1099-OID Question

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Goldman Sachs contingent payment obligation bond

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Number one, tell me who the broker is, so I make sure to never recommend him to my clients.

What you have is a structured investment. It's not a bond in the sense of, corporate bonds or tax-exempt bonds. It is a vehicle used as a derivative investment. This is a rather complex type of investment. That doesn't make it bad... but it should have been better explained to you and your husband. They are all different but here is a general overview:

You give them $20,000. At some point in the future, they will give you back $20,000 plus or minus. The plus or minus is "contingent" (hence the name) on some future thing. For example, it can be contingent on the price of oil on April 30, 2019. Or it can be contingent on the closing value of the S&P 500 on November 30, 2018. In your case it sounds like there is no minus, only a potential plus.

Generally, this is done by taking a portion of the money and putting it in super safe investment, and the rest of it and putting it in a riskier investment. The super safe part is high enough to guarantee all 20K will be returned.

Each year, IRS rules require the writer of the note (it's commonly referred to as a structured note) to predict what the ending value will be. They then figure out what you have "earned" or "lost" to date, based on how much time is left between now and the end date of the note. That amount is also called OID. If you are getting positive OID, it means that the writer of the note has predicted that you will have a positive addition to your 20K, and you now have to pay tax on some of that potential positive addition.

They make the same measurement each year, so it's possible next year you will have the more or less OID, or even negative OID.

The note may or may not pay coupons (i.e. make payments to you of what could be somewhat called intersst) during the term of the note.

Like I said, pretty complex stuff. Also, they can carry some crazy high expense ratios.

These are some rough explanations:

Citi

Investopedia

Glad to help.

FWIW, I don't have a high opinion of the guys who work at a bank, see cash balance in your checking/savings/CD, and then steer you to one of their "investment advisors."

A number of years ago, my grandfather who was still alive, had 10K in a savings account, and 10K in a CD, at Bank One. He was in his early 80s. He lived on his pension and social security check so basically that money was never touched, but it was there if he needed it.

One day he goes in to cash a check, and the teller informs him that the CD is about to mature. so he tells her ok, go ahead and renew it for another 6 month term. She says before I do that, you have to talk to John. He says ok, so she brings him to John. He sits at John's desk and John stares at the screen and then tells him he's the perfect candidate for a fixed immediate annuity, and that in order to "get his money's worth" he should select an option that only pays while he is alive, and there is no residual value. He then prints out the information and asks him to sign, please, so they can get started right away. Thank God my grandfather had enough sense to say, no, let me bring it home and think about it. He called me and recounted the story.

I arrived at the bank at 9 am the next morning, asked for John, and I think the first 50 words out of my mouth were obscenities. 1) My grandfather wasn't in the greatest health and never would have gotten 10K in payments. 2) My grandfather did not need a monthly stream of income, as he was able to live on his pension and social security. The story ended about an hour later when I brought my grandfather back to the branch, John apologized, and we closed all his accounts there and moved him to another bank.

It sounds like a similar situation happened to your husband, sorry to hear.

I'm sure he will get all 20K back, but I would be careful about those fees. They probably sold him on the fact that his money is "just as safe" as a CD but he has a chance at a bigger return than the paltry CD rates. But there is nothing free. Either he's paying an outright fee, or the expenses are being paid out before he gets credited with any return.

Again I'm not saying it's out and out a bad investment, but I am saying the guy at the bank should have given your husband a much greater understanding of what he is doing.

I'm a consultant that helps small businesses, their owners, and other professionals and high net worth individuals make sense of their complex financial financial situations, as well as help them maximize their after-tax income. My clients range from companies with 50 million in revenue to new startups, as well as a bunch pr doctors, attorneys, and other professionals. I'm a licensed CPA.

I'm knowledgeable about your husband's situation because I've seem this exact scenario dozens of times over the last few years. As soon as you said "Goldman Sachs contingent payment obligation bond" the light bulb turned on. It's something we are seeing more and more of, and the vast majority of our clients have no idea what this is.

In my experience, your husband got sold on some kind of bank rip-off investment. It may very well work out to be better than a CD, but almost all "investments" that a brick and mortar type of bank does are HEAVY on fees and poor investments. They try to get into that sector through the back door to offer some additional products for their customers but mostly to make some additional money.

In general, I would never recommend an investment product from your traditional brick and mortar bank outside of a standard CD.

It is a lot like those using "insurance" as an investment. The two just don't compute and are heavy on fees and expenses.

Thanks Baldona. I'm trying to get him away from the brick-and-mortar bank, but he doesn't like spending money (for someone to handle his money) or taking risks. It's taking some time, but I think this little incident may actually have put him off enough to make some changes. We'll see.

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but he doesn't like spending money (for someone to handle his money) or taking risks. It's taking some time, but I think this little incident may actually have put him off enough to make some changes.

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No one should take more risk than they are comfortable with. There are CDs, T-bills, and certain bond funds that all tend to be lower risk.