|
Comparing bond fund with CD
01-19-2019, 03:58 PM
|
#1
|
Dryer sheet aficionado
Join Date: Jan 2008
Posts: 32
|
Comparing bond fund with CD
I have holdings in VMLUX (limited term tax exempt) which currently has a yield of 1.89% as per Morningstar.
I wanted to compare it to a CD which has a yield of 2.25%
I am in the 22% marginal tax rate bracket.
I live in California which is a high state income tax state 9.3% (the bond fund is only Federally tax exempt)
This is not money that I need to withdraw anytime soon so I could keep it in the bond fund for several years
Would I be better off in the long run putting the money I have in a CD?
Any insight would be appreciated
|
|
|
|
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!
Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!
You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!
|
01-19-2019, 04:12 PM
|
#2
|
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Nov 2010
Location: Sarasota, FL & Vermont
Posts: 36,204
|
Are you able to deduct state income tax for federal tax purposes?
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
Retired Jan 2012 at age 56
|
|
|
01-19-2019, 04:16 PM
|
#3
|
Dryer sheet aficionado
Join Date: Jan 2008
Posts: 32
|
Quote:
Originally Posted by pb4uski
Are you able to deduct state income tax for federal tax purposes?
|
Yes, I think so
|
|
|
01-19-2019, 05:02 PM
|
#4
|
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Nov 2010
Location: Sarasota, FL & Vermont
Posts: 36,204
|
So the after tax yield on the tax free fund will be [1.89%*(1-9.3%)]*(1-0%) = 1.71% and the after tax yield on the taxable CD will be [2.25%*(1-9.3%)]*(1-22%) = 1.59% assuming that state income taxes are deductible.
If not, then 1.71% and 1.55%.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
Retired Jan 2012 at age 56
|
|
|
01-19-2019, 05:18 PM
|
#5
|
Dryer sheet aficionado
Join Date: Jan 2008
Posts: 32
|
Quote:
Originally Posted by pb4uski
So the after tax yield on the tax free fund will be [1.89%*(1-9.3%)]*(1-0%) = 1.71% and the after tax yield on the taxable CD will be [2.25%*(1-9.3%)]*(1-22%) = 1.59% assuming that state income taxes are deductible.
If not, then 1.71% and 1.55%.
|
thanks so much for the answer!
|
|
|
01-19-2019, 05:32 PM
|
#6
|
Recycles dryer sheets
Join Date: Feb 2014
Posts: 59
|
If you own a home in California and are in the 9.3% bracket, you will likely max out your State tax deduction at the $10k limit. Thus, the additional tax would not be deductible. This assumes that you would even itemize your deductions under the new tax code which increased the standard deduction. It’s unlikely, though not impossible, that someone in the 22% bracket would itemize.
Welcome to the world of tax reform which did not benefit residents of blue high tax states like CA, NY, NJ, CT, MA
|
|
|
01-19-2019, 06:38 PM
|
#7
|
Recycles dryer sheets
Join Date: May 2015
Location: NorCal
Posts: 329
|
I'm also in California and have a similar situation. I think the answer depends on the amount of Schedule A deductions. The Std deduction went up in 2018 to $12k for single and $24k for married filing jointly. So unless you exceed the new limits you are essentially not getting a deduction for State taxes. Also, since 6 month CDs are only paying around 2.4% and 6 month zero coupon US Treasuries are yielding 2.5% (and are State Tax exempt) it was a no brainer to go with the 6 month zero coupons at 2.5%.
|
|
|
01-19-2019, 06:42 PM
|
#8
|
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Nov 2010
Location: Sarasota, FL & Vermont
Posts: 36,204
|
Quote:
Originally Posted by rrppve
If you own a home in California and are in the 9.3% bracket, you will likely max out your State tax deduction at the $10k limit. Thus, the additional tax would not be deductible. This assumes that you would even itemize your deductions under the new tax code which increased the standard deduction. It’s unlikely, though not impossible, that someone in the 22% bracket would itemize.
Welcome to the world of tax reform which did not benefit residents of blue high tax states like CA, NY, NJ, CT, MA
|
But as you can see above... whether or not state tax is deductible or not only makes a 4 bps difference in the after-tax return.... 1.59% vs 1.55%.
Or put another way... if you have $100 income and 9.6% state income taxes are deductible then your state tax is $9.60 and your federal tax is $19.80 for net after-tax income of $70.50... OTOH, if state income tax isn't deductible you have $9.60 of state income tax and $22.00 of federal income tax for net after-tax income of $68.40... a $2.10/2.1% difference...9.6% * 22%.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
Retired Jan 2012 at age 56
|
|
|
01-19-2019, 07:03 PM
|
#9
|
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jun 2016
Location: Colorado
Posts: 8,971
|
There are so many better options for tax free, longer term fixed income. Keep in mind the average inflation rate, over time is 3.22%
|
|
|
01-20-2019, 12:09 PM
|
#10
|
Dryer sheet aficionado
Join Date: Jan 2008
Posts: 32
|
Quote:
Originally Posted by COcheesehead
There are so many better options for tax free, longer term fixed income. Keep in mind the average inflation rate, over time is 3.22%
|
Can you give me a few examples?
|
|
|
01-20-2019, 12:20 PM
|
#11
|
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Mar 2017
Location: City
Posts: 10,308
|
Quote:
Originally Posted by ranchoparque
Can you give me a few examples?
|
I am too lazy to check but IIRC the 30 year inflation rate is about 2.4%. The 40 year rate is 4.1% because that extra 10 years picks up the late-70s, early-80s excitement.
This is why we hold TIPS. I don't think inflation history is very helpful in retirement planning. High inflation might not be probable, but we think it is our biggest risk.
|
|
|
01-20-2019, 01:22 PM
|
#12
|
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jun 2016
Location: Colorado
Posts: 8,971
|
Quote:
Originally Posted by ranchoparque
Can you give me a few examples?
|
It depends on what you are trying to achieve: income, portfolio ballast, safety, tax efficiency, liquidity. I can’t tell what is right for you, but there are a bunch of things I would explore.
Bond ladders muni or taxable.
CA specific muni funds or ETF’s
Individual muni’s
I personally use a muni bond ladder that throws off a bunch of cash flow, liquidity and a reasonable amount of safety yet yields in the mid 4% range, tax free or close to tax free, not sure about AMT under the new rules.
I also have a corporate bond ladder in my deferred accounts that yields a bit more.
|
|
|
|
Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
|
|
Thread Tools |
|
Display Modes |
Linear Mode
|
Posting Rules
|
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts
HTML code is Off
|
|
|
|
» Recent Threads
|
|
|
|
|
|
|
|
|
|
|
|
|
» Quick Links
|
|
|