Part 2 - Getting a 4.94% return on my savings! - The Taxes & Options

This is Part 2 of a series about me trying to get 4.94% APR on my savings that are just sitting in a 2.1% savings account. If you missed Part 1, you can find it by clicking here:

Background Summary

I have $8,300 sitting in a savings account that I will need to use to pay my taxes in 2020 for 2019 income. But until then, I wanted to find a way to make more money than the 2.1% APR I was getting from my savings accounts (I could put it in higher rate accounts, but I’ve already committed to the bank that I am at).

I stumbled upon the offer below and thought I should take advantage of this opportunity to try to make 4.94% APR on the funds. (Not this is not a 4.94% return per se because this is a one-time payment instead of actual interest, but if you do the calculations it is a 4.94% APR return for the 6 months my money will be locked up).

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Making the decision

Part 2 of this 4 part series is all about understanding the logic to arrive at my decision to actually take $15,000 and park it away at Citi Bank to receive $500. What made this situation a little different from just calculating the difference between what my savings account would pay versus the $500 bonus was in the terms and conditions for this bonus. The terms and conditions on their offer page was as follows…

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The terms and conditions states that I will be issued a Form 1099-MISC…If you are not familiar, a Form 1099-MISC is used for independent contractors NOT interest income. What does that mean? Well, technically, that means I have to put this income on Schedule C - Self-Employment Income. This also means that I have to pay SELF-EMPLOYMENT TAX on top of the income tax. Which means instead of just paying ordinary income tax, I have to also consider an additional 15.3% of self-employment tax as well. So I had to do an analysis to figure out whether or not I should keep my money in my 2.1% savings account or open up this new account and get the $500 bonus.

The Calculation

As an accountant, I love to do analysis of numbers. This was a perfect opportunity to do an analysis of the numbers. I pulled out my Excel Spreadsheet and I started to crunch the numbers.

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Let me walk you through this analysis. the first thing you will notice is that I wouldn’t move $15,000, but $15,002. I added an extra $1 to each account just to make sure everything went right.

The first column is all of the descriptions in the rest of the columns. The other four column provides the logic analysis of either (1) leave my money in my savings accounts earning 2.1% or (2) switch and lose out on 2.1%, but get a $500 bonus at the end of the day.

You will also notice that I calculated the days the funds would be away from the 2.1% savings account. I calculated 160 days. 10 days were allocated to transfers being made to and from my savings to Citi Bank. 60 days is the period in which the account must have $15,000. Finally, the payment of the bonus is 90 days after you have succeeded. Some would argue that you do not need to keep the $15,000 in your account past the 60 days, but I don’t want to chance it. The funds are staying until I get my $500 (or 6 months go by, then I’m pulling out and taking a loss on this idea).

Option 1

In option 1, I would put my money in my savings account earning 2.1%. After 160 days, I would have earn about $138.10 in interest. After paying income taxes of $29.00, my overall balance would rise from $15,002 to $15,111.10. This is the status quo and this is what I am basing all of my calculations on.

Option 2

In option 2, I would put $15,002 into a Citi bank checking and savings account for the purpose of earning a $500 bonus. Now, technically, the money will earn interest at Citi Bank (.03% on the Checking and .04% on the Savings). The problem with adding that interest into the conversation is that it is so small in the grand scheme of things that it almost isn’t worth it (about $3 of interest). The problem here is that my $500 bonus would be taxed as an independent contractor, therefore I have a 21% income tax and a 15.3% self-employment tax for a whopping 36.3% in taxes (this isn’t the exact number because you can deduct half of self-employment taxes, but to keep it simple just think 36.6%). You’ll notice that $76.50 will go to Self-Employment tax and $96.97 will go to income taxes. However, at the end of the day, I would have earned $15,328.53 which is $217.43 MORE than if I kept the funds in my savings account.

Results

After completing this analysis, I decided to open up the account and put $15,002 in a Citi Bank Account. With $217.43 more in income, it is worth the hour or so to make it all happen.

Calculating APR

To calculate APR, I used a financial calculator and put these numbers into it:

N = 106
P/Y = 365
I/Y = ? (Calculator to Solve)
PV = -$15,002
PMT= $0
FV = $15,328.53

I/Y = 4.94%

One Random Post

What was interesting was a thread comment that I read when investigating this offer before diving in:

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Patrick Lee