Accounts for cash reserve

This post is for knowledge sharing only. It is not intended to be investment or tax advice.


[Update] Consider BOXX ETF for more tax advantages.


Before investing risky assets, one should reserve enough cash for both expected expenses (like down payment of home purchase) and unexpected expenses (in case of layoff for example).  The goal of cash reserve is NOT high return, but safety and liquidity. Even so, we still want to earn some interest from the cash reserve.

In the table below, we list some common options for high income CA residents to park cash reserve for a relatively high interest rate or after tax earnings as of January 12, 2024. Note that interest is taxed as ordinary income plus a so called net investment income tax. The total tax rate can be as high as 51% including 37% federal income tax, around 10% CA state income tax and nearly 4% net investment income tax.


Account Interest Rate Total Tax Rate After Tax Earning
Marcus High Yield Saving [1] 5.50% [2] 51% 2.70%
Cit Platinum Savings [1] (NOT Citi) 5.05% 51% 2.47%
4 Week Tresuary Bill [3] 5.39% 41% [4] 3.18%
Series I Saving Bond [5] 5.27% [6] Tax Deferred 5.27% [7]
Vanguard Treasury Money Market Fund (VUSXX) [8] 5.29% - 0.09% [9] 41% [10] 3.07%
Cit 11 month No-Penalty CD [11] (NOT Citi) 4.9% 51% 2.40%

Table 1: Options to park cash for high interests in 01/12/2024

Notes:

[1] Cit Bank usually provides higher interest rates as compared to Discover Online Saving, Capital One 360 Performance Saving, Ally Saving as well as Marcus High Yield Saving without referral bonus. Also note that

  • Open bonus of high yield saving accounts is taxed as interest.
  • In contrast, there is NO tax on the open bonus of credit cards. 

[2] Include 1.00% referral bonus. Without the referral bonus, the interest rate is only 4.50%.

[3] U.S. treasury securities are believed to be riskless in real world. Short term treasury bills are of highest interest rate, especially during the period when Fed keeps raising the interest rates.

[4] There is no state income tax on the interests from treasury securities.

[5] \$10,000 purchase limit per calendar year per SSN. Also be aware of the liquidity issue: one can NOT redeem the I bond within the first year and will loose the last 3 months of interest when redeeming within the first five years.

[6] The interest rate of I bond consists of a fixed rate and an inflation rate. The fixed rate is determined at the time of purchase while the inflation rate is adjusted semi-annually.  

[7] Interest can be excluded from tax when redeeming I bonds for higher education under some conditions.

[8] This is money market fund (MMF):

[9] This is 7 day SEC yield as of 01/12/2024 minus the expense ratio. Strictly speaking, money market funds pay ordinary dividends instead of interest. But the ordinary dividends are taxed in the same way as interest.

[10] For CA state tax exemption, 2022 Instructions for Schedule CA (540) states that "If the mutual fund has at least 50 percent of its assets invested in tax-exempt U.S. obligations and/or in California or its municipal obligations, that amount of dividend is exempt from California tax. The proportion of dividends that are tax‑exempt will be shown on your annual statement or statement issued with federal Form 1099-DIV, Dividends and Distributions."

[11] No-penalty CDs are often used to lock an interest rate without sacrificing liquidity, especially when the Fed starts to decrease the interest rates. Others include Marcus 13 month no-penalty CD and Ally 11 month no-penalty CD.


Remarks on Municipal Money Market Fund:

The income from municipal bonds and municipal money market funds are tax-exempt interest and exempt-interest dividend, meaning that

  • They are exempted from federal income tax.
  • They may or may not be exempted from state income tax. 
  • Tax-exempt interest is exempted from net investment income tax; Exempt-interest dividends are generally considered tax-exempt interest for the purpose of the net investment income tax.
Therefore, for CA state residents, there will be NO tax at all for the income from California municipal money market fund! 

However, their current yield is lower than the after tax earnings from short term treasury bills, for example,
  • VCTXX:  7-day SEC yield as of 01/12/2024 is only1.47% with the expense ratio is 0.16%.
  • FSPXX:  7-day SEC yield as of 01/12/2024 is only 2.14% with the expense ratio is 0.3%.
Let's see whether it is worthy investing municipal money market fund in future.

Location: 美国加利福尼亚帕罗奥图

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