I’ve got a big chunk of change coming in soon, and I get to keep all of it until April 2009, when I’ll have to give the tax man about 44% of it (combined Fed. and California state). (I’m a California resident.)
I’m looking for the best place to put it to maximize my after-tax return on the interest it earns.
Because my investment horizon is short (about 13 - 14 months), I’m not willing to risk the principal.
So far I’ve found:
5.45% 3 and 6 month CD from Countrywide Bank.
5.05% “Complete Savings” account from Etrade Bank
3.3% Vanguard CA and Fed tax-exempt money market func (VCTXX)
I probably wouldn’t consider the Countrywide CD because of the financial trouble they are in. The Etrade taxable account returns 5.05 * (1 - .44) = 2.82% after taxes. So the Vanguard tax-exempt money fund is still giving the best after-tax return.
I’m looking for ideas for how to maximize my return on this money without risking the principal. Any one have any better ideas than these? (And before you ask, no, I’m not going to give the money to you. )
I coulda sworn I was in General Questions when I wrote this message. MODS: can you move this post to GQ please (assuming that is the correct forum for it).
As far as I’m concerned, you’re already investigating along pretty much the only lines open to you if you don’t want any risk: something interest-bearing with deposit insurance. Of course, it depends on the amount. If the amount is above the deposit insurance limit, you have some thinking to do. You could also look at solid corporate/government bonds and t-bills, but I doubt you’ll come out much ahead of what you’ve already found.
And if you’re already dead certain about the amount of tax you’ll have to pay on your chunk of change, you could place that amount in a safe, interest-bearing vehicle along the lines of what you’ve mentioned, and then invest the remainder with a bit more risk.
When I read your reply there was an ad at the bottom of the page for Millenium Bank (http://www.mlnbank.com) who are offering a 1 year $100,000 CD at 7.25%. The catch? I guess there are 3: 1) There is NO early withdrawal, even with penalties. 2) There is no deposit insurance. 3) They are an offshore bank located in St. Vincent and the Grenadines.
I can live with the no early withdrawal. The no deposit insurance could be acceptable if I was convinced of the bank’s safety. I wouldn’t be adverse to investing offshore, again assuming I was convinced of the bank’s safety.
Does anyone have any experience with Milenium Bank? Their website says they are a wholly owned subsidiary of United Trust of Switzerland S. A. who has been in business since 1931. I’d like to hear if anyone has personal experience with this bank…
I’m afraid that there is no such thing as a risk free investment. Even US treasuries (the canonical risk free investment) have, at a conservative estimate, something over a chance of one in a thousand of becoming practically worthless in any one year. To answer your question a bit better we need a slightly better idea of your real level of risk aversion and how great the sum you talk of is. A “big chunk of change” is really quite ambiguous.
Are they federally insured, and is your investment amount within the federal insurable limit? If so, I can’t imagine that the risk is any worse than your local bank.
:dubious: Can you go into a little more detail here? Have any treasury securities ever become worthless? Genuine question, but this is something that I’ve never heard before. Perhaps you are talking about the value of a bond going down as interest rates move up, but you are still guaranteed the original interest rate.
Well, the REAL catch about Millennium Bank is that they seem to be a scam. With just a little Google Fu, you can see a lot of scepticism about this bank, and several stories of people having problems with it (such as, having trouble getting their money back after the CD term was over).
I think a little more than 5% is the best you’ll be able to do if you want a totally risk-free investment (for a certain definition of “totally.”) The various online banks like ING Direct and the others you’ve researched can provide FDIC-insured CDs and savings accounts at those rates. If you are a Citibank customer, they also have an FDIC-insured “e-savings” product which offers similar rates. (I use it, but you have to be a B&M Citibank customer already to qualify.)
You can split the money up into multiple banks if it’s more than $100,000. (Remember that FDIC protects up to $100,000 per depositor per bank, so don’t buy multiple $100,000 CDs at the same bank.)
Ah, thanks. Didn’t mean to pry. Still, that is a decent interest rate if federally insured, and if you could find another (or however many you need) with a similar rate you could divide the money up into multiple accounts. IIRC, the insurable limit is per bank, not per person.
I know someone who is doing just this with the various banks highest “money market account” (?) which is risk free and you can take it out at any time penalty free and they told me they get about 225.00 in interest per account per month.
A 5% return, after taxes, is only a 2.8% after tax return in my tax bracket.
Even the Countrywide Bank 5.45% return is only a 3.05% return.
The Vanguard tax-exempt money market account is currently giving about a 3.3% tax exempt return.
Has anyone come across a tax exempt return better than 3.3%?
I found this website: http://www.money-rates.com/ which lists rates for all sorts of accounts. I’m looking at it now to see if there’s anything I might want to put my own money in.
I’ve been throwing an idea around that might work under the Canadian tax system, and I can see no reason why it wouldn’t work under the US tax system as well:
Enter into a risk-free (in theory) set of futures contracts that end up with a net payout equal to the risk free treasury rate
For example, you could sell short Single Stock Futures on a blue chip stock expiring on the date that you want, while simultaneously going long on the underlying stock. Once you reach the date, you can deliver the underlying stocks (or otherwise liquidate your position) and make the treasury rate as a capital gain, less the trade commissions. I see your time horizon is long enough for it to be counted as a long term capital gain for tax purposes (not an expert on US tax code).
I certainly have not thought this all the way through, so feel free to tell me why it won’t work.
You may want to check into the AMT situation. I invested in a tax-free municipal bond fund (Vanguard) because of the damage my tax rate did to regular interest. However, I then discovered that tax-free muni bonds are not tax-free under AMT, which I am hit by, so these bonds were totally unsuitable. I have no idea if the same issue applies to the tax-exempt money market account, or if you suffer from AMT.
I don’t think you really want advice from a message board. You sound as though you’re already pretty savvy about investments, tax rates, etc., and you’re talking about serious change here. Don’t you have anyone more professional than us who can help you out? I’m assuming (maybe incorrectly) that your chunk of change is coming from someone who had some smarts. Maybe their advisor/broker/banker can help?
Christ on a pogo stick. Risk free, by definition, means US Treasuries and nothing fucking else on the planet. Any interest rate greater than the bench mark US treasuries means that risk goes up. Ask anyone holding some of that sub prime triple A rated radioactive shit.
You may, at slightly greater risk, be able to invest in CA bonds that reduce your tax exposure. But again, this is at greater risk.
Sheeple, one last time, if it pays interest than a US treasury, it ain’t risk free. Learn this at your own peril.
MyToeHurts: do you have any kind of a cite that shows a US treasury not being paid off?
Two statisticians were out hunting, and saw a deer. They both shot at the same time. One missed ten feet to the left, the other ten feet to the right. They high-fived each other and said “Together, we hit it!”
Saying that the US may not be here 1000 years from now, and then interpreting that to mean that any investment in US securities has “at a conservative estimate, something over a chance of one in a thousand of becoming practically worthless in any one year” may make sense to a statistician, but not to me.
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