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comparing interest rates
Old 07-10-2019, 12:54 PM   #1
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comparing interest rates

The thread on Wealthfront got me to thinking about interest rates, especially between tax deferred (IRA or Roth IRA) and after tax accounts.

I'm pretty sure it depends on your tax rate, but as a rule of thumb is there a difference between rates where it doesn't make sense to move money (or does make sense)?

In my case I have some money in Vanguard Prime Money Market Fund (VMMXX) with a 7 day SEC yield of 2.31%. The interest accrued is tax free until I take it as ordinary income. I know this fluctuates but for this discussion let's say it stays constant.

Arguably, I could take some of this money and move it to an after tax account earning more (e.g. Wealthfront @ 2.57%), but this is taxed coming out of the IRA and then taxed on the interest it earns.

Given that the money coming out is taxed regardless, is there a way to determine if the differential between these two interest rates is big enough to compensate for the after tax rate (e.g. 2.57%) being taxed, against the tax deferred (IRA @ 2.31%) not being taxed as it accrues?

Hopefully I have phrased the question clearly enough. And if the answer is it depends on your tax bracket, for me, I'm in the 12% bracket.

Thanks!

Bob
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Old 07-10-2019, 01:01 PM   #2
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If you're going to move it to Wealthfront, why not set up a tax-deferred account at Wealthfront and then do a rollover... then apples-to-apples.

That said, I probably wouldn't bother to transfer money to pick up 26 bp.
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Old 07-10-2019, 01:09 PM   #3
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I think the missing info is your time horizon. How long until you plan to need the money?

Also, a Roth isn't tax deferred. It's tax free.
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Old 07-10-2019, 01:12 PM   #4
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I think the missing info is your time horizon. How long until you plan to need the money?

Also, a Roth isn't tax deferred. It's tax free.
I think he is referring to a tax-deferred account like a IRA rather than a tax-free account like a Roth IRA.
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Old 07-10-2019, 01:33 PM   #5
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Thanks yes, tax deferred. I did cite Roth IRA in my OP by mistake.

The time horizon is low. I put my parking in Ally right now. It essentially holds about 6 months mos expenses. It gets replenished quarterly.

I think the effort for the payback may be low as well. I was more wondering if there is any thought process for when it does make sense.
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Old 07-10-2019, 03:38 PM   #6
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It might make sense if the time horizon is long or if the principal is big, especially if you do a rollover like pb4uski suggested. But I think of a MM more as a short term holding account rather than something I'm growing my money in, so a few bp isn't going to make or break someone.
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Old 07-10-2019, 03:51 PM   #7
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...is there a way to determine if the differential between these two interest rates is big enough to compensate for the after tax rate (e.g. 2.57%) being taxed, against the tax deferred (IRA @ 2.31%) not being taxed as it accrues?

Hopefully I have phrased the question clearly enough. And if the answer is it depends on your tax bracket, for me, I'm in the 12% bracket.
Yes, if your tax rate is 12%, the break even point is 2.31% / ( 1 - 0.12) = 2.625%
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Old 07-10-2019, 05:03 PM   #8
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My dear departed Uncle Pat was a rate-chaser. After he died, the family had to go to every single bank and S&L in town to check for CDs in his name. Thankfully this was before the internet and the town was only 100K people.

I just look for a suitable deal through Schwab. Govvies, funds, brokered CDs, etc. "Suitable" includes consideration of time frame, liquidity, and risk. I am just not interested in chasing a few basis points if it involves moving money between institutions or having to deal with multiple statements every month.

YMMV, of course.
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Old 07-10-2019, 06:04 PM   #9
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Yes, if your tax rate is 12%, the break even point is 2.31% / ( 1 - 0.12) = 2.625%
Thanks! I knew there must be a formula.

I agree with everyone's point on time frame, chasing interest, etc. I'm going to pass on Wealthfront, but it is nice to have this formula.
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