Savings account interest rates are pretty much zero. That said, I'd like to keep my emergency fund in a bond or stock index fund. For tax purposes, would this money that I may need to withdraw from time to time (in fact, I know I'll need it for a couple big purchases this summer) be better off in a stock index or bond index?
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Putting Cash into Bond or Stock fund temporarily
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Neither. If you know you'll be needing this money within a few months, it shouldn't be invested. In should be in a savings account or money market account. Maybe a CD if you know the timeline for sure.
Keep in mind that fund prices fluctuate, both up and, more importantly, down. You don't want to go to withdraw the money and not have enough for what you needed it for in the first place. Also, every time you sell shares of a fund, it is a taxable transaction which you'll have to report when you file your taxes next year. Seems like an awful lot of risk and hassle for money you will be taking out so soon.Steve
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Money you'll need in a few months should be in a money market or CD. Do not invest it.seek knowledge, not answers
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Originally posted by Relmiw View PostSavings account interest rates are pretty much zero. That said, I'd like to keep my emergency fund in a bond or stock index fund. For tax purposes, would this money that I may need to withdraw from time to time (in fact, I know I'll need it for a couple big purchases this summer) be better off in a stock index or bond index?Brian
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Money needed for a specific goal within 5 years should never be in stocks. How would you feel about losing possibly 30% of the principal over the short term when you need the money to buy a car, house downpayment, emergency, etc, and you have to liquidate it at a large loss?
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Originally posted by Relmiw View PostFor tax purposes...
So to answer your question, I don't think there is any difference. You are also subject to wash sale rules with either, should you sell/buy the same fund or a substantially similar fund within 30 days.
Having said that, I'll also go against the grain and say I think something like TLH (iShares Barclays 10-20 Year Treasury) could be a good option. (Not sure that is the "best" option; my point being that you could get a low risk, treasuries or bond ETF, and do better than cash rates.)
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Originally posted by violet80907 View PostIf you are considering buying funds (ETFs, mutual funds), I am not aware of any tax related difference. You buy a fund, it has capital gains/losses, all reported and taxed on schedule D. It does not matter if a fund is primarily stocks, bonds, or a mix; they are treated the same.
Originally posted by violet80907 View PostHaving said that, I'll also go against the grain and say I think something like TLH (iShares Barclays 10-20 Year Treasury) could be a good option. (Not sure that is the "best" option; my point being that you could get a low risk, treasuries or bond ETF, and do better than cash rates.)
I know you only threw that out there as an option but I just wanted to point out to the OP to not just look at yield.The easiest thing of all is to deceive one's self; for what a man wishes, he generally believes to be true.
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Disneysteve and Feh, thank you for your concern over volatility. I am well aware of the relative risks inherit in investing in bonds and stocks. That said, in the long term, it is more risky to opt out of those investments. Sure there may be some major fluctuation in the short term, but we are not capable to time the market. Looking at past rates, over time money invested in these sectors is much more profitable than savings moneymarket, or CD accounts.
Cascade, nobody wants to lose 30% of their investment, but that would not be especially problematic in this case.
BJL, the purpose of having an emergency fund is to safegaurd you against immediate dangers. Traditionally it's around six month's expenses right? No reason you'd need that in a low yield if it can be quickly withdrawn from a high yield account, and there's enough on hand to cover twelve month's expenses even with a 50% drop. The expenses coming up are a wedding and new car
But back on the topic of where to invest. The problem with stocks as a temporary holding spot for money is the difference between short term capital gains (holding less than a year) and long term capital gains (holding more than a year).
Either of these is a better choice than CDs, but I'm wondering how they stack up to the bond taxation rate.
Violet, that is interesting about the wash sale rule. I read up on it, but I'm not good enough with tax policies to have been planning on gaming the system like that. Good to know though, thanks.
Kv968, it sounds like you're saying that even if I sells stocks over a short amount of time, it's taxed at a lesser rate than bonds would be?
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If you're in the USA & taxes are your primary concern, add a Tax-Exempt (or Tax-Managed) Fund to your list of options. Vanguard has 20 such funds. They even have state-specific tax-exempt funds if you live in California, Florida, Massachusetts, New Jersey, New York, Ohio, or Pennsylvania. If you decide to go with Vanguard, go for Admiral shares if available. Minimum investment will be $10K; if a 30% drop doesn't faze you and funds are for a car, wedding, and EF meeting that minimum should be a piece of cake.
I STRONGLY suggest that you put the money you will want this summer in to an account at a bank of credit union. Opening an account for a short term only that offers a bonus will give your interest earnings a big boost. You can search for bank promos here. Do a local search for your state. I usually find better deals with state searches than national. Bank Promotions and OffersLast edited by scfr; 02-16-2013, 01:45 PM.
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