Vanguard Tax-Exempt Bond Index Fund vs Savings Account

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mysoloshot
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Joined: Tue Jan 13, 2015 7:29 am

Vanguard Tax-Exempt Bond Index Fund vs Savings Account

Post by mysoloshot »

Bogleheads,

This is my first post. I have recently began investing my taxable account into an asset allocation that I've picked through some research and look back comparison of various financial advisors that have guided me over the years.

I had a question. I have a business checking bank account that is usually around 100k and I've always wondered if a municipal bond investment would be a better use of those checking account funds... Are there any folks out there that have using muni bonds conceptually as their checking account? I noticed that Vanguard just came out with Vanguard Tax-Exempt Bond Index Fund ....and thought it might be a wise choice. thanks for any thoughts...
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House Blend
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Re: Vanguard Tax-Exempt Bond Index Fund vs Savings Account

Post by House Blend »

Welcome to the forum.

What do you mean by a "conceptual" bank account?

Using short term bonds (muni or otherwise) as a store of cash reserves for an existing bank account does make sense to me. Short term CDs do too. Or a "high"-yield savings account.

Yes you can get checkwriting privileges for some (all?) Vanguard bond mutual funds, but I would not want or try to use a bond fund as a drop-in replacement for a business checking account.
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ogd
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Re: Vanguard Tax-Exempt Bond Index Fund vs Savings Account

Post by ogd »

Hi mysoloshot and welcome to the forum.

While I certainly meant the above, I think this particular proposal is a bad idea. Several reasons:

1) The muni funds can fluctuate quite severely in the short term. See 2010 or 2013. Since this is short-term money, this is a problem. Basically if fund yields increase, you pay the penalty but might not be there to actually benefit from higher yields (normally this balancing effect works well for longer term holdings).

2) Vanguard will not actually let you use it as such, see http://www.bogleheads.org/wiki/Frequent_trading_policy . Only the very short term funds can be used frequently, and those yield nothing. For muni ETFs, spreads would make this even worse.

3) Sales from the fund create taxable events. This is not only inefficient but also a bit of a headache at tax time.

4) In the particular case of munis, there is a complex tax interaction between capital losses (if any) on recently acquired shares and tax-exempt interest. Without going into a lot of detail here, munis should always be held more than 6 months.

5) For amounts below $250K, the individual investor has at their disposal an instrument much better than anything the market can offer: savings accounts yielding 1% or so . Market instruments with comparable safety make a paltry 0.1%; longer or riskier instruments pay more, but only "fairly more" if you will. Meaning that the "unfair", 0.9% advantage of (good) bank accounts persists when judged on a risk-equivalent basis, even vs higher-yielding instruments. See the independent site http://depositaccounts.com for good up to date cash account deals. Again, the market would love to have access to these accounts, but they don't. You do, and they sound perfect for your use.
pascalwager
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Re: Vanguard Tax-Exempt Bond Index Fund vs Savings Account

Post by pascalwager »

Open a 1% APY bank (online) savings account and also keep your checking account. You can move money from savings to checking up to six times per statement period with no additional fees. Allow three days for moving money, so does require some planning.

This is what I did last year, but should have done years earlier.
VT 60% / VFSUX 20% / TIPS 20%
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dratkinson
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Re: Vanguard Tax-Exempt Bond Index Fund vs Savings Account

Post by dratkinson »

If I understand you correctly... you want to use a muni fund as a business checking account?
mysoloshot wrote:...
I had a question. I have a business checking bank account that is usually around 100k and I've always wondered if a municipal bond investment would be a better use of those checking account funds...
Great Scott! NO!!

Every muni withdrawal transaction (draft/check) is a taxable event... requiring a Sch D entry.

Every withdrawal of shares less than 6-months old results in disallowed favorable tax treatment of earned income on those shares, and documentation to track/report (Sch B?) that (now) taxable income.

To avoid the 6-month rule (above) you must sell shares based on specific share identification (to ensure sold shares are older than 6-months), and the paper draft/check form does not have that provision.

At Vanguard, except for short-term bond funds and money-market funds, any sale (assume a draft/check is considered to be a sale) imposes a 60-day lockout (you can't buy more shares for 60 days without jumping through additional hoops): Vanguard frequent trading policy.

What you propose would be a monumental original-share-tracking, reinvested-share-tracking, VFTP-invoking, jump-through-hoops-to-add-money, record-keeping, tax-reporting headache... if you write even one draft/check. Write multiple drafts/checks and it will quickly becomes a nightmare.

At Vanguard all fund drafts/checks are restricted to a $250 minimum, so it probably can't be used to pay the guy to shovel your business sidewalk.


Okay... maybe you could implement this idea using a tax-exempt money market fund, but they pay ~0% interest and have the same $250 minimum. So why bother?


