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The chart below provides a side-by-side comparison of the different low-risk investment options available.
| INVESTMENT OPTIONS | Advantages | Disadvantages | Best Current Interest Rate* | Minimum Deposit | Risk to Principal / Insurance | Tax Attributes |
| Online savings or money market accounts | Many accounts require only $1; very liquid | Transaction costs; no guarantee of rate stability if short term rates decline | As high as 4.00%. | Varies. Often $1; many accounts require larger deposits | At FDIC-insured banks, total principal amounts below $250,000 for individual account or $200,000 per depositor where multiple accounts, including joint accounts, are held (including other savings, checking, CDs accounts, etc.) in each ownership form in that institution are secure until the end of 2009. | Fully taxable in the year of accrual |
| Fully Taxable Money market funds | Usually very liquid | Rates have not been very competitive with alternatives; yields may not rise as quickly as some alternatives if short term rates rise. | Retail funds as high as 2.31% over last week (institutional funds as high as 2.46%) | Ordinarily between $1,000 and $3,000, although sometimes as low as $1 | Although very rare, principal invested may fall below par ("break the buck"). The US Treasury, however, has guaranteed that the principal deposited in qualifying 2a-7 funds as of September 19, 2008 will be insured for one year. | Fully taxable in the year of accrual |
| Tax-Free Municipal Money Market Funds | Usually very liquid; most beneficial to those in the higher federal and state tax brackets | If tax advantages are fully utilized, the effective return is ordinarily above that of fully taxable alternatives | Approximately 1.00% to 1.25% which for investors in the highest federal tax bracket (35%) who are residents of high taxing states may be equivalent to a fully taxable yield above 2.00%. | Ordinarily $3,000, although sometimes as low as $1 | Although very rare, principal invested may fall below par ("break the buck"). The US Treasury, however, has guaranteed that the principal deposited in qualifying 2a-7 funds as of September 19, 2008 will be insured for one year. | Fully tax free provided that you are a resident of the appropriate state for the entire year |
| Short Term Certificates of Deposit | Provides a guarantee of income should short term rates fall | Not liquid for term of CD (without significant penalty); current 3 month rates are just below the best online savings accounts | APY rates may be slightly higher than online savings accounts for terms over 6 months | As low as $500. Some banks offer better rates on larger deposits. | At FDIC- insured banks, total principal amounts below $250,000 for individual account or $200,000 per depositor where multiple accounts, including joint accounts, are held (including other savings, checking, CD accounts, etc.) in each ownership form in that institution are secure until the end of 2009. Depositors in CDs with terms extending beyond December 31, 2009 should bear in mind that FDIC-insurance limits are slated to return to $100,000 per depositor per ownership class on that date. | Fully taxable. |
| US Treasury Securities | Very liquid | May decline in value if interest rates rise |
Differs according to duration | $1000 | 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. |
| Series I Bonds | Very 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 | 5.64% through April 2009, reset bi-annually based on CPI-U thereafter | $50; maximum purchase is $10,000 per calendar
year per individual ($5,000 electronic and $5,000 in paper format) |
No risk to principal; backed by US Full Faith and Credit | Not subject to state and local taxes. Since interest accrues, federal tax is deferred until redemption |
| Treasury Inflation Protected Securities | Like all US Treasuries (except I Bonds), very liquid; strong protection against inflation due to link to CPI-U | May lose value if interest rates rise and inflation (as reflected in the CPI-U) does not rise as quickly | Approximately 2.30% on the 10-year TIPS | $1000 | 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. |
| Agency Bonds | Usually very liquid. 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. | Long-term callable state and local tax-free bonds with 5.00% coupons are trading, but may trade below par value if rates rise before called. | Usually sold in $5,000 increments | 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. |
| Municipal
Bonds, including Pre-Refunded
Municipal Bonds |
Usually very liquid; yields often exceed after tax yields for taxable bonds and cash equivalents for investors in higher tax brackets | Even the shortest term bonds may lose value if interest rates rise | Short term (3 to 6 month) rates are around 1.00% | Usually $5,000 | Default risk (risk to principal) exists (mitigated for pre-refunded municipal bonds); may trade at values signficantly below par before maturity | Usually not federally taxable, and usually state
tax free to residents of the issuing state |
| Auction Rate Securities | Very liquid as presumably can be redeemed (not renewed) any week; however, at current some auction rate securities, particularly those related to Master Limited Partnerships are not liquid. | Little stability in rates as they change on the auction date each week | Current rates are anywhere between 3% and 5% (the higher end being on failed auctions that are renewed at default rates (holders are illiquid) | Usually $25,000 | Risk to principal exists; securities are secured only by assets of issuer. | Fully taxable, unless secured by pools of municipal bonds |
| Variable Rate Demand Notes | Combines the advantages of municipal bonds and auction rate securities | Same as auction rate securities | Similar to auction rate securities. | Usually $100,000 | Risk to principal exists; securities are secured only by assets of issuer | Same as municipal bonds |
| Commercial Paper Accounts | May be operated similar to online savings accounts | Not insured, significant risk to principal is borne | Competitive with online banks APY for deposits over $50,000. | Due to graduated scale, rates are ordinarily only interesting for deposits over $15,000 | Significant risk to principal exists; securities are an unsecured liability of issuer | Fully taxable in year of accrual |
| Federal Credit Union Accounts | May be operated similar to online savings accounts or CDs | Often difficult to find a FCU for which you qualify with the products you want | Depends on particular FCU and duration | Varies, but often as low as $1 | Not FDIC Insured. Insured by NCUSIF which has matched FDIC insurance limits (see above) through 2009; banking lobby argues that there is more risk to principal than FDIC-insured products | Fully taxable. |
* Since APY (see definition in the Financial
Terminology section) assume interest compounding over the course of
365 days, the comparative rate for non-bank or FCU-issued products (all
products other than savings and CD products) would ordinarily be
between 10 and 15 basis points (0.10% to 0.15%) higher, depending on
the frequency of interest payments or accrual in those non-bank or
FCU-issued products.