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Financial Planning / Tax Strategies


Subject:  Re: 5% Capital Gains Tax Rate Date:  12/29/2004  5:37 PM
Author:  KenAtPcs Number:  75057 of 127753


Yes, generally "tax exempt" money market funds and "tax exempt" (municipal) bond funds are more appealing to those in higher tax brackets because they are left with more after taxes than in a fully taxable money market account or fully taxable bond fund.

But for those of us in the middle and lower marginal tax rates don't save as much by the "tax exempt" status so usually we in the middle and lower marginal tax rates are better off with a fully taxable money market account or a fully taxable bond fund.

There have been times when the numbers didn't quite work that way, but those tend to be relatively brief times (a couple years, for example).

It seems like perhaps this is one of those times? I almost always agree with what you write, but I have to disagree this time.

Here are current yields from Vanguard's website. The highest taxable MMF at the moment is Prime at 1.92%. The Tax-Exempt MMF is at 1.77%.

The lowest Federal marginal tax rate is 15%. That means Prime has an after tax yield of 1.63%. If you're in the middle tax rate of 25%, its yield drops to just 1.44%. Even ING's 2.35% rate (not apples to apples) drops to 1.76%, which is the same as the current tax-exempt MMF rate.

For someone living in a high tax state in the 25% bracket or higher, if there's a a tax-free MMF for your state, you're definitely better off in that than even at ING.

Of course, if you have too much tax-exempt income, there's always AMT to worry about ....

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