Need some advice on fixed

[chinaco]

I have a fair amount of money accumulated in a taxable MM account. It represents between 5 & 6% of the portfolio.

It is part of the short-term emergency fund... but most of it is to be used for expenses when we ER (a little less than 4 years off).

I want to keep it in fixed investments because we will be spending it when we ER. I have been wanting to take about 2/3 of the money moving it to some fixed assets that will get a higher yield.

Should I keep the money in the MM account or move that money to (There are Mutual Fund choices):

• High Quality Long-term Bond Fund
• High Quality Intermediate-term Bond Fund
• High Quality Short-term Bond Fund
• Inflation protector Bond Fund
• High Yield Bong Fund.
• Split the money between some high quality and high yield funds

Your thoughts please.

 

[OAG]

CD Ladder? PENFED currently has 5% APY 7 year NCUA insured CD's. You have the option to pull interest monthly. I know it is a much longer term than most like and rates have been better. Just a thought.

 

[2B]

I suggest you stay away from bond funds. The principal varies so if interest rates shoot up you may not have the same balance you started with. I'd look at either the CD ladder with target maturity about where you think you'll need the cash or just leave it in MM. This is not a good time for very safe fixed investments.

 

[LOL!]

Get it out of your taxable accounts right away and stop paying taxes on the interest and dividends. You can accomplish this in a double-trade:

1. Take this money and buy tax-efficient total stock market index funds. You can split it any way you like between domestic and foreign index funds. The advantages are you pay very little taxes on any dividends, with a foreign fund you can use the foreign tax credit, and if they lose money you can do tax loss harvesting which will reduce your taxes further.

2. In your tax-advantaged accounts, sell the same amount of total stock market index funds and buy a fixed income fund or even money market fund. Thus the dividends become tax-deferrred. I use Vanguard GNMA and Vanguard short-term investment-grade corporate.

With the above, you have not changed your asset allocation at all. You still would have 5% to 6% of the portfolio in a MM fund or a fixed income fund, but you would not be paying taxes on its income. Look at how much money this would save you in taxes:

Suppose you have a $2 MM portfolio. 5% of that is $100,000. You earn $5,000 on that and are in the 33% tax bracket. $5,000 earned in a taxable money market costs you $1650 in taxes. If you had $100,000 in a taxable index fund, maybe it pay 1.8% dividend, or $1800. But the dividend would be qualified so you pay tax at 15% rate, so taxes would be just $270. The difference in asset location saves you $1650 - $270 = $1380.

 

[chinaco]

Get it out of your taxable accounts right away and stop paying taxes on the interest and dividends.

Yes. IT is a good suggestion. But, we have already done as you have suggested with as much money is as reasonable (considering our allocations, some special tax considerations, etc.)

The fixed money in the taxable account is emergency funds today (until we ER) and when we ER it will be used to help cover our living expense till we reach 59.5 All other taxable money is in equity mutual funds already.

We intend to use the money during the period of time from 55-59.5 before we can unlock tax deferred money penalty free.

Our situation is:

We know our spending target during that approx 5 year period.

Much of our expenses during that period will be covered by:

1. small pension
2. 72t from tax deferred accounts.
3. Dividends and Cap gains thrown off by the taxable equities

The pool of money in question covers the remainder of our expenses.

 

[donheff]

Get it out of your taxable accounts right away and stop paying taxes on the interest and dividends. You can accomplish this in a double-trade:

Who has done the math on this? I have some MM cash in a taxable account to pay off the mortgage when DW quits next year (or the year after). So I pay Tax on the interest but I won't pay tax on the lump sum I pull to pay off the house. If I change the taxable MM to an equity fund I will defer and reduce taxes on that. But if I convert some equities in the non-tax account to MM I will pay income tax on the total amount I withdraw to pay off the mortgage. So what is the better approach given very high income tax rates in either case (top of the scale now, around 25% later).

 

[donheff]

Expanding the "where to keep" part of the question, what about the general issue of where to keep a 3-7 year "bucket" of fixed money to outlive a bear market? During the accumulation phase it makes sense to keep any funds that throw off a lot of dividends or interest in IRAs. But, after ER, does that still hold? If you are at a fairly high tax rate (probably a minority of ERs) is it better to postpone the full tax hit of withdrawing from the IRAs until you are 70? It would seem hard to calculate when the downturn was sufficient that pulling money from a somewhat depressed pile of taxable equities is worse than tacking a full hit on income tax from the IRA - and how that will even out (or not) 10 or 15 years down the road.

 

[LOL!]

Yes. IT is a good suggestion. But, we have already done as you have suggested with as much money is as reasonable (considering our allocations, some special tax considerations, etc.)

The fixed money in the taxable account is emergency funds today (until we ER) and when we ER it will be used to help cover our living expense till we reach 59.5 All other taxable money is in equity mutual funds already.

We intend to use the money during the period of time from 55-59.5 before we can unlock tax deferred money penalty free.

