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.
Certainly, back in the days of miniscule interest rates, this may not have mattered but, now in 2023, it will matter much more, especially when you receive your Form 1099 for the tax year 2023 (by March 2024) stating 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 how much you would owe in taxes if you lived in NYC, NY State or NJ based on the type of money market fund you owned? Do you understand the 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 the treasury fund that you own; and if that fund receives a state and local tax exemption? If you are an investor 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.
This is why it is important to know the specific mandate of the underlying money market. Have you as a taxpayer or you as a tax advisory discussed this with your client?
We took it upon ourselves to analyze 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.