Advice - Parking cash before it gets paid in taxes

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sylvial
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Advice - Parking cash before it gets paid in taxes

Post by sylvial » Mon Jun 18, 2018 9:21 pm

Hi all -

Have a quick request. I recently sold some shares of a private company through a secondary transaction to an institutional investor. This transaction will generate a personal tax bill of approx $3m (all long-term capital gains). I will take prior year safe harbor, which is accepted in my state as well, giving me 10 months of potential interest to be gained before this gets paid in April 2019

I read through a few previous threads on this topic (seems like one comes up each year) and would like to know current views on the best way to handle this given the size of the amount. Goal is to get as high a return as I can balancing risk in this tiny time frame. Most suggest high yield interest accounts or money market funds (e.g., VMMXX). I will likely be in the 24% federal / 9% state on ordinary income this year. Would love any thoughts that you have.

Thank you!
SL

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grabiner
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Re: Advice - Parking cash before it gets paid in taxes

Post by grabiner » Mon Jun 18, 2018 10:15 pm

You could view this as a negative bond which matures in April. If you buy a CD or bond which matures in April, you will be in exactly the same situation as if you had neither the CD nor the tax bill. If you buy a bond which matures after April, you are taking interest-rate risk, although that may be a trivial risk if the bond matures near April.

This suggests using ultrashort bonds or money-market funds. In a 24% bracket, you'll get a higher yield from Vanguard Prime Money Market (1.98% becomes 1.50% after federal tax, 1.32% after federal and state tax) than in even a state money-market fund from Vanguard. You could use Vanguard Ultra-Short Bond Fund (2.42% yield on Admiral shares) or Short-Term Tax-Exempt (1.68% yield tax-free) but those have more credit risk.
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Tyler Aspect
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Re: Advice - Parking cash before it gets paid in taxes

Post by Tyler Aspect » Tue Jun 19, 2018 12:32 pm

With 3 million dollars invest amount it will probably be US Treasury Notes. There is a secondary market US Treasury Note maturing on March 31, 2019 yielding around 2.27% (CUSIP 912828W97).
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Re: Advice - Parking cash before it gets paid in taxes

Post by thangngo » Tue Jun 19, 2018 12:46 pm

sylvial wrote:
Mon Jun 18, 2018 9:21 pm
Hi all -

Have a quick request. I recently sold some shares of a private company through a secondary transaction to an institutional investor. This transaction will generate a personal tax bill of approx $3m (all long-term capital gains). I will take prior year safe harbor, which is accepted in my state as well, giving me 10 months of potential interest to be gained before this gets paid in April 2019

I read through a few previous threads on this topic (seems like one comes up each year) and would like to know current views on the best way to handle this given the size of the amount. Goal is to get as high a return as I can balancing risk in this tiny time frame. Most suggest high yield interest accounts or money market funds (e.g., VMMXX). I will likely be in the 24% federal / 9% state on ordinary income this year. Would love any thoughts that you have.

Thank you!
SL
I think you'll jump to the highest tax bracket and not the 24% fed / 9% state. Since this transaction is done, there's no point going back and debate whether you should defer your gain.

Money market fund is a good choice to balance return vs. risk. It should give you at least 1.79% yield. A one-year CD would give you 2.30% return, but you won't be able to get 1-yr CD since you'll need the money next April.

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grabiner
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Re: Advice - Parking cash before it gets paid in taxes

Post by grabiner » Tue Jun 19, 2018 6:37 pm

thangngo wrote:
Tue Jun 19, 2018 12:46 pm
I think you'll jump to the highest tax bracket and not the 24% fed / 9% state. Since this transaction is done, there's no point going back and debate whether you should defer your gain.
It's a long-term capital gain, so it will put you into the highest state tax bracket. The federal marginal tax rate will become 32.8%, as every additional dollar of income will be taxed at 24%, but will also move a dollar of capital gain from the 15% to the 20% capital gain rate, and add a dollar to the 3.8% net investment income tax. This makes muni funds more attractive, particularly if there is one for your state; use CA Municipal Money Market if you are a CA resident.
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Kevin M
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Re: Advice - Parking cash before it gets paid in taxes

