Keith Mack
While traditional bank savings and checking accounts are the first options that come to mind to place your hard-earned money, there are many other places to store your wealth that can provide better returns and flexibility. This is especially true if you are worried about the collapse of the banking system or are simply looking for alternatives that can offer higher interest rates. There are several options to consider, including money market accounts, treasury notes, and mutual funds, each with its own features, benefits, and tax implications. It's important to carefully consider the risks and tax requirements associated with each option before making a decision.
Places to put your cash outside of the bank
| Characteristics | Values |
|---|---|
| Money Market Mutual Funds (MMMFs) | Share prices are typically fixed at $1 and generate interest income. Interest earned from MMMFs that invest in municipal securities can be exempt from federal, state, and local taxes. |
| Treasury bills | Highly liquid and virtually risk-free. Can be purchased in increments of $100 through an investment bank, a broker, or at auction on the TreasuryDirect.gov website. |
| Treasury notes | Issued by the U.S. government and are a safe and reliable investment. They come with maturities ranging from 2 to 10 years and are backed by the full faith and credit of the U.S. |
| HYSA | Emergency funds can be kept liquid in a High-Yield Savings Account (HYSA) and can also earn 4-5% interest. |
| SPAXX | Can earn say 4.5% over the year. |
| Money orders | The IRS accepts money orders as payment for taxes. |
| Prepaid debit card | The IRS accepts payments online via a prepaid debit card. |
| Cash | Cash can be paid directly to the IRS at a Taxpayer Assistance Center (TAC). |
| Foreign currency | Cash can be converted into foreign currency and mailed anywhere in the world without limit. Amounts over $10,000 must be reported to U.S. customs authorities with a Currency Reporting Form (FinCen 105). |
| Checks | Cash can be converted into checks and mailed anywhere in the world without limit. Amounts over $10,000 must be reported to U.S. customs authorities with a Currency Reporting Form (FinCen 105). |
| Brokerage sweep programs | Client cash is swept into FDIC-insured bank accounts. Deposits may be spread across multiple banks to provide higher levels of FDIC protection. |
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What You'll Learn
Money Market Mutual Funds (MMMFs)
MMMFs are governed by regional regulations that stipulate guidelines that the funds must adhere to, including credit exposure requirements, liquidity requirements, and duration constraints. They are required to maintain sufficient liquidity to meet reasonably foreseeable redemptions. Generally, they must invest at least 10% of their portfolios in assets that can provide daily liquidity and at least 30% in assets that can provide weekly liquidity. MMMFs are different from money market accounts offered by banks and credit unions, as they are not insured by the Federal Deposit Insurance Corporation (FDIC).
MMMFs invest in high-quality, short-term debt instruments, cash, and cash equivalents. They blend highly-rated, short-term securities with longer-dated securities (up to 397 days for most funds). Some MMMFs seek to maintain a constant net asset value (NAV) of $1.00 in the respective currency, while others float their NAV to the fourth decimal place. MMMFs are not designed to generate high yields, but rather to offer investors the potential for income that approximates the rate on other overnight or short-term investments.
MMMF managers can attempt to differentiate their yields by changing risk classes, typically by shifting funds into higher-yield certificates of deposit (CDs) and commercial paper (CP) and away from lower-yield Treasury securities. Investors should be curious about whether the MMMF average maturity index (AMI) and changes in that average maturity provide useful information in terms of impending short-term interest rate changes. Yield data on MMMFs is readily available and may easily influence investors' selection of particular funds.
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Treasury bills
The interest earned on T-bills is subject to federal income taxes but is exempt from state and local taxes. This makes T-bills attractive to investors in high-income tax states, such as California and New York, where the state tax exemption provides a significant advantage over other short-term, fixed-income assets. Investors can opt to have up to 50% of their interest earnings automatically withheld, simplifying the process of paying federal taxes.
It is important to note that if a T-bill is sold before maturity, the gains may not be state tax-exempt. In this case, the gains may be considered ordinary income and subject to state taxes. Additionally, T-bills purchased on the secondary market at a market discount may be subject to capital gains taxes if sold before maturity.
