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Hi

I don't know how to figure whether Vanguard OH tax-exempt MM is more favorable than a Vanguard Prime MM (treasuries?) in a taxable acct.

1. 2007 marginal FIT will be 25%

2. 2007 marginal OH SIT will be 6%

3. VG OH tax-exempt MM yields 3.4% annualized

4. VG Prime MM yields 5.1% annualized

Is it roughly a wash???

What I "want" to do is multiply .69 x 5.1%, but I know that isn't right. What's the formula please? I can't find a calculator at the VG site. Tried Fidelity, too; Jane B Quinn's book; and a google search.

Thank you so much .... Lethean
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If you itemize, you will gain a little from the state tax write-off.

I see nothing seriously wrong with multiplying by .69. If you itemize and are not subject to AMT, .705 would be a little closer.

On a $1,000
Federal Taxes would be $235 ($250 - 25%($60))
State Taxes would be $60
Leaving $705


Debra
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Thanks Debra.

I sort of understand what you did with those numbers. But I couldn't have done it myself without spending hours/or days. (It's the fed deduction of state inc tax that would have thrown me off.)

Nice to know that you think that multiplying by .69 is close enough. Thank you!!! (I know that's not the formula. But if it's close enough? Great. That's all I need right now.)

We do itemize and will apparently not be subject to AMT in 2007.

Sounds like it's very close, in which case I'll just stick with the OH tax exempt MM.

Thank you again ... Lethean


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I know that's not the formula. But if it's close enough?

No, it's not the formula. And as they sometimes say, "close" only counts in horseshoes. Why not do it right? The formula is:

(taxable yield) = (tax free yield)/(1 - tax rate)

Assuming you're a resident of Ohio,

taxable yield = 3.4/(1-.31) = 4.93

So the taxable fund, paying 5.1%, is marginally better than the tax-free fund, paying 4.93%.

(In my experience, it's usually the case that you'll do slightly better with a taxable fund than with a tax-free fund.)

Lorenzo

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No, it's not the formula.

Whoops, my apologies to both you and Debra! It is the formula, just coming from the other direction. Multiplying the taxable yield by .69 is the same as dividing the tax-free yield by (1-.31). Duh!

(But in my defense, what you normally want to do is compute the tax equivalent yield of a tax-exempt issue. Also, as Phil would say, I haven't yet finished my first cup of coffee.)

Lorenzo
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