Post by Kevin M » Tue Jun 19, 2018 7:30 pm

grabiner wrote:
Tue Jun 19, 2018 6:37 pm
thangngo wrote:
Tue Jun 19, 2018 12:46 pm
I think you'll jump to the highest tax bracket and not the 24% fed / 9% state. Since this transaction is done, there's no point going back and debate whether you should defer your gain.
It's a long-term capital gain, so it will put you into the highest state tax bracket. The federal marginal tax rate will become 32.8%, as every additional dollar of income will be taxed at 24%, but will also move a dollar of capital gain from the 15% to the 20% capital gain rate, and add a dollar to the 3.8% net investment income tax. This makes muni funds more attractive, particularly if there is one for your state; use CA Municipal Money Market if you are a CA resident.
Assuming you are a CA resident, your marginal tax rate is 13.3% for this year. I'll use grabiner's 32.8% for marginal federal rate.

The muni fund yields are cyclical approximately quarterly, and although currently on the upswing, at this point your taxable-equivalent yield (TEY) currently still is higher in the Vanguard Treasury money market fund, at 2.24%, compared to 2.06% in the CA muni MM fund. However, the muni fund yields are rising pretty steeply, so they probably will overtake the Treasury fund at your tax rates soon--perhaps in a week or less.

The Treasury mentioned earlier at 2.27% provides a TEY of 2.83%, so this is almost 60 basis points more yield for extending maturity to about nine months, which is excellent. The Treasury also closely matches the maturity/duration of your liability, so it is a better fit than a money market fund.

However, your marginal tax rates will drop in January, so you might want to consider a Treasury maturing in late December, then revisit your options at that point. I see one maturing 12/31/2018 at a yield of about 2.13%, which is TEY of 2.66% given stated assumptions about tax rates.

The CA muni MM fund almost certainly will peak at a TEY higher than the Treasury in less than two months, but the average over the cycle may be less.

You probably can beat a Treasury with some individual AA munis--maybe even with AAA munis--maturing in December 2018, but buying individual munis is more time consuming and complex than buying Treasuries, and it would take some time to get up to speed on evaluating them.

Kevin
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limeyx
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Re: Advice - Parking cash before it gets paid in taxes

Post by limeyx » Wed Jun 20, 2018 12:09 am

sylvial wrote:
Mon Jun 18, 2018 9:21 pm
Hi all -

Have a quick request. I recently sold some shares of a private company through a secondary transaction to an institutional investor. This transaction will generate a personal tax bill of approx $3m (all long-term capital gains). I will take prior year safe harbor, which is accepted in my state as well, giving me 10 months of potential interest to be gained before this gets paid in April 2019

I read through a few previous threads on this topic (seems like one comes up each year) and would like to know current views on the best way to handle this given the size of the amount. Goal is to get as high a return as I can balancing risk in this tiny time frame. Most suggest high yield interest accounts or money market funds (e.g., VMMXX). I will likely be in the 24% federal / 9% state on ordinary income this year. Would love any thoughts that you have.

Thank you!
SL
if your tax bill alone is $3M then seems like you "win" no matter what you do with that in the meantime, no ? Maybe just take it safe and go retire to a nice tropical Island :)

mgensler
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Re: Advice - Parking cash before it gets paid in taxes

Post by mgensler » Wed Jun 20, 2018 8:28 am

We had a similar situation a year ago. We put the money in FZDXX. It's currently 1.93% and it moves with interest rates. For such a short period it didn't make sense for us to over complicate things.

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welderwannabe
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Re: Advice - Parking cash before it gets paid in taxes

Post by welderwannabe » Wed Jun 20, 2018 8:46 am

I had a similar situation, though a far lesser amount. I stuck mine in a TBill that matures the next Tax year before taxes are due.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

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