Confused on how to do numbers

[gayl]

My marginal federal tax rate is 22% / 9.3% marginal state rate. If it was you and all else equal, would you invest 50k in taxable CDs or taxfree bond fund with 1.32 beta / 2.49% yield?? Do I add 22+9.3=31.3%. Then add the 31.3% to 2.49% yield or subtract it from 4.25% cd? How do I factor in the effect this has on my SSA becoming taxable? This was my 1st full year collecting SSA

 

[dmpi]

For the taxable CD case:
Interest Income = CD rate * (1-(Federal Tax rate + State Tax rate)) * CD Amount
$1459.875 = .0425 * (1-(.22 + .093)) * 50,000


For the tax-free bond case:
Interest Income = Tax Free Bond Rate * Bond Amount
$1245 = .0249 * 50,000



So all being equal it's better to get the taxable CD. I'm not sure how you would work in SSA into the analysis. I'm curious myself. My thinking is if the two after tax return amounts are equal then it's always better to get the tax free bond because it makes the IRS think you have lower income and its harder to hit one of the trigger points.

 

[gayl]

For the taxable CD case:
Interest Income = CD rate * (1-(Federal Tax rate + State Tax rate)) * CD Amount
$1459.875 = .0425 * (1-(.22 + .093)) * 50,000


For the tax-free bond case:
Interest Income = Tax Free Bond Rate * Bond Amount
$1245 = .0249 * 50,000



So all being equal it's better to get the taxable CD. I'm not sure how you would work in SSA into the analysis. I'm curious myself. My thinking is if the two after tax return amounts are equal then it's always better to get the tax free bond because it makes the IRS think you have lower income and its harder to hit one of the trigger points.

Thank you. So the taxfree would mean less of my SSA gets taxed?? Redoing to determine what the bond rate needs to be to become equal.

 

[prototype]

I think Muni Bond interest is counted towards determining total income for SS taxation and IRMAA determination. Not 100% sure, here's one link I found on quick search.



https://www.schwab.com/learn/story/not-always-tax-free-7-municipal-bond-tax-traps

 

[dmpi]

Thank you. So the taxfree would mean less of my SSA gets taxed?? Redoing to determine what the bond rate needs to be to become equal.

Yes. Taxfree would mean less of your SSA is taxed. Your AGI (including your taxable income) will always be >= than AGI + non taxable income because the non-taxable interest is less than the taxable. But it hardly makes a difference and I find it hard to find a competitive rate on tax free municipals. I'm also in the 22% bracket but I don't have the state income tax so for you it's easier to find something comparable.

Also I should also point out municipals bonds have risks and you need to study them before you buy in. Don't let taxes drive your important investment decisions.

 

[COcheesehead]

I think Muni Bond interest is counted towards determining total income for SS taxation and IRMAA determination. Not 100% sure, here's one link I found on quick search.



https://www.schwab.com/learn/story/not-always-tax-free-7-municipal-bond-tax-traps

And ACA subsidies too.

 

[Accidental Retiree]

My marginal federal tax rate is 22% / 9.3% marginal state rate. If it was you and all else equal, would you invest 50k in taxable CDs or taxfree bond fund with 1.32 beta / 2.49% yield?? Do I add 22+9.3=31.3%. Then add the 31.3% to 2.49% yield or subtract it from 4.25% cd?

How do I factor in the effect this has on my SSA becoming taxable? This was my 1st full year collecting SSA

At least CA does not tax our SS, so we have that to be grateful for.

And since you’re already in the 22% marginal bracket, I’d have thought your SS is already 85% taxable at the federal level.