How to best invest cash to "hide" income for a year? (house sale, ACA cliff, etc.)

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OkanePlease
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How to best invest cash to "hide" income for a year? (house sale, ACA cliff, etc.)

Post by OkanePlease »

Our story 2020: The two of us became unemployed early in the year and mid-year enrolled in a plan through the ACA marketplace. Subsidies looked promising, but enhanced unemployment benefits and extensions (no complaints!) put us close to the cliff and perhaps in peril of going over. Rather unexpectedly, we decided to sell our home. Since I wrote off home office depreciation/expenses the past ten years, I fear that the need to recapture the depreciation will send us over the cliff and that we'll have to pay back to the ACA subsidies. That's about $1000 per month for the half-year and will be acceptable if necessary.

Dilemma for 2021: It's hard to forecast income for ACA subsidy eligibility for 2021. I don't believe either of us will go back to work (unemployment may turn into early retirement), and it's too soon to know if unemployment benefits will get enhanced and/or extended. Biggest dilemma is that we're sitting on a huge pile (about $1M) of cash from the home sale, and we might want to buy a new home mid-year or so, after our one-year rental ends. Therefore, I don't want to invest the cash in anything too risky. At the same time, I don't want to squander the opportunity to generate some income from the cash position. Aside from this cash, we have a comfortable portfolio invested in basically the three-fund approach. If I invest the cash completely by adding to the Vanguard Total Bond position (as one option that would be comfortable to me), I calculate that the dividends from that alone will generate about $2,000 additional dividends per month--nice as fixed income, but the resulting $24,000 (if we don't buy a new home) added to our usual annual interest/dividend/cap gain income plus unemployment could put us over the cliff again.

What does one do in a situation like mine? (Hence the use of "hide" income in the topic title.) I know I can simply feel lucky to have the proceeds of the home sale go to use to generate $2,000 of monthly income, thereby exceeding the loss of the ACA subsidy, but wondering if I'm missing out on some strategy to maximize income opportunity while still being able to be eligible for the ACA subsidy.

Thanks for any thoughts/advice.
Last edited by OkanePlease on Sat Nov 21, 2020 12:51 pm, edited 2 times in total.
livesoft
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Re: How to invest huge cash to "hide" income for a year? (house sale, ACA cliff, etc.)

Post by livesoft »

Short-term Treasuries paying negative interest rates, perhaps? LOL!
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Re: How to invest huge cash to "hide" income for a year? (house sale, ACA cliff, etc.)

Post by retired@50 »

OkanePlease wrote: Sat Nov 21, 2020 12:41 pm
Thanks for any thoughts/advice.
I see no way of hiding the income, other than to not earn it to begin with.

If you put your money in a Bank of America account you'll likely only earn .01% interest, so, problem solved. :shock:

In this case, I suppose it's better to earn a real return, and have to surrender some of it in taxes / health care expenses than to not earn it at all.

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KlangFool
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Re: How to invest huge cash to "hide" income for a year? (house sale, ACA cliff, etc.)

Post by KlangFool »

OP,


It is probably too late for you now. One of the solutions is to sign up for COBRA insurance for the year that you are unemployed. Then, use ACA insurance for the following year.


KlangFool
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OkanePlease
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Re: How to invest huge cash to "hide" income for a year? (house sale, ACA cliff, etc.)

Post by OkanePlease »

KlangFool wrote: Sat Nov 21, 2020 12:52 pm OP,

It is probably too late for you now. One of the solutions is to sign up for COBRA insurance for the year that you are unemployed. Then, use ACA insurance for the following year.

KlangFool
KlangFool, not surprising to me, COBRA costs were considerably higher than what I found in the ACA marketplace even without subsidies!
iamblessed
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Re: How to best invest cash to "hide" income for a year? (house sale, ACA cliff, etc.)

Post by iamblessed »

Ally at .6% if that is to much income then a 0% checking account.
Hockey10
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Re: How to best invest cash to "hide" income for a year? (house sale, ACA cliff, etc.)

