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I am exploring my options, financial managers only give you options that help them get rich. So why not ask people like you :)... |
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Droppin Knowledge | What is a better option - a tax free mutual fund at 3% or a taxable savings account at 5.8%? |
I'm selling my condo and have about $117K to invest until I buy another property.
Morgan Stanely can get me 3.5% on a tax free money market however I pay .5% in commission. I can get 5.8% in a savings account but taxed on the interest. My tax rate is very high....highest braket....what will provide the largest return? |
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CogWork
 |
It depends on the tax bracket you fall into. In general though, the higher your tax rate the better a tax free fund wil be for you. There is a simple formula you can use to deterime which investment option is better for your individual case.
Tax exempt rate
--------------------- = Comparable rate
(1-your tax rate)
Using the above example (3% tax free rate & 25% tax rate) you would get the following: 3/(1-.25) = 4%
Compare this 4% to the 5.8% taxable savings account and you'll make more money investing in the taxable savings account. |
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Sandy G
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Do the math....
You say you are in the top tax bracket (AGI over $175,000) = 35%.
On the taxable account you will earn 65% of 5.8% = 3.77%
On the tax free account tou will earn 3%.
Taxable savings account wins...and you don't have to pay MS that ridiculous 0.5% fee. |
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Shauno
 |
Tax Free only -- and consider using a different company than Morgan Stanely.-- you deserve to keep all your dough.
Schwab or Fidelity will have better choices for you based on the total amount. Tax free Money Markets. |
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rhino9joe
|
You have to know what your marginal income tax rate is, both Fed and state, (if any). "High" is not quantifyable, therefore ANY answer you get here from anyone is a guess. |
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a2z_4me
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The only way to answer that is to calculate what is going to be your contribution. And based on the numbers what is going to be the better return. |
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Matthew S
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As many have pointed out the equation for figuring out tax adjusted yields I won't repeat it; however, the thing I see everyone ignoring is do you have to pay state income tax as well...if you do this could change the answer to the question |
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BosCFA
|
The highest tax bracket in 2006 was 35%.
So, let's compare:
Taxable yield is easy. It's 5.8%*(1-.35)= 3.77% after taxes. That's actually enough information to make a decision, but we'll do the other side, too.
On the tax exempt side, you will only be able to invest 116,415 because of the commission. On that you will earn 3.5%, which is 4,074. That means that your effective yield is 3.48%.
So...as it turns out, the spread between the two accounts is enough that the taxable account is actually better for you.. |
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Richard & Brenda F
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You will still make more money after tax by taking the 5.8%, even if you are in a 35% tax bracket.
116,415 X 3.5% = $4074.53 (assumes .5% comm)
117,000 X 5.8% = $6786.00 minus 35% fed tax = $4410.90
If you have to pay state income tax over 5% (acutally 4.9569%), you will actually do better in the tax free. |
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beareyouseae
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Non tax mutual funds. No taxes no problems. Even with the higher rate of return, each time you with draw from it you will be taxed because it is such a high rate that it is always producing money. And with the mutual fund you don't have to report the tax. I don't know of any bank that gives that kind of return. The most I see is round 2-3% |
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Frank Castle
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a 25% Annually tax free money market account. |
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SMEAC
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Savings,the fund involves risk as does all stock market investment this link my help. http://charting-the-market.com/ |
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