Is a tax-exempt bond fund better for me?

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Is a tax-exempt bond fund better for me?

Postby artsy1 » Tue Jul 02, 2013 12:47 am

I've never bought a bond fund outside of my retirement accounts, and I'm not sure if I should just go with the Vanguard total bond market index or save on taxes with the Vanguard Intermediate-Term Tax-Exempt Fund Admiral Shares (VWIUX). Keeping in mind that I'm in the 25% tax bracket, can anyone tell me what would be best for me?

If you're curious, here's why I'm asking. My retirement accounts are in great shape and are all maxed out (both 401K and Roth.) I have about $150,000 in non-retirement savings and investments. Half is currently set aside for a house downpayment/emergency fund and half in individual stocks (mostly in reliable dividend payers like T, WM, ABT, PM, and DUK). I'm thinking about moving $25K out of the emergency fund and into something with a higher yield. (Currently it's earning .75%.) I don't have time to research individual stocks these days and I'm tempted to just put the whole $25K into the Vanguard total stock market index, but part of me would sleep better if I could go with something more conservative—like a bond index that will earn 3 or 4% without the risk of a 40% loss like I could have in a stock index. Basically, my emergency/house downpayment fund has gotten a bit too big and I feel like a bond fund would let me increase my yield a bit while still having a little extra padding in case all my stocks are down just as I find a dream house that is a little pricier than I anticipated. I probably won't be buying for another two to four years, which is why I hate to just let the $25K sit in checking earning .75%.
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Re: Is a tax-exempt bond fund better for me?

Postby rkhusky » Tue Jul 02, 2013 8:26 am

Perhaps a CD? You risk losing principal if you invest in a bond fund and interest rates move up. If you go with a short term bond, you won't make much more than the savings account. SEC yields for Vanguard's Short Tax Exempt is 0.39%, Limited Tax Exempt is 0.74%. If you are in a high federal tax bracket, the latter might give you a bit more after tax.
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