Post by Hockey10 »

Sign up for an ACA plan that has an HSA attached to it. Then in 2021, contribute the max amount to the HSA which is then used to reduce your income for ACA cliff purposes.
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OkanePlease
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Re: How to best invest cash to "hide" income for a year? (house sale, ACA cliff, etc.)

Post by OkanePlease »

Hockey10 wrote: Sat Nov 21, 2020 1:05 pm Sign up for an ACA plan that has an HSA attached to it. Then in 2021, contribute the max amount to the HSA which is then used to reduce your income for ACA cliff purposes.
Thanks, Hockey10. That's already done for this year and planned for next year, so that deduction is calculated in.
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OkanePlease
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Re: How to best invest cash to "hide" income for a year? (house sale, ACA cliff, etc.)

Post by OkanePlease »

iamblessed wrote: Sat Nov 21, 2020 12:57 pm Ally at .6% if that is to much income then a 0% checking account.
Thanks, iamblessed. I know rates/returns can change, but going by current returns, $1M invested for a year:
Ally at .6% yields $6,000 in interest.
Total Bond Market yields $24,000 in dividends.

At that differential, it seems financially better to try Total Bond Market and accept the loss of the ACA subsidies. But I appreciate your suggestion. In fact, the cash is currently parked in no-penalty CDs at Ally at .55% just in case I can (barely) qualify for the subsidies this calendar year.

Bottom line is that I'm just trying to make sure I haven't overlooked an investment vehicle to consider. I know everyone is looking for the same miracle investment. In the end, I know I likely need to just evaluate risk and decide if I want to invest funds in a stock mutual fund, but even those will spin off quarterly dividends/gains.
curmudgeon
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Re: How to best invest cash to "hide" income for a year? (house sale, ACA cliff, etc.)

Post by curmudgeon »

1-year CDs generally (though not always, check details when you open) pay their interest at the end of their term. A CD opened in January 2021 would report interest in tax year 2022. This isn't an option for anything longer than 1-year terms; they have to pay interest at least yearly. Zero-coupon bonds and similar stuff still requires you to count implied interest as income each year. There are a few special cases such as EE and I bonds, but I don't think they would be useful in these circumstances.

HSA-eligible insurance plans let you put money into an HSA and deduct it from gross income (much better than being buried down in normal deductions). If you are over 55, there is a bit of extra contribution space (do a search for HSA threads here).

Watch out for state income tax refunds. A refund for a prior year gets added to top-line gross income (affects ACA cliff), but a deduction for current year state taxes comes out much lower down (doesn't help with ACA eligibility). That one almost burned me several years ago when I retired.

You and/or spouse might have been above the income limit for deductible IRA contributions in the past, but that might be an option in this transition year to get income under the ACA cliff.
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Re: How to best invest cash to "hide" income for a year? (house sale, ACA cliff, etc.)

Post by Kenkat »

Maybe I am stating the obvious, but make sure you don’t forgo $24k in interest so that you still receive a $16k subsidy.
iamblessed
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Re: How to best invest cash to "hide" income for a year? (house sale, ACA cliff, etc.)

Post by iamblessed »

OkanePlease wrote: Sat Nov 21, 2020 1:19 pm
iamblessed wrote: Sat Nov 21, 2020 12:57 pm Ally at .6% if that is to much income then a 0% checking account.
Thanks, iamblessed. I know rates/returns can change, but going by current returns, $1M invested for a year:
Ally at .6% yields $6,000 in interest.
Total Bond Market yields $24,000 in dividends.

At that differential, it seems financially better to try Total Bond Market and accept the loss of the ACA subsidies. But I appreciate your suggestion. In fact, the cash is currently parked in no-penalty CDs at Ally at .55% just in case I can (barely) qualify for the subsidies this calendar year.

