Which account is more tax-efficient for cash in money market funds and leveraged funds?

Related Materials

• Previous presentation: Cash is like air: it may not generate profit, but it can keep you alive! Rev 1.1
• Next presentation: Smart Rebalancing Method

Document Text

Money market funds such as SWVXX, SGOV, BIL, and BOXX can also serve as the cash position.

BOXX does not pay dividends; its price grows with interest. If you do not sell, you do not pay tax. If you sell, you pay capital gains tax. If held for more than one year, it is taxed at the long-term capital gains rate. Compared with interest income being included in ordinary income, this has a tax-deferral effect.

If You Invest in SGOV or BIL, They Pay Dividends, and the Interest Is Subject Only to Federal Tax, Not State Tax

If you are under age 59 1/2, the best place for six months of emergency cash is a ROTH account, because you can use it immediately when needed. If you use pledged securities lending, you do not need to prepare a separate emergency fund. If you have a traditional retirement account, put cash there as much as possible to slow the growth of the traditional retirement account.

Do not put the leveraged fund QLD in a brokerage account if you can avoid it; place it in a ROTH account if possible. If you do not have a ROTH, then use a traditional IRA.

If you want to hedge beta, invest the leveraged fund QLD in the ROTH account and place the same amount in money market assets in the traditional account. At this point, cash in the retirement account, whether SWVXX, BIL, SGOV, or BOXX, can all serve the same tax-deferral function. This lets the ROTH IRA grow faster while slowing the taxable growth of the traditional IRA, which can save tax in future conversions.