Comments on: Making Sense of Tax Efficient Money Funds

By: DR

DR — Fri, 12 Oct 2007 09:43:53 +0000

Nickel, thanks for this nice analysis. My cash is currently in VMFXX (Federal Money Market), but I need to reconsider the Tax-exempt fund.

By: nickel

nickel — Thu, 11 Oct 2007 04:05:46 +0000

You just have to divide the yield by 1 minus your marginal rate. If you’re in the 25% tax bracket, it’s yield/0.75 — I guess I’m not sure why something that simple needs to be automated.

By: MoneyNing

MoneyNing — Thu, 11 Oct 2007 04:02:46 +0000

nickel: Thanks I still think the process is still quite manual though. Why can’t someone take my financial situation, tax situation and then let me know how much yield it will be by going online and comparing the yields and recommending me with the best yield?

By: nickel

nickel — Wed, 10 Oct 2007 23:18:23 +0000

MoneyNing: It’s very easy to set up in a spreadsheet. Just make a column for the yield and a column for the marginal tax rate. Then set up the simple equation (above) in a third column.

By: MoneyNing

MoneyNing — Wed, 10 Oct 2007 23:03:53 +0000

Great analysis but does anyone know of software that will do this? It’s quite involving to do the calculation for all scenarios.

By: nickel

nickel — Wed, 10 Oct 2007 20:58:52 +0000

Ben: The expense ratio is reflected in the yield.

MFJ: Wrong way to think about it. If you are in the 33% tax bracket, then any dollars you slice off the top (or add on) are subject to a 33% tax savings (or tax hit) until you cross the threshold down (or up) into the next tax bracket. The marginal rate (in this case 33%) is what counts even though you are paying less than that on average.

It’s the same way with any sort of tax deduction. Tax deduction come “off the top” so they save you money at the full marginal rate.

By: MFJ

MFJ — Wed, 10 Oct 2007 20:36:47 +0000

Shouldn’t you also take into account your effective tax rate? Even though you will be in the 33% tax bracket your entire income won’t be taxed at 33% so in theory the benefit won’t be quite as great.

Great analysis I’ve been debating where to go with my money as well. BTW congrats on the 33% tax bracket

MFJ

By: Ben

Ben — Wed, 10 Oct 2007 19:43:05 +0000

Shouldn’t you take into account the expense ratio on the given fund? In your last example for the Vanguard Tax Exempt Money Fund (VMSXX) it would appear that the expense ratio is 0.13% which drops your effective yield down to 5.37%.

Or am I misreading — does Vanguard’s compound yield number already take this into account?

By: Money Socket

Money Socket — Wed, 10 Oct 2007 19:31:10 +0000

Very detailed analysis. Thank you. To be quite honest I never really took taxes into major consideration, but your examples here show that it can make a pretty big impact depending on your tax bracket. I’m going to start looking into municipal bonds, currently I just throw my cash holdings into my etrade savings account at 5.05APY and some in the ol ING account.

By: Patrick

Patrick — Wed, 10 Oct 2007 16:16:53 +0000

This is nice analysis. It looks like for many people (those in the 28% tax bracket or lower), it is probably best just to leave their money in a hih yield savings or money market account for now. At least, that is what I will be doing until the rates continue to decrease. If you have a lot of money to invest and are in a higher tax bracket, the Vanguard tax exempt fund you mentioned looks promising.