Bottom line is that I'm just trying to make sure I haven't overlooked an investment vehicle to consider. I know everyone is looking for the same miracle investment. In the end, I know I likely need to just evaluate risk and decide if I want to invest funds in a stock mutual fund, but even those will spin off quarterly dividends/gains.
It can be crazy sometimes. One year I had to buy an active mutual fund to get my income up for the ACA. LOL
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OkanePlease
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Re: How to best invest cash to "hide" income for a year? (house sale, ACA cliff, etc.)

Post by OkanePlease »

iamblessed wrote: Sat Nov 21, 2020 1:30 pm
It can be crazy sometimes. One year I had to buy an active mutual fund to get my income up for the ACA. LOL
Indeed.
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Re: How to best invest cash to "hide" income for a year? (house sale, ACA cliff, etc.)

Post by Ron Ronnerson »

If you buy the house mid-year and only generate half as much in dividends, will you be able to qualify for the premium tax credit? If so, it might be an additional incentive to make the purchase since you’d basically be getting a $12k tax credit to do so.

If you donate to charity or give gifts, perhaps consider front loading that so you have less money generating income. Also, it’s only a little bit but you can deduct $300 for cash donations above-line as of this year even if you don’t itemize and this can reduce your modified adjusted gross income for ACA purposes.
qwertyjazz
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Re: How to best invest cash to "hide" income for a year? (house sale, ACA cliff, etc.)

Post by qwertyjazz »

Buy the home earlier and break your lease

Or buy a slight fix-er-upper and you will have time to rehab while you are still renting
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OkanePlease
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Re: How to best invest cash to "hide" income for a year? (house sale, ACA cliff, etc.)

Post by OkanePlease »

curmudgeon wrote: Sat Nov 21, 2020 1:20 pm 1-year CDs generally (though not always, check details when you open) pay their interest at the end of their term. A CD opened in January 2021 would report interest in tax year 2022. This isn't an option for anything longer than 1-year terms; they have to pay interest at least yearly. Zero-coupon bonds and similar stuff still requires you to count implied interest as income each year. There are a few special cases such as EE and I bonds, but I don't think they would be useful in these circumstances.

HSA-eligible insurance plans let you put money into an HSA and deduct it from gross income (much better than being buried down in normal deductions). If you are over 55, there is a bit of extra contribution space (do a search for HSA threads here).

Watch out for state income tax refunds. A refund for a prior year gets added to top-line gross income (affects ACA cliff), but a deduction for current year state taxes comes out much lower down (doesn't help with ACA eligibility). That one almost burned me several years ago when I retired.

You and/or spouse might have been above the income limit for deductible IRA contributions in the past, but that might be an option in this transition year to get income under the ACA cliff.
Thanks, curmudgeon. As mentioned above, HSA is already factored in for this year and next. Same for IRA this year, as we eked out just enough income to maximize contributions. (Nothing planned for next year, of course, if we're not working and therefore no earned income.) No state income tax (WA).

I appreciate the idea about 1-year CDs. That's similar to the 9-month no-penalty CDs we currently use at Ally, and nice to have 1-years as additional options.
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OkanePlease
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Re: How to best invest cash to "hide" income for a year? (house sale, ACA cliff, etc.)

Post by OkanePlease »

Ron Ronnerson wrote: Sat Nov 21, 2020 1:36 pm If you buy the house mid-year and only generate half as much in dividends, will you be able to qualify for the premium tax credit? If so, it might be an additional incentive to make the purchase since you’d basically be getting a $12k tax credit to do so.

If you donate to charity or give gifts, perhaps consider front loading that so you have less money generating income. Also, it’s only a little bit but you can deduct $300 for cash donations above-line as of this year even if you don’t itemize and this can reduce your modified adjusted gross income for ACA purposes.
Ron Ronnerson, thanks for this, as I don't really know about the Premium Tax Credit and will have to research to learn more about it.
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OkanePlease
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Re: How to best invest cash to "hide" income for a year? (house sale, ACA cliff, etc.)

