SoReady
Recycles dryer sheets
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
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