023. May rise faster than savings rates in rising rate environments and fall more quickly when short-term rates fall. |
Retail funds are generally around 5.20% to 5.30%. Main value is to ultra high net worth individuals, corporations, and not-for-profits that have asset bases too large to disperse to savings and money market accounts. Most individuals and couples can obtain higher rates and benefit from insurance in FDIC-insured banks and NCUA-insured credit unions. |
Not insured. Although rare, principal invested may fall below par ("break the buck"). |
Fully taxable in the year of accrual. |
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Usually fairly liquid; most beneficial to those in the highest federal and state tax brackets. |
Even if tax advantages are fully utilized by high earning individuals, the effective return is often below US Treasuries and fully taxable alternatives. May also involve credit risk. |
Approximately 2.60% yield for funds geared to a 10-year duration. For investors in the highest federal tax bracket (35%), these may produce better fully-taxable equivalent returns than US Treasuries, US Treasury funds or agency bonds of equal duration. |
Although very rare, principal invested may fall below par ("break the buck"). The US Treasury has backstopped this through guarantees on occasion (most notably during the financial crisis when it guaranteed that the principal deposited in qualifying 2a-7 funds as of September 19, 2008 would be insured for one year). |
Fully tax free provided that you are a resident of the appropriate state for the entire year. |
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Very liquid |
May decline in value if interest rates rise |
Differs according to duration. Compare Treasury rates. |
Backed by the US Full Faith and Credit. Generally accepted to be he highest credit quality bonds. |
Federally taxible in year that interest payments are made, and gains (losses) are reported at sale or maturity Not subject to state and local taxes. |
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Relatively high yields; strong protection against inflation even where short term interest rates do not rise |
Absolutely not liquid for 1 year; penalty of 3 month interest forfeiture if redeemed in fewer than five years. Maximum purchase is $10,000 per calendar year per individual in electronic format (may also purchase up to $5,000 per year using a Federal tax refund). |
5.27% for new bonds through April 30, 2024, reset bi-annually based on CPI-U thereafter. Impractical beause most individuals may not purchase more than $10,000 per year. May be redeemed after 1-year with a 3-month penalty, and after 5 years with no penalty. |
Backed by US Full Faith and Credit. |
Not subject to state and local taxes. Since interest accrues and is not paid out, federal tax is deferred until redemption. |
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Like all US Treasuries (except I Bonds), very liquid; strong protection against inflation due to principal and interest adjustments according to CPI-U. |
May lose value if interest rates rise and inflation (as reflected in the CPI-U) does not rise as quickly. These bonds lost tremendous value in 2022. |
Principal and yield component adjusts according to inflation. 10-year TIPs are currently priced to yield a "real" yield (inflation adjusted yield) of approximately 1.90%.
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No risk to principal if held to maturity; backed by US Full Faith and Credit; may trade at values significantly below par before maturity |
Not subject to state and local taxes. Interest is fully taxable in the year in which it is paid. Phantom interest is taxable in the year in which the bond's principal appreciates in accordance with changes in CPI-U. |
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Bonds issued by the Federal Farm Credit Bank (FFCB), Federal Hom Loan Bank (FHLB) and Tennessee Valley Authority (TVA) are usually fairly liquid and like Treasuries are exempt from state and local taxes (other agency bonds may not be). Benefits are greater for those holding state and local tax-exempt agency bonds in highest tax brackets of highest taxing states. Callable agencies may offer a substantial yield premium over other short term securities. |
Longer term agency bonds may lose value very quickly if interest rates rise and bonds are not called. If rates fall, the call feature will cause them not to appreciate. While the US government is perceived to have a moral obligation to avoid an agency default, this obligation has not been tested and agency bonds may have more credit risk than Treasuries. |
Long-term callable bonds issued by Federal agencies, such as Federal Farm Credit Bank (FFCB), Federal Home Loan Bank (FHLB) or Tennessee Valley Authority (TVA), may be state and local tax free, like US Treasuries. Due to the call feature and the perceived additional credit risk in the issuing agencies, these may offer higher yields than are available on US Treasuries of similar maturities. |
Even those these are issued by federal agencies, risk to principal may exist; may trade at values significantly below par before maturity. |
Certain agency bonds are not taxable at the state and local level; interest is federally taxable in the year that it is paid. |
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Municipal Bonds, including Pre-Refunded Municipal Bonds |
Yields often exceed after tax yields for taxable bonds and cash equivalents for investors in highest feeral and state tax brackets. |
Even the shortest term bonds may lose value if interest rates rise. Unless tax advantages are fully utilized by high earning investors, these bonds will underperform fully taxable savings accounts and CDs. |
Current average 10-year yields on AAA-rated bonds are trading around 2.90%, which is can deliver an after-tax equivalent just under 4.00% for high net worth investors in the highest federal and state tax brackets. |
Default risk (risk to principal) exists (mitigated for pre-refunded municipal bonds); may trade at values significantly below par before maturity. |
Usually not federally taxable, and usually state tax free to residents of the issuing state. |
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High quality Dow Jones dividend stocks, such as Intel or Pfizer offer 2-3% yield. More risky Dow Stocks, like Verizon and Walgreens can offer yields above 5%. |
Stocks price can drop and investors can lose principal. Dividends can be cut. |
1-5% yield. |
Investor can lose all of their principal. |
Tax rate on qualified dividends is 15%. To be a qualified dividend, investor must "must have held the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date." |
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