T-bills are sold in electronic form and can be purchased directly from the US Treasury through TreasuryDirect.gov or through brokers such as Charles Schwab, Fidelity, and E-Trade. They are offered in various maturity durations, ranging from 4 to 52 weeks, providing investors with flexibility in their investment horizons.
Overall, T-bills are a safe and liquid investment option, particularly appealing to those seeking to minimize their state tax obligations while maintaining a low-risk profile.
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Municipal securities
Municipal bonds are known for their tax advantages, as the interest earned is often excluded from gross income for federal income tax purposes. In some cases, the interest may also be exempt from state and local income taxes, making them attractive to income-oriented investors looking to reduce their tax burden. However, it's important to note that municipal bonds are not always entirely tax-free, and certain taxes may still apply depending on various factors.
Municipal bonds typically have maturities ranging from one to 30 years, with interest paid semiannually. The coupon rate represents the annual interest rate received by the investor, expressed as a percentage of the bond's principal value. While municipal bonds offer stability and tax benefits, they are subject to market fluctuations, interest rate risk, inflation risk, liquidity risk, and credit and default risks, similar to other fixed-income securities.
Municipal money market funds invest a significant portion of their assets in municipal securities, providing investors with exposure to tax-exempt interest at the federal level and potentially at the state level as well. These funds offer a way to access the benefits of municipal securities while diversifying their investments across multiple municipal issuers.
Before investing in municipal securities, it is essential to consult with an attorney or tax professional to understand the specific tax implications and risks associated with these investments. While they can provide tax advantages, the overall decision should consider an investor's financial goals, risk tolerance, and the broader investment portfolio.
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HYSA accounts
High-yield savings accounts (HYSA) are offered by financial institutions and provide an annual percentage yield (APY) that is usually a multiple of the national average APY on a traditional savings account. HYSA interest rates are often 4-5% or higher.
While HYSAs can be a great way to maximize the return on your cash holdings, the interest you earn is taxable. The interest is taxed as ordinary income, the same as your regular earnings, and must be reported on your federal tax return. You will need to fill out Form 1099-INT and Form 1040 to report your taxable interest to the IRS. Even if you don't receive a 1099-INT form, you are still required to report and pay taxes on any interest you've earned.
To reduce your tax liability, you can consider saving in tax-advantaged accounts such as a 401(k) or IRA, which are tax-deferred accounts. Additionally, you can look into tax-exempt investment options such as municipal securities or money market mutual funds (MMMFs).
It's important to remember that the goal is maximizing wealth, not minimizing taxes. Sometimes paying taxes is necessary to maximize your wealth. By keeping your money in an HYSA, you can still end up with a higher total amount, even after paying taxes, compared to keeping it in a traditional savings account with a lower interest rate.
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Cashier's checks
- Social Security number (SSN) or employer identification number (EIN)
- Taxpayer's full name
- Tax year
- Form type
It is important to note that the IRS does not accept cash payments through the mail. If you prefer to pay in cash, you should refer to the IRS guidelines for more information. Additionally, the IRS may experience delays in processing payments, so it is recommended to avoid posting questions related to payment delays on online platforms.
There have been instances where individuals accidentally sent checks to the wrong company, such as their cable company or electric company, and the IRS still cashed and credited the payment. However, it is always best to ensure that the correct information is provided to avoid any potential issues.
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Frequently asked questions
There are several alternatives to traditional bank accounts, including money market accounts, treasury bills, notes, and brokerage sweep programs. These options offer varying levels of flexibility, security, and returns.
You can consider investing in tax-exempt securities, such as municipal bonds or money market mutual funds (MMMFs), which can generate tax-free interest income. However, it's important to note that tax laws vary by state, so be sure to review your specific state's regulations.
Yes, holding large amounts of cash may attract scrutiny from tax authorities, especially if there are discrepancies between your income received and reported. Additionally, mailing or travelling with large sums of cash may require special reporting and could result in penalties if not done properly.
It is crucial to maintain meticulous records and separate business and personal expenses. Be transparent and provide necessary documentation when required. Consult a financial advisor or tax specialist for personalized advice regarding your cash holdings and tax obligations.
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