Post by OkanePlease »

Kenkat wrote: Sat Nov 21, 2020 1:26 pm Maybe I am stating the obvious, but make sure you don’t forgo $24k in interest so that you still receive a $16k subsidy.
Thanks, Kenkat. Your comment is appreciated and reinforces what I'm trying to remind myself. As mentioned in the original post, I know I am fortunate/lucky to have the cash and to have this dilemma. Just wanting to make sure I'm considering all options and not overlooking anything.
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Re: How to best invest cash to "hide" income for a year? (house sale, ACA cliff, etc.)

Post by Ron Ronnerson »

OkanePlease wrote: Sat Nov 21, 2020 1:48 pm
Ron Ronnerson wrote: Sat Nov 21, 2020 1:36 pm If you buy the house mid-year and only generate half as much in dividends, will you be able to qualify for the premium tax credit? If so, it might be an additional incentive to make the purchase since you’d basically be getting a $12k tax credit to do so.

If you donate to charity or give gifts, perhaps consider front loading that so you have less money generating income. Also, it’s only a little bit but you can deduct $300 for cash donations above-line as of this year even if you don’t itemize and this can reduce your modified adjusted gross income for ACA purposes.
Ron Ronnerson, thanks for this, as I don't really know about the Premium Tax Credit and will have to research to learn more about it.
The premium tax credit is just another name for the ACA subsidy. If you purchase the home mid-year and keep your dividends for 2021 to $12k or thereabouts, would you be under the income threshold to qualify for the subsidy?
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Re: How to invest huge cash to "hide" income for a year? (house sale, ACA cliff, etc.)

Post by KlangFool »

OkanePlease wrote: Sat Nov 21, 2020 12:57 pm
KlangFool wrote: Sat Nov 21, 2020 12:52 pm OP,

It is probably too late for you now. One of the solutions is to sign up for COBRA insurance for the year that you are unemployed. Then, use ACA insurance for the following year.

KlangFool
KlangFool, not surprising to me, COBRA costs were considerably higher than what I found in the ACA marketplace even without subsidies!
Yes, that is true. But, it gives you one year to work out your tax/ACA subsidy issues.


KlangFool
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OkanePlease
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Re: How to best invest cash to "hide" income for a year? (house sale, ACA cliff, etc.)

Post by OkanePlease »

Ron Ronnerson wrote: Sat Nov 21, 2020 1:57 pm
The premium tax credit is just another name for the ACA subsidy. If you purchase the home mid-year and keep your dividends for 2021 to $12k or thereabouts, would you be under the income threshold to qualify for the subsidy?
Ah, silly me... of course! I'm not sure about the timing, but I am sure that I'll be keeping close tabs on numbers throughout the year.
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Re: How to best invest cash to "hide" income for a year? (house sale, ACA cliff, etc.)

Post by marcopolo »

OkanePlease wrote: Sat Nov 21, 2020 12:41 pm Our story 2020: The two of us became unemployed early in the year and mid-year enrolled in a plan through the ACA marketplace. Subsidies looked promising, but enhanced unemployment benefits and extensions (no complaints!) put us close to the cliff and perhaps in peril of going over. Rather unexpectedly, we decided to sell our home. Since I wrote off home office depreciation/expenses the past ten years, I fear that the need to recapture the depreciation will send us over the cliff and that we'll have to pay back to the ACA subsidies. That's about $1000 per month for the half-year and will be acceptable if necessary.

Dilemma for 2021: It's hard to forecast income for ACA subsidy eligibility for 2021. I don't believe either of us will go back to work (unemployment may turn into early retirement), and it's too soon to know if unemployment benefits will get enhanced and/or extended. Biggest dilemma is that we're sitting on a huge pile (about $1M) of cash from the home sale, and we might want to buy a new home mid-year or so, after our one-year rental ends. Therefore, I don't want to invest the cash in anything too risky. At the same time, I don't want to squander the opportunity to generate some income from the cash position. Aside from this cash, we have a comfortable portfolio invested in basically the three-fund approach. If I invest the cash completely by adding to the Vanguard Total Bond position (as one option that would be comfortable to me), I calculate that the dividends from that alone will generate about $2,000 additional dividends per month--nice as fixed income, but the resulting $24,000 (if we don't buy a new home) added to our usual annual interest/dividend/cap gain income plus unemployment could put us over the cliff again.

