Emergency Fund in PP vs Tax Efficiency

[DragonJoey3]

Something I'm struggling with my PP over is the tax efficiency of holding my cash portion outside of Tax-free/Tax-deferred accounts.  It seems clear that the most tax efficient of the 4 assets is Gold (only being subject to capital gains taxes when sold).  As such I try to hold as much gold as possible in my taxable accounts while throwing the other 3 assets into Roth IRA's, 401k, etc...

The difficulty is I also want to have an emergency fund available (you know for emergencies).  That fund seems obvious that it should be held in cash, but by keeping that cash outside my PP I'm essentially making myself cash heavy.  However if I put the cash into the portfolio and balance it, I'll end up with (at the moment still early on in the accumulation phase) a majority of my cash being my emergency fund and taxable.

I grant you that at the moment cash isn't exactly paying "huge dividends" to be taxed anyway, but it is clearly generating more taxable events than Gold.

I suspect that I'm just over-estimating the impact of taxes on the small amount that is 3-6 months expenses, but I'm curious what others do with their emergency funds.  Do you put yours in your PP?  If so is it in a taxable account, or do you plan to potentially sell some other asset/re-balance in the event of a need?

~DragonJoey3

[Cortopassi]

I keep my emergency fund/partial PP cash readily available.  For, you know, emergencies! 

And for peace of mind that I can get to it in any situation.

[ochotona]

I would say, don't obsess over the taxes. The cash component has the "second best" tax profile of the four components. Why? Because long Treasuries pay more interest... and the S&P500 divided yield is more than the interest you're getting on your cash.

If you are close to age 59.5, you can keep your cash in retirement accounts, because you can get to it in case of emergency.

[ochotona]

MAYBE you could use a very short term very high quality MUNI bond fund or ETF as cash if the taxes really roil you, but you'd have to look at it frequently (monthly or so) to make sure the share value is holding up, and ditch it if bad issuer news or interest rate hikes torpedo the share price. you don't pay taxes on municipal bond interest.

Having said that, I would not personally use that for my cash. I'm just brain-storming. I keep most of mine at Ally Bank.

[rickb]

It seems clear that the most tax efficient of the 4 assets is Gold (only being subject to capital gains taxes when sold).  As such I try to hold as much gold as possible in my taxable accounts while throwing the other 3 assets into Roth IRA's, 401k, etc...

A clarification - gold in most forms, i.e. physical coins and any of the ETFs including GLD, IAU, and SGOL, is subject to the collectibles tax not the capital gains tax.  The collectibles tax is the same as your regular income tax except capped at 28%.  So, yes, you pay tax on the "capital gain" but you don't pay at the reduced capital gains rate.

With the takeover of GTU by PHYS, I believe there is now a single exception to this which is PHYS.  If you file the right forms every year you own it (8621), you can end up paying the capital gains rate on gains in PHYS.

Full disclosure: I am not a financial panther nor have I ever played one on the Simpsons.

[Libertarian666]

It seems clear that the most tax efficient of the 4 assets is Gold (only being subject to capital gains taxes when sold).  As such I try to hold as much gold as possible in my taxable accounts while throwing the other 3 assets into Roth IRA's, 401k, etc...

A clarification - gold in most forms, i.e. physical coins and any of the ETFs including GLD, IAU, and SGOL, is subject to the collectibles tax not the capital gains tax.  The collectibles tax is the same as your regular income tax except capped at 28%.  So, yes, you pay tax on the "capital gain" but you don't pay at the reduced capital gains rate.

With the takeover of GTU by PHYS, I believe there is now a single exception to this which is PHYS.  If you file the right forms every year you own it (8621), you can end up paying the capital gains rate on gains in PHYS.

Full disclosure: I am not a financial panther nor have I ever played one on the Simpsons.

And CEF, of course, although that also contains a lot of silver.

[Tortoise]

I suspect that I'm just over-estimating the impact of taxes on the small amount that is 3-6 months expenses, but I'm curious what others do with their emergency funds.  Do you put yours in your PP?  If so is it in a taxable account, or do you plan to potentially sell some other asset/re-balance in the event of a need?

My approach is to have a separate PP in each type of account I have--401(k), Roth IRA, traditional IRA, and taxable long-term savings--plus separate taxable cash funds for emergencies and short- to intermediate-term savings goals.

It means I'm very cash-heavy if I look at all of my assets combined, but to me that's fine since each account type has a different purpose to me and therefore a different time horizon. The PP has a certain time horizon and is therefore not necessarily ideal for all types of accounts.

Some folks would probably consider my "view each account type separately" approach overly complicated, but I think trying to manage all of your accounts--taxable and tax-sheltered--as one giant PP can also be a bit complicated, just in a different way. Pick your poison.

The tax on my taxable cash doesn't bother me much since it's miniscule at current interest rates.

[sophie]

I wouldn't be comfortable without a nice wad of cash in the bank savings account to cover emergencies.  Paying taxes on the interest isn't enough to change that.  Incidentally, interest on a bank savings account is LESS than dividend payouts on a stock index fund, so you can argue that at the moment, cash is highly tax efficient.

Some other options for emergency fund cash:

- US savings bonds (Treasury Direct) - no state/local tax, and federal taxes are deferred until you cash the bond or it matures in 30 years.

- Roth IRA.  You can withdraw contributions at any time.

- Health savings account.  You can save up your medical expenses and use them to justify withdrawals years after the fact.

- Under your mattress.  Or in a safety deposit box.  No interest AND no taxes.

Muni bonds are attractive if you are in a high tax bracket, but they don't have a place in the PP.