Broker Check

Investing in Taxable vs Non-Taxable Money Market Instruments

| November 01, 2023

Do you, as a taxpayer or a tax advisor, analyze the after-tax implications of buying a taxable money market fund versus a Treasury fund or a tax-exempt money fund? The same need to analyze these implications is true for individual Treasury bills and bonds, corporate bonds, taxable bond funds, or certificates of deposit.

In the days of miniscule interest rates, this did not have a material tax effect but, now in 2023 with interest rates rising, it will matter much more as it may materially increase your 2023 taxable income.

If you had $1,000,000 in a taxable fund at 5% and you earned $50,000 in interest, do you know the tax impact if you lived in NYC, NY State or NJ based on the type of money market fund you owned?  In addition, there is the federal impact of the 3.8% Medicare Surtax (Obama tax) on net investment income for those whose AGI exceeds $200,000 to $250,000?

Would you be better off in a US Treasury fund, presuming there is no state income or city income taxes due, or would you be better off in a tax-free municipal bond fund?

NOT ALL TREASURY FUNDS ARE CREATED EQUAL. Do you know what securities are held in a specific treasury fund; and if that fund receives a state and local tax exemption? If you invest in a US treasury obligation fund that invests in treasury repurchase agreements, you will not qualify for the state and local tax exemption. Compare those returns to investing in a fund that owns the underlying bonds that would qualify for the state and local exemption.  The results will be tax beneficial.

This is why it is important to ask you advisor about the tax specific mandate of the underlying money market and your investments. 

We have prepared and attached the various options that are available at Charles Schwab & Co.  Schwab offers the following:

 

  • 9 taxable money funds that trade at $1 and one taxable (SVUXX) that is variable (i.e.: can trade above or below $1). Two hold repurchase agreements, commercial paper, and certificates of deposit, two hold US various types of government securities, and four are US Treasury funds. Of these, two hold repurchase agreements that are subject to state and city tax, and two are pure US Treasury obligation funds that are not subject to either state or city tax. Additionally, SVUXX holds corporate fixed income securities.
  • 8 tax exempt funds. Two are national, two are AMT tax free money funds, two are California funds, and two are NY funds.

 

We are only focused on taxpayers who are in the highest tax bracket.  We have created a Money Market Analysis where you can enter the current yield of the money market fund and the applicable tax cost to calculate your potential net return.

 

Strategic Wealth Management Group and its affiliates do not provide tax, legal or accounting advice.  This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice.  You should consult your own tax, legal and accounting advisors before engaging in any transaction.