In comparison, a zero-interest checking account would be nirvana: simple, flexible, no headaches.

If you can find a low-interest, no-fee checking account then so much the better.

There are some high-interest checking accounts, but they require additional hoops (multiple debit transactions per month, direct deposit,...) to avoid fees. If your monthly spending supports this, then go for it.
d.r.a., not dr.a. | I'm a novice investor; you are forewarned.
Parthenon
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Re: Vanguard Tax-Exempt Bond Index Fund vs Savings Account

Post by Parthenon »

In addition to the above, there is the additional drag of "To mitigate portfolio transaction costs and allow the fund to more closely track its benchmark, the new fund will assess a 0.50% purchase fee on Investor and Admiral Shares."

Ed
"What am I gonna do if I run out of money?"
Topic Author
mysoloshot
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Joined: Tue Jan 13, 2015 7:29 am

Re: Vanguard Tax-Exempt Bond Index Fund vs Savings Account

Post by mysoloshot »

To Everyone who responded - wow. What a great amount of detail and # of responses. OK...I really appreciate both the forum here and these particular answers to this question.
learning how to respond or post to each person here / so we're catching up.

Thanks for the welcome from all.

Overall, it sounds like my idea was a bad idea - which I think I saw coming :).
I thought about the idea more - I have concluded is that I don't need to carry that sort of balance/money in checking (not that much /maybe just 30 to 40k) and so I have been sitting on money that should be invested.

I guess I really didn't ever plan on needing the account for transactions (like a checking account.) However, down the road (maybe a year +) I might have to pull a single sum back into my checking account if cash flows changed etc.

Next time I post...I will slow down a bit!

I see "Parthenon" and their .50% purchase fee, and the 60 day lockout re: Vanguard Frequent trading Policy by "dratkinson" and the fluctuating issues like 2010/2013 posted by "OGD" ...all pointing me to the idea of either a 1% high interest bearing checking account suggested by "House Blend"

Great place for advice so thanks again and I hope to post again soon.
Topic Author
mysoloshot
Posts: 3
Joined: Tue Jan 13, 2015 7:29 am

Re: Vanguard Tax-Exempt Bond Index Fund vs Savings Account

Post by mysoloshot »

House Blend wrote:Welcome to the forum.

What do you mean by a "conceptual" bank account?

Using short term bonds (muni or otherwise) as a store of cash reserves for an existing bank account does make sense to me. Short term CDs do too. Or a "high"-yield savings account.

Yes you can get checkwriting privileges for some (all?) Vanguard bond mutual funds, but I would not want or try to use a bond fund as a drop-in replacement for a business checking account.
dratkinson wrote:If I understand you correctly... you want to use a muni fund as a business checking account?
mysoloshot wrote:...
I had a question. I have a business checking bank account that is usually around 100k and I've always wondered if a municipal bond investment would be a better use of those checking account funds...
Great Scott! NO!!

Every muni withdrawal transaction (draft/check) is a taxable event... requiring a Sch D entry.

- GREAT ADVICE AND CERTAINLY MADE ME REALIZE I REALLY WANT TO JUST TAKE 60% OF THE CASH OUT OF MY CHECKING AND JUST SIMPLY INVEST IT / I HAVE HAD TOO LARGE OF A CHECKING ACCOUNT. I AM NOT LOOKING FOR THE WORLD'S FIRST MUNI-BOND INVESTMENT VEHICLE/CHECKING ACCOUNT COMBO! :)

Every withdrawal of shares less than 6-months old results in disallowed favorable tax treatment of earned income on those shares, and documentation to track/report (Sch B?) that (now) taxable income.

To avoid the 6-month rule (above) you must sell shares based on specific share identification (to ensure sold shares are older than 6-months), and the paper draft/check form does not have that provision.

At Vanguard, except for short-term bond funds and money-market funds, any sale (assume a draft/check is considered to be a sale) imposes a 60-day lockout (you can't buy more shares for 60 days without jumping through additional hoops): Vanguard frequent trading policy.

What you propose would be a monumental original-share-tracking, reinvested-share-tracking, VFTP-invoking, jump-through-hoops-to-add-money, record-keeping, tax-reporting headache... if you write even one draft/check. Write multiple drafts/checks and it will quickly becomes a nightmare.

At Vanguard all fund drafts/checks are restricted to a $250 minimum, so it probably can't be used to pay the guy to shovel your business sidewalk.


Okay... maybe you could implement this idea using a tax-exempt money market fund, but they pay ~0% interest and have the same $250 minimum. So why bother?


In comparison, a zero-interest checking account would be nirvana: simple, flexible, no headaches.

If you can find a low-interest, no-fee checking account then so much the better.

There are some high-interest checking accounts, but they require additional hoops (multiple debit transactions per month, direct deposit,...) to avoid fees. If your monthly spending supports this, then go for it.
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