If you have ANY money in equities in a tax-deferred account, then you can switch. One has COMPLETE access to a money market fund in a tax-deferred account in this situation just by reversing the double-trade. Many people cannot wrap their heads around this and thus continue to pay higher taxes than they need to. The posts by donheff illustrate the problem.

Suppose I have $100,000 in a total stock market index fund in my taxable account and $100,000 in a money market fund in my IRA. I need $10,000 in the next 2 months for living expenses. I don't want to change my position in equities, but want to use the money market fund. Let's also say I am age 50, so I cannot remove money from my IRA without a penalty. The following double-trade solves the problem:

1. In my taxable account, I sell $10,000 worth of the stock index fund.
2. In my IRA, I buy $10,000 worth of the stock index fund.

Notice that it does not matter whether the stock index fund has gone up in value, stayed the same, or even dropped precipitously in value. All I have done is keep the exact same amount of the stock index fund. One will want to sell the shares with the highest cost basis to reduce taxes and also watch out for wash sales which can easily be avoided.

Anyways, this is what I am doing. At the present time, I have 0.03% of our assets in a tax-exempt money market and all the rest of our fixed income in tax-advantaged accounts. In the taxable account, I now have only tax efficient investments. Also I have been able to do tax-loss harvesting, so I will have net capital losses to deduct against ordinary income for many years to come. Altogether, I have reduced my taxes by a few thousand dollars a year (i.e. serious money) by doing it this way.

 

[LOL!]

Let me re-iterate: Yes, I do keep my short-term emergency fund in an IRA for the tax-deferred savings.

 

[FinanceDude]

I suggest you stay away from bond funds. The principal varies so if interest rates shoot up you may not have the same balance you started with. I'd look at either the CD ladder with target maturity about where you think you'll need the cash or just leave it in MM. This is not a good time for very safe fixed investments.

How are interest rates going to shoot up in this environment? What you say holds equally true with individual bond issues, the difference being there's MORE risk in ANY individual bond holding or ladder than a diversified bond fund.

A 5% 7 year CD ladder is NOT very interesting to me, the after-tax yield isn't that appealing,IMHO. TIPS yields are now negative, not a lot to get one's blood pumping...........

I have done extremely well being in short-term bond funds when the Fed is in cutting mode. But that's me, there is no "perfect" answer.........

 

[chinaco]

... Many people cannot wrap their heads around this and thus continue to pay higher taxes than they need to. ...

Thanks for the advice and explanation. It is a great idea.

I completely understand the move and tax results. We have already done that. The majority of our tax deferred holdings are already in bonds except for some equities that represent some special circumstances for which a better tax maneuver can be executed later... too complex to describe here.

But my question was about where to place the money in a taxable account to increase my yield and meet my goals.

I am holding all duration of high quality bonds now... mostly in intermediate term bonds.

I have some inflation protectors... the total return seems to have done very well last year.

How can I maximize my yield in that taxable account without jeopardizing the basic investment (fairly low risk... but willing to take more risk than a money market).

 

[LOL!]

...
But my question was about where to place the money in a taxable account to increase my yield and meet my goals.

I am holding all duration of high quality bonds now... mostly in intermediate term bonds.

I have some inflation protectors... the total return seems to have done very well last year.

How can I maximize my yield in that taxable account without jeopardizing the basic investment (fairly low risk... but willing to take more risk than a money market).

As I wrote above, I am using Vanguard GNMA and Vanguard investment-grade short-term bond. Both have more risk than a money market fund (and treasuries) and thus higher yields. The NAV of both do not vary much historically. Both have shorter duration. Just check that the yield after-tax is still better than a tax-exempt fund.

PS: I understood your situation from your previous post, but wrote a lengthy explanation mostly for donheff and others who can probably take advantage of it.

 

[chinaco]

I looked at some data with interest rates falling and rising... over the last say 8 years.

It looks like TIPS outperformed Intermediate bonds, LT bonds, and the total bond market. Of course it out performed the short-term bond index.

Anyone see a problem investing 2/3 of the MM in a TIPS fund? Comments.

 

[mathjak107]

heres what we did, we had about 11,000 in taxable interest from money markets as well as 30,000 or so in taxable mutual fund distributions that were on the actively managed funds. problem was this extra 40,000 put us in a marginally higher bracket , it triggered the amt tax , it reduced the benefit from alot of other deductions like education, the stimulus pkg rebate and upped the medical deduction threshold. we also decided to max out 401k's to take advantage of the high bracket and amt penalty now that we are paying. am in the process of making the changes now. bottom line looks like i will be saving 8,000 more a year in 401k and paying 26000 in estimated add'l taxes besides what is taken from our checks at work. instead of the 32,000 now . .

by switching to ny triple tax free amt money market and swapping out the actively managed funds into our ira/401k's and moving the etf index mix i also use into the taxable instead we brought our taxes down drastically.

yes we will be taxed later on in full on the active funds instead of paying a little each year like we were but overall we will be in a far lower bracket with no amt when we retire and the pay check stops. as well as relocating to a more tax advantaged state in pa then we are now in new york city

 

[mathjak107]

the idea of making money in interest safely right now is almost a moot point. with treasury bills paying 1/2% most safe interest bearing stuff is just becoming a place to store cash and not loose money. kind of like an interest free checking account. i just look at the 2% the triple tax free mmkt is paying as a place to keep my money so i dont have to put it in my mattress or pay a guard to watch it at home.

