Strategies For Investing Cash Without Irs Attention

Banks and financial institutions are required by law to report cash deposits of $10,000 or more to the federal government. This rule, known as the Bank Secrecy Act, was passed in 1970 and adjusted with the Patriot Act in 2002. The purpose of this regulation is to curb money laundering, tax evasion, drug dealing, terrorist financing, and other illegal activities. As a result, individuals who wish to invest large amounts of cash without alerting the IRS face significant challenges and potential legal consequences.

Depositing under $10,000

If you deposit under $10,000 in cash, your bank or credit union will not report it to the government. However, keep in mind that depositing large amounts of cash may still raise suspicions, and the bank may choose to report it as suspicious activity. To avoid raising any red flags, it is generally recommended to deposit smaller amounts over time rather than a single large sum.

Additionally, if you are depositing foreign currency, cashier's checks, money orders, or investment securities, these are also subject to reporting requirements, even if the amount is less than $10,000. For example, if you deposit multiple cashier's checks or money orders that add up to $10,000 or more, your bank will report it.

It's important to note that while depositing under $10,000 may help you fly under the radar, it is not a guarantee that the IRS will not be alerted. Banks and financial institutions have systems in place to detect suspicious activity, and they may report any transactions that seem unusual, even if they are below the $10,000 threshold.

If you are looking to invest this money, there are a few options available to you. You could consider opening a brokerage account, an IRA (Individual Retirement Account), or contributing to a 401(k) plan. These options offer different tax advantages and investment choices, so be sure to research each option thoroughly before deciding which one is best for your financial goals.

Investing in stocks

There are two types of capital gains taxes: short-term and long-term. Short-term capital gains tax is levied on profits from the sale of assets held for a year or less, and it is taxed as regular income. Long-term capital gains tax is levied on profits from the sale of assets held for longer than a year, and the tax rate is typically lower than the short-term rate.

To avoid alerting the IRS, it is important to accurately report all dividends and capital gains on your tax returns. This includes dividends that are reinvested to purchase additional shares. The cost basis of the stock must also be adjusted in the case of a stock split, but the stock split itself is not a taxable event.

If you have stock options from your employer, be sure to report the sale correctly, using the correct cost basis. Failing to do so may result in the IRS assuming that the basis is $0 and that the stock's sale proceeds are fully taxable.

Additionally, it is important to file your tax returns on time, even if you are waiting for year-end statements from your investments. Staying organised and keeping records of all your purchases and receipts will help you accurately report your investment income and avoid attracting the attention of the IRS.

Treasury's inflation-protected securities

Treasurys inflation-protected securities, or TIPS, are a type of Treasury bond issued by the US government. They are designed to protect investors from a decline in the purchasing power of their money. In other words, they are a safeguard against inflation.

The principal value of TIPS rises as inflation rises. Conversely, if deflation occurs, the principal value of TIPS decreases. The interest payment varies with the adjusted principal value of the bond. The interest payment is made every six months at a fixed rate determined at the bond's auction. So, as inflation rises, investors receive higher interest payments.

TIPS are issued with maturities of five, 10, and 30 years. They are considered a low-risk investment because the US government backs them. At maturity, investors receive the adjusted principal or the original principal, whichever amount is greater.

TIPS can be purchased directly from the US government through the TreasuryDirect system, in $100 increments with a minimum investment of $100. They can also be bought via a TIPS mutual fund or exchange-traded fund (ETF). However, purchasing TIPS directly allows investors to avoid the management fees associated with mutual funds.

There are several advantages to investing in TIPS:

• Inflation protection: The principal amount of TIPS is adjusted based on changes in the Consumer Price Index (CPI).
• Safety and stability: TIPS are issued and backed by the US government, meaning they are considered lower-risk.
• Regular interest payments: TIPS provide semi-annual interest payments, which can be important for retirees or those seeking a steady income.
• Capital appreciation potential: As inflation rises, the principal value of TIPS increases. If investors sell their TIPS before maturity, they may realise capital gains.
• Tax advantages: While the interest income from TIPS is subject to federal income tax, it is exempt from state and local taxes.
• Diversification: Including TIPS in an investment portfolio can enhance diversification.
• Market liquidity: TIPS are highly liquid securities and can be easily bought and sold in the secondary market.

However, there are also some disadvantages to consider:

• Lower yield compared to other bonds: TIPS typically offer lower yields due to their lower risk.
• Inflation adjustment taxation: The increase in the principal value of TIPS due to inflation is considered taxable income, even though the investor does not receive this amount until the security matures or is sold.
• Deflation risk: While TIPS protect against inflation, they are less beneficial during deflationary periods, as the principal value is adjusted downward.
• Liquidity issues in times of crisis: During financial crises or market stress, it may be more difficult to sell TIPS.
• Opportunity cost: Investing in TIPS may involve opportunity costs, as investors may forgo potentially more lucrative investment opportunities.

Exchange-traded funds

ETFs are structured to minimize taxes for investors. They are designed to avoid triggering taxable events, such as capital gains taxes, until the investor sells their ETF shares. This is because ETFs create and redeem shares using in-kind transactions, which are not considered sales for tax purposes. As a result, the tax bill for an investor in an ETF is typically lower than for someone invested in a similarly structured mutual fund.

When an investor exits an ETF, they can sell their shares to another investor, meaning there is no taxable sale of the underlying holdings. In contrast, when an investor exits a mutual fund, the fund manager must sell securities to raise cash for redemption, triggering a taxable event.

ETFs also have fewer "taxable events" than mutual funds. Mutual fund managers need to constantly rebalance the fund by selling securities to accommodate shareholder redemptions or to reallocate assets, creating capital gains for shareholders. On the other hand, ETF managers can accommodate investment inflows and outflows by creating or redeeming "creation units", baskets of assets that approximate the ETF's investment exposure. This means that investors in ETFs are usually not exposed to capital gains on any individual security in the underlying structure.

While ETFs are generally more tax-efficient, there are some exceptions. Certain international ETFs, particularly emerging market ETFs, may be less tax-efficient due to restrictions on performing in-kind deliveries of securities. Leveraged/inverse ETFs and commodity ETPs have also proven to be relatively tax-inefficient due to their use of derivatives, which are taxed at a higher rate.

In summary, ETFs can be a tax-efficient way to invest without alerting the IRS. However, it is important to note that investors who realize a capital gain after selling an ETF are still subject to capital gains tax, and there are some types of ETFs that may be less tax-efficient than others.

Certificates of deposit

CDs are considered one of the safest savings options. A CD bought through a federally insured bank is insured up to $250,000. The $250,000 insurance covers all accounts in your name at the same bank, not each CD or account you have at the bank. As with all investments, there are benefits and risks associated with CDs. The disclosure statement should outline the interest rate on the CD and whether the rate is fixed or variable. It should also state when the bank pays interest on the CD, for example, monthly or semi-annually, and whether the interest payment will be made by check or electronic transfer of funds.

The maturity date should be clearly stated, as should any penalties for early withdrawal of the money in the CD. The risk with CDs is that inflation will grow faster than your money, lowering your real returns over time. It's important to thoroughly check the background of the issuer or deposit broker to ensure that the CD is from a reputable institution. Deposit brokers are not licensed or certified, and no state or federal agency approves them. Always check whether the deposit broker or the company they work for has a history of complaints or fraud. Many deposit brokers are affiliated with investment professionals, so you can check their disciplinary history using the SEC's and FINRA's online databases. Your state securities regulator may also have additional information.

Frequently asked questions