What does one do in a situation like mine? (Hence the use of "hide" income in the topic title.) I know I can simply feel lucky to have the proceeds of the home sale go to use to generate $2,000 of monthly income, thereby exceeding the loss of the ACA subsidy, but wondering if I'm missing out on some strategy to maximize income opportunity while still being able to be eligible for the ACA subsidy.

Thanks for any thoughts/advice.
How are you getting 2.4% yield from total bond index?
The current yield seems to be about 1/2 of that.
Once in a while you get shown the light, in the strangest of places if you look at it right.
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Re: How to best invest cash to "hide" income for a year? (house sale, ACA cliff, etc.)

Post by Ron Ronnerson »

OkanePlease wrote: Sat Nov 21, 2020 2:10 pm
Ron Ronnerson wrote: Sat Nov 21, 2020 1:57 pm
The premium tax credit is just another name for the ACA subsidy. If you purchase the home mid-year and keep your dividends for 2021 to $12k or thereabouts, would you be under the income threshold to qualify for the subsidy?
Ah, silly me... of course! I'm not sure about the timing, but I am sure that I'll be keeping close tabs on numbers throughout the year.
That’s a good idea. Knowing how much over the ACA cut-off the dividend income will put you is important. For example, if $23k in dividends allows you to qualify for the subsidy but $24k means you won’t, the $1k extra in dividend income costs you $12k in tax credit. In that case, it is better to not generate that last $1k since it is actually worth -$11k. If you are able to provide specific numbers, you might be able to get suggestions for your exact situation. These details are important for optimization.
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OkanePlease
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Re: How to best invest cash to "hide" income for a year? (house sale, ACA cliff, etc.)

Post by OkanePlease »

marcopolo wrote: Sat Nov 21, 2020 2:20 pm
OkanePlease wrote: Sat Nov 21, 2020 12:41 pm If I invest the [$1M] cash completely by adding to the Vanguard Total Bond position (as one option that would be comfortable to me), I calculate that the dividends from that alone will generate about $2,000 additional dividends per month--nice as fixed income, but the resulting $24,000 (if we don't buy a new home) added to our usual annual interest/dividend/cap gain income plus unemployment could put us over the cliff again.

What does one do in a situation like mine? (Hence the use of "hide" income in the topic title.) I know I can simply feel lucky to have the proceeds of the home sale go to use to generate $2,000 of monthly income, thereby exceeding the loss of the ACA subsidy, but wondering if I'm missing out on some strategy to maximize income opportunity while still being able to be eligible for the ACA subsidy.

Thanks for any thoughts/advice.
How are you getting 2.4% yield from total bond index?
The current yield seems to be about 1/2 of that.
marcopolo, I'm glad you chimed in. Good reality check. I have had a $525K position in Total Bond that had been generating over $1,000 in dividends monthly... until recently. I see that the dividend has dipped in the past couple of months. So I should adjust my calculation. I was using ballpark numbers of $2,000 in monthly dividends for a $1M investment in Total Bond. Looks like it's currently more like $1,800-$1,900. Still exceeding the ACA monthly subsidy, though.
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OkanePlease
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Re: How to invest huge cash to "hide" income for a year? (house sale, ACA cliff, etc.)

Post by OkanePlease »

KlangFool wrote: Sat Nov 21, 2020 2:03 pm
OkanePlease wrote: Sat Nov 21, 2020 12:57 pm
KlangFool wrote: Sat Nov 21, 2020 12:52 pm OP,

It is probably too late for you now. One of the solutions is to sign up for COBRA insurance for the year that you are unemployed. Then, use ACA insurance for the following year.

KlangFool
KlangFool, not surprising to me, COBRA costs were considerably higher than what I found in the ACA marketplace even without subsidies!
Yes, that is true. But, it gives you one year to work out your tax/ACA subsidy issues.


