The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: chills on May 06, 2013, 08:50:16 AM
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We had been investing short/mid term saving (3+ year out expected car/home savings) in a vanguard brokerage account. A significant portion of this savings was in bonds:
BND VANGUARD TOTAL BOND MARKET ETF
This has worked well, but I realized that a decent portion of the dividends are going to taxes (25% bracket), and and wondering if tax-exempt account would make more sense here.
Would it be reasonable to go with:
VWAHX Vanguard High-Yield Tax-Exempt Fund Investor Shares
or
VWITX Vanguard Intermediate-Term Tax-Exempt Fund Investor Shares
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I plan on either using Vanguard Intermediate-Term Tax-Exempt or Vanguard Long-Term Tax-Exempt myself when I need to put bonds outside of tax-advantaged accounts.
If you have state/local taxes, I would look into tax-exempt bonds for your specific area.
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VWAHX looks risky for money needed in three years. VWITX isn't bad but the SEC yield is only 1.53%, in exchange for some interest rate and credit risk.
In contrast, a 3-year CD with Discover Bank will get you 1.2% APY, basically risk-free (0.9% after your taxes). If I were you I'd probably put what I had already saved into 3-year CDs, assuming you're pretty sure you won't want the money before then.
I've been learning recently about how the bond market's past returns have been pretty good the last few years but that's about to dry up as all the 5- and 6-year notes issued before the financial crisis come to maturity. This is why recent yields on bonds have been so good but SEC yields are so low. CDs are now a better deal than bonds (they actually have been for a couple years now). thefinancebuff.com has been covering this in several blog posts.
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I don't think the 25% tax bracket is sufficiently punitive to go for the even lower yielding muni version in your state, worse, your state's finances might be much scarier/riskier than what BND is providing
there are abundant calculators out there to give you the after-tax yield to compare with whatever muni you are looking at
as another option, consider Ibonds [or EE bonds], zero risk to principal
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I don't think the 25% tax bracket is sufficiently punitive to go for the even lower yielding muni version in your state, worse, your state's finances might be much scarier/riskier than what BND is providing
there are abundant calculators out there to give you the after-tax yield to compare with whatever muni you are looking at
as another option, consider Ibonds [or EE bonds], zero risk to principal
Thanks, I was wondering if that might be the case.