Taxable Interest Deferral As Rates Decline-

InterestYields | Oct 1, 2024 | 76 posts since 2010

Deferring further taxable interest income into next year, when rates are expected to be lower, is a strategy I'm now using to reduce my tax bill to keep more (based on tax software scenarios I gamed out doing my 2023 income taxes). Yes I'm still considering T-Bills but I expect those rates to drop faster. Ken was correct https://www.depositaccounts.com/blog/cd-interest-bank-1099int-forms-and-taxes.html with regards to Ally Bank "Some banks allow you to specify the intervals of when interest will be paid. For example, if you open a CD at Ally Bank with a term of one year or less, the default will be for interest to be credited to your CD at maturity. Customers also have the option to change payment to be done monthly, quarterly or annually. If you choose these other intervals for a 1-year CD, you may have taxable interest for two tax years." Per Ally Bank "default frequency for interest to be posted to a CD is: At maturity for CD terms of 12 months or less. Annually, on December 31st of each year and at maturity for CD terms greater than 12 months" so a 6-9-11-12 month CD with default interest disbursement at maturity would only generate a 2025 1099-INT to first be available in January 2026.

However, among big online banks I only found this taxable interest income deferral option into next year being offered by Ally Bank, not the over 5% CDs offered recently by Discover Bank or Barclays which would produce a 2024 1099-INT according to representatives. This month I renewed Ally CDs into 6 month CDs @ 4.95% APY & 9 month CDs @4.85 for funds I may want access to next year around that time but didn't want further taxable interest in 2024 from these accounts. I still have many No Penalty CDs at Ally earning the most Ally currently offers 4.6%, which would be eligible for a loyalty reward but I'll likely get out of some sooner as they'd mature after the expected November Fed rate cut then fund 6 month CDs or T-bills maturing in Q1-Q2 2025. For funds I'm less likely to need in 2025 I'll likely lock-in longer term CDs before year end.

When I moved funds from CIT I was also offered a higher unpublished rate for 12 months as mentioned in https://www.depositaccounts.com/banks/cit-bank.html#promo58859 I did not accept that offer as "Interest rates for the Platinum Savings account are variable and may change at any time without notice" since dropping to 4.7% APY https://www.cit.com/cit-bank/bank/savings/platinum-savings-account that even with the extra "We'll increase your interest rate by 0.143% for the next 12 months" is less than I locked in at Ally Bank & are expected to drop further with every projected Fed rate cut while adding monthly to my 2024 taxable interest income (rather than deferring that interest income into 2025 when rates will likely be significantly lower).

Also note FDIC has effectively lowered coverage to max out at $1.25M. Per https://edie.fdic.gov/calculator.html now "The maximum deposit insurance coverage per trust owner when there are 5 or more beneficiaries is $1,250,000" when before the change it would ask "Do all of the named beneficiaries have an equal interest in their respective ITF/POD/Living Trust Accounts?" which if they did for 10 POD beneficiaries having equal interest could cover double that at Ally Bank up to $2,500,000". 5 POD beneficiaries in a savings account with a $5 balance along with CDs totalling $1,249,995 with 1 POD beneficiary are still fully covered though interest income from such accounts would bring the total >1.25M so could be disbursed externally. More at https://www.depositaccounts.com/blog/cds-fdic-insured.html

T-Bills & other Treasury securities are said to be "considered safer because they are backed by the U.S. government, while CDs, though insured by the FDIC, carry slightly more risk if the bank fails, though that risk is minimal for insured amounts". Ally Bank would likely be even better positioned for a buyer after SVB https://www.ally.com/about/company-structure/ . Anyone here consider their crisis exit strategies from where they keep their funds? For example CIT Bank allows up to 250k ACH outbound daily online while Ally Bank now limits 150k daily, 600k per 30 days outbound (vs inbound daily limits of 500k, 1M per 30 days) but higher limits up to balance of accounts could be requested. I'd expect indications of a debt default or fiat crisis to hit treasury markets first but with T-bills transfer limits are less of a concern. Anyone else here worried about ongoing inflation, de-dollarization & future of USD?

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InterestYields | Oct 3, 2024 | 76 posts since 2010

Independent of tax credits-brackets, keeping income more even year to year also simplifies estimated tax payments. If Harris gets in, don't be so sure you wouldn't be affected P_D. Will we be censored if we discuss how politics could affect deposit rates & the economy? Sept 18th 50 bp rate cut appears politically timed with upcoming election & Democratic senators calling for large cut. What are your predictions for upcoming FOMC meetings?

https://www.bondsavvy.com/fixed-income-investments-blog/fed-dot-plot "September 2024 Fed Dot Plot -100 bps in 2024 (Yearend Median 4.25-4.5%) -100 bps in 2025 (Yearend Median 3.25-3.5%) -50 bps in 2026 (Yearend Median 2.75-3.00% 2026 & 2027)

https://www.federalreserve.gov/monetarypolicy/fomccalendars.htm

2024:
November 6-7
December 17-18*
* Meeting associated with a Summary of Economic Projections.

2025 FOMC Meetings
January 28-29
March 18-19*
May 6-7
June 17-18*
July 29-30
September 16-17*
October 28-29
December 9-10*
* Meeting associated with a Summary of Economic Projections.

2026 FOMC Meetings
January 27-28
March 17-18*
April 28-29
June 16-17*
July 28-29
September 15-16*
October 27-28
December 8-9*
* Meeting associated with a Summary of Economic Projections.

Note: A two-day meeting is scheduled for January 26-27, 2027. Each meeting date is tentative until confirmed at the meeting immediately preceding it."

https://www.ally.com/bank/cd-rates/
https://www.ally.com/go/bank/8m-select-cd/

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w00d00w | Sep 10, 2024 | 360 posts since 2012

another option, as others have mentioned, for deferring interest into the next tax year is to buy a T Bill at auction that matures in 2025. 4 and 6 month T Bills auction weekly and if purchased anytime through the end of 2024, will defer interest paid into next year. for those who pay state income tax, the yield might actually be higher than the best CD of that term available

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happyharold4 | Oct 1, 2024 | 388 posts since 2022

The Op is correct and wise stewardship---But Ally is the only one of all the FI's that I work with that does it that way. All the others issue the 1099 based on even one months interest earned---They should all separate the two based on interest earned vs interest payed.

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Rightdx | Oct 3, 2024 | 43 posts since 2022

I've also been deferring income to next year by buying T-bills. From 1/24-6/24 I bought 1 year T-bills, beginning 7/1, I started buying 6 month T-bills, now you can defer until 2025 the 3 month bills. I will be in a lower tax bracket and IRMAA by doing this. The down side is that most of them mature early next year, so there is some re-investment risk if rate keep dropping until then.

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