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Short Term Investing

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  • Avatar mlc7 
    Participant
    Status: Physician
    Posts: 23
    Joined: 02/18/2018
    medical school scholarship sponsor

    I would like to invest $50000 for about 1 year when I would need the money.

    What would be the most effective, low risk and tax efficient way ? I would like to stay with Fidelity or Vanguard where my current funds are.

    Thank you

    #189188 Reply
    ENT Doc ENT Doc 
    Participant
    Status: Physician
    Posts: 3452
    Joined: 01/14/2017

    What are your federal and state marginal tax rates?

    #189189 Reply
    Avatar mlc7 
    Participant
    Status: Physician
    Posts: 23
    Joined: 02/18/2018

    37% and 6.99%

    #189192 Reply
    ENT Doc ENT Doc 
    Participant
    Status: Physician
    Posts: 3452
    Joined: 01/14/2017

    VMMXX and VMSXX are going to have similar after-tax yields.  Those would be my go-to’s in a situation like this.  You could also attempt state municipal bond purchase directly from your state, which I assume is CT given your 6.99%, to save on that state tax:

    Buy CT Bonds

    You’d have to check the bond yields they’re offering though and duration.

    #189194 Reply
    Liked by Peds
    Avatar mlc7 
    Participant
    Status: Physician
    Posts: 23
    Joined: 02/18/2018

    Thank you

    #189196 Reply
    Liked by ENT Doc
    Faithful Steward Faithful Steward 
    Participant
    Status: Financial Advisor, Small Business Owner
    Posts: 481
    Joined: 06/12/2017

    Agree with @ENT Doc! With a 1-year timeframe, you’re not an investor, you’re a saver. The two Vangiard money market funds he referenced are excellent tools for the job.

    Michael Peterson, CFP® | Faithful Steward Wealth Advisors
    https://ProsperousPhysician.com | (717) 496-0900

    #189202 Reply
    Liked by jfoxcpacfp, Peds, mlc7
    Avatar Peds 
    Participant
    Status: Physician
    Posts: 4217
    Joined: 01/08/2016
    you’re not an investor, you’re a saver.

    Click to expand…

    yes.

    #189203 Reply
    Avatar Xeno 
    Participant
    Status: Physician
    Posts: 128
    Joined: 01/24/2016

    You can buy 1-year treasury bills at auction for free at both places, I believe. You buy them in $1,000 increments, paying about $975 today for $1,000 in a year. The interest isn’t taxable until the tax year in which they mature, in this case 2020. Also, the interest isn’t taxable at a state level, so the equivalent fully taxable yield is 2.6 / 0.93 = 2.8%. They are sold monthly. The next issue settles 2/28/19 and matures 2/27/20. The size of the issue is announced on 2/21/19 and the auction takes place 2/26/19. My brokerage allows me to place market orders after the announcement date, which are then filled on the auction date. The ones I bought at the auction a few weeks ago were $974.57 per $1,000, which means I have no taxable interest in 2019, and the $25.43 interest I make when they mature at the end of January, 2020 will only be taxed federally and only on the tax bill due in April, 2021. In your case, you could buy $51,000 face value (matures 2/27/20) for ~$49,725 on 2/28/19. Unlike a CD, the money is highly liquid and penalty-free if you want to sell it before it matures, although there may be a nominal transactional cost.

    #189585 Reply
    Liked by Tim
    Avatar mlc7 
    Participant
    Status: Physician
    Posts: 23
    Joined: 02/18/2018

    Never tired that before but sounds interesting and safe. Thank you for a detailed explanation.

    #189586 Reply
    Avatar Xeno 
    Participant
    Status: Physician
    Posts: 128
    Joined: 01/24/2016

    You’re most welcome. There’s a whole generation of investors for whom short term treasury bills only recently started to make sense, myself included. The yields are now competitive and the SALT deduction being capped at $10K really means there’s even less incentive to pay the 6.99% tax on anything you don’t have to. Once I realized I could buy them directly from my brokerage account and didn’t need to create an account with the treasury or anything, I started buying a range of them, from 4-week to 52-week issues. I think the longer issues (e.g. 2-year, 5-year bonds rather than bills) pay interest more frequently and the taxes are due on that interest prior to maturity, so I haven’t ventured into issues with duration longer than 52 weeks. Also, the yield curve currently has it’s first peak right around 1 year.

    #189590 Reply
    Liked by mlc7

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