KlangFool
Yeah, that option has come and gone. But thanks anyway. You've given me good guidance in this forum previously, so please know your time and thoughts are appreciated!
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Re: How to best invest cash to "hide" income for a year? (house sale, ACA cliff, etc.)

Post by ivgrivchuck »

OkanePlease wrote: Sat Nov 21, 2020 12:41 pm Thanks for any thoughts/advice.
Savings accounts and no-penalty-cds sound like your best option.

Bonds are not risk-free. There is duration risk and credit risk. I wouldn't recommend them considering your situation.

If you want to take some risk to earn higher returns it's better to do it in the stock market.
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Re: How to best invest cash to "hide" income for a year? (house sale, ACA cliff, etc.)

Post by indexfundfan »

Also take a look at MYGAs for any money you don't need access for three years or longer. Any income earned is deferred until maturity, and you can continue to defer the income by renewing with a new MYGA.
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privateer79
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Re: How to best invest cash to "hide" income for a year? (house sale, ACA cliff, etc.)

Post by privateer79 »

it will be more variable over the short term, but I like that Berkshire Hathaway doesn't issue a dividend, and essentially allows you to chose when you take any income through capital gains.....

if you won't put all of that million into the next house, have other sources of taxable investments that can be tapped without cap gains, or are willing to take a mortgage, that might be a useful investment option.
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Re: How to best invest cash to "hide" income for a year? (house sale, ACA cliff, etc.)

Post by JBTX »

Not necessarily recommending it, it isn't zero risk, but if you found a tax efficient long short ETF that could be an interesting alternative. The below list you can sort by dividends.

https://etfdb.com/etfs/alternatives/lon ... esc&page=1

As to the recommendation of Berkshire above, I had a similar thought, but perhaps hedge it with a short or a put. I'm not an expert in such matters as to how to safely set it up and not run afoul of any wash sale rules.
skierrex
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Re: How to best invest cash to "hide" income for a year? (house sale, ACA cliff, etc.)

Post by skierrex »

I like BRKB.

Some risk, but at least you might get a reward.
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OkanePlease
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Re: How to best invest cash to "hide" income for a year? (house sale, ACA cliff, etc.)

Post by OkanePlease »

indexfundfan wrote: Sat Nov 21, 2020 8:25 pm Also take a look at MYGAs for any money you don't need access for three years or longer. Any income earned is deferred until maturity, and you can continue to defer the income by renewing with a new MYGA.
Thanks, indexfundfan. I've always been annuity-adverse, but that's based on a bias not grounded in research. I'll take a look.
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Re: How to best invest cash to "hide" income for a year? (house sale, ACA cliff, etc.)

Post by indexfundfan »

OkanePlease wrote: Sun Nov 22, 2020 10:14 am
indexfundfan wrote: Sat Nov 21, 2020 8:25 pm Also take a look at MYGAs for any money you don't need access for three years or longer. Any income earned is deferred until maturity, and you can continue to defer the income by renewing with a new MYGA.
Thanks, indexfundfan. I've always been annuity-adverse, but that's based on a bias not grounded in research. I'll take a look.
There have been several MYGA discussions. Here's one

viewtopic.php?f=1&t=325889
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OkanePlease
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Re: How to best invest cash to "hide" income for a year? (house sale, ACA cliff, etc.)

Post by OkanePlease »

indexfundfan wrote: Sun Nov 22, 2020 12:36 pm
OkanePlease wrote: Sun Nov 22, 2020 10:14 am
indexfundfan wrote: Sat Nov 21, 2020 8:25 pm Also take a look at MYGAs for any money you don't need access for three years or longer. Any income earned is deferred until maturity, and you can continue to defer the income by renewing with a new MYGA.
Thanks, indexfundfan. I've always been annuity-adverse, but that's based on a bias not grounded in research. I'll take a look.
There have been several MYGA discussions. Here's one

viewtopic.php?f=1&t=325889
Thanks again, indexfundfan. The link is helpful!
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