Short Term Savings -- suggestions?

taraleeDecember 13, 2004

My husband is planning on cashing in some stock options in the next few days while his company's stock is at an all time high. The money will come out to about $130k - 150k. We're planning on buying a house in about 6 months, and don't need to do anything with the money in the meantime. We're thinking that we should put it in a short term CD or money market account, but don't really know all that much about our different options. Has anyone done anything like this, and do you have some tidbits of advice? We'll go speak to our bank once we have the money, but I'd like to do some research first.

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Jonesy

I don't know if I would put it in a CD, even a short term. If you should happen to find a special house or an especially good buy your money would be tied up and you would have to pay a penalty to cash it in before it matures.

    Bookmark   December 14, 2004 at 12:21AM
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steve_o

But if you keep it in really-short-term CDs (my credit union offers CD terms as short as a month), you may forfeit none of the money at all. OTOH, the interest rates for that short a term typically approaches that of a money market, which imposes practically no penalty on withdrawal.

    Bookmark   December 14, 2004 at 9:50AM
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taralee

What are the risks associated with money market versus CD? Any?

Also, where does one go to do that kind of thing? Is it better to stick to your normal bank, or should we shop around?

    Bookmark   December 14, 2004 at 1:40PM
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steve_o

Money market accounts are FDIC-insured, just like CDs. Money market funds offered by stock brokerages, etc., are not FDIC-insured, though they may be privately-insured. Both are quite stable because they're very-short-term holdings of firms which present no significant financial risk over the terms being discussed.

The main differences will be in interest rates and in how long your money could be tied up without penalty. Even a short CD could hold your money for 30 days (which may not be a big deal if you need it for a closing, which typically takes longer than a month to schedule). Money market holdings can be redeemed in a day or so.

Where to get them? Your bank or credit union most likely offers them. So do stock brokerages. I have not canvassed rates, but I don't think they'll be so different that it pays to spend a lot of time shopping around -- especially for the short time you're likely to need it. Go for convenience in making the deposit and redeeming it.

    Bookmark   December 15, 2004 at 8:46AM
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spewey

I don't know if I would put it in a CD, even a short term. If you should happen to find a special house or an especially good buy your money would be tied up and you would have to pay a penalty to cash it in before it matures.

You only pay a penalty on the amount of interest, not the principal. Even if you lost all the interest (typical for a 30-day CD but not longer ones), you'd be no worse off than if you hid the money under your mattress.

    Bookmark   December 15, 2004 at 1:28PM
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pebbles396

My credit union offers a money market that is just like a savings account. It's actually so smart that when I go below $2500 in balance it turns into a savings account until I go above that balance.

I think the difference in rates is about 1.5%

    Bookmark   December 15, 2004 at 3:43PM
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chelone

Will you be required to pay capital gains tax? Is the 130-150K before or after cap. gains?

    Bookmark   December 15, 2004 at 5:05PM
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taralee

I'm not sure about the capital gains -- how is that different from regular tax? When we cashed the options in, they were actually worth about 250k, but they take out about 40% for taxes. Is capital gains included in that?

    Bookmark   December 15, 2004 at 7:42PM
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chelone

The only reason I have a basic clue about capital gains is because I am in the will of a recently deceased aunt. Her estate has liquid assets and some stocks. I have the option of taking ownership of the stock ("basis" is determined by the value of stock at the date of her death) or selling it, paying capital gains tax, and putting the proceeds into whatever vehicle I so choose.

I think the number you posted in your first post is the "net" proceeds (your realized value AFTER capital gains are paid); I suspect cap. gains tax is a hefty one, depending on the timing and number of times it has been foregone.

BUT, I don't really know... let's hope someone more knowledgeable weighs in soon... I could use the advice, too!

    Bookmark   December 15, 2004 at 10:02PM
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downsouth

When we sold our house 9 years ago which was paid off, we took all the money and put it into a money market account at a local bank. We knew it was going to be at least six months before we moved into our home that we were building, so we put it in for six months. We were surprised at how much interest it made in that short time. You really need to go to the bank and talk to someone about your options and make sure the money is going to be accessible when you need it.

    Bookmark   January 6, 2005 at 9:58PM
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southboundtrain

If 40% is being withheld, you have what I call "baby options" and the withholding should cover all of your tax liability. You will probably even get a big refund next year. It is treated as ordinary income so capital gains are not involved at all. If you are planning on "spending" the $150K in 6 months, just pop it into a money market fund. Anything that says FDIC insured will cover up to $100,000 so if you are very safety oriented you might want to split your money up. I personally would probably go with the Treasury Money Market Fund from Vanguard for the whole amount. It is not FDIC insured but about as safe as one can get.

    Bookmark   January 15, 2005 at 12:43PM
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