 

[TromboneAl]

• High Yield Bong Fund

This is the obvious answer, is anyone paying attention here?

 

[Moemg]

This is the obvious answer, is anyone paying attention here?

I saw that but with the serious discussion going on I was waiting for someone to pick up on it . Goes nicely with the medical marijuiana thread .

 

[Nords]

This is the obvious answer, is anyone paying attention here?

Except for that post, not me. I can't help but notice that this thread is trying to optimize the return of an investment that's already optimized for safety. Seems kinda oxymoronic.

If it's about the money, there's probably more profit (and less work) to be made from stoozing.

 

[mathjak107]

If you have ANY money in equities in a tax-deferred account, then you can switch. One has COMPLETE access to a money market fund in a tax-deferred account in this situation just by reversing the double-trade. Many people cannot wrap their heads around this and thus continue to pay higher taxes than they need to. The posts by donheff illustrate the problem.

Suppose I have $100,000 in a total stock market index fund in my taxable account and $100,000 in a money market fund in my IRA. I need $10,000 in the next 2 months for living expenses. I don't want to change my position in equities, but want to use the money market fund. Let's also say I am age 50, so I cannot remove money from my IRA without a penalty. The following double-trade solves the problem:

1. In my taxable account, I sell $10,000 worth of the stock index fund.
2. In my IRA, I buy $10,000 worth of the stock index fund.

Notice that it does not matter whether the stock index fund has gone up in value, stayed the same, or even dropped precipitously in value. All I have done is keep the exact same amount of the stock index fund. One will want to sell the shares with the highest cost basis to reduce taxes and also watch out for wash sales which can easily be avoided.

Anyways, this is what I am doing. At the present time, I have 0.03% of our assets in a tax-exempt money market and all the rest of our fixed income in tax-advantaged accounts. In the taxable account, I now have only tax efficient investments. Also I have been able to do tax-loss harvesting, so I will have net capital losses to deduct against ordinary income for many years to come. Altogether, I have reduced my taxes by a few thousand dollars a year (i.e. serious money) by doing it this way.

becareful of wash sales rules. you cant buy the same or similiar within 30 days if you had a tax loss. irs has ruled that not only is selling at a loss in a taxable and rebuying in an ira or 401k before 30 days a breach of rules but they disallow you from even taking the loss the following year if a wash sale occurs unlike a regular wash sale

 

[chinaco]

Except for that post, not me. I can't help but notice that this thread is trying to optimize the return of an investment that's already optimized for safety. Seems kinda oxymoronic.

Yes, safety is a concern. But the money will not be used for 4-6 years. The time horizon is out there a bit...

It is a quite a bit of cash to leave earning low returns... (Inflation risk).

I will keep our emergency fund in MM.

 

[two4theroad]

Go for the High Yield BONG Fund!

You may not make more money but then you won't really care.....

2fer

 

[megacorp-firee]

Go for the High Yield BONG Fund!

You may not make more money but then you won't really care.....

2fer

uh ... where does one buy this then? O0
far out man

 

[Nords]

Yes, safety is a concern. But the money will not be used for 4-6 years. The time horizon is out there a bit...
It is a quite a bit of cash to leave earning low returns... (Inflation risk).
I will keep our emergency fund in MM.

We put one year's expenses in cash (whoever has the best MM) and a second year's expenses in five-year CDs.

Our hope is that we only have to break into the CDs once or twice a decade (as has been the case with most of the century's bear markets). We keep them small (as PenFed allows) so that the interest penalty is minimized to break only the CDs we need for spending money. If there's a sale or a flat yield curve then we'll reduce the duration but right now it's all 3-5 years.

Between rebalancing and diversification we have yet to experience the phenomenon of selling into a down market, let alone at a loss. We've never even come close to breaking into the five-year CDs, and we're starting to ladder them so that one's always rolling over annually. But it's a tracking hassle for a few basis points.

IMO once an investor plays the "Safety!" or "Low volatility!" trump cards then there shouldn't be any permission to fuss over inflation or returns. That buffer is supposed to be compensated for by facilitating the higher returns of a portfolio's equity component.

But perhaps I'm biased by having to listen to my PILs kvetch over the lousy inflation protection and low returns of their 100% CD/Treasuries portfolio...

 

[donheff]

I like LOL's trade off solution but I do worry about the wash rules. I think I would be OK for now. Right now I would by a bunch of Vanguard Indexes in taxable and liquidate some non-index type funds in an IRA. But down the road as I simplify things that could prove problematic. If I sell a VG index in taxable and buy a Fidelity Index in the IRA is that considered a wash transaction?