Anyone in high bracket using short or Ltd. term muni for EF?

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am
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Anyone in high bracket using short or Ltd. term muni for EF?

Post by am » Sun Apr 22, 2018 12:28 pm

Like the subject, anyone using short to Ltd. term muni funds from vanguard as their primary source of liquid cash or emergency fund? Seems like the max drawdown is <5% historically but tax equivalent yields for someone in 32% bracket is 2.77% for short term and 3.27% for Ltd term. My Amex taxable savings is 1.55% right now. Seems like it would make taxes messier since every transaction would have tax consequences. A little fluctuation in principle. I don’t see any other downsides?

aaronl
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Re: Anyone in high bracket using short or Ltd. term muni for EF?

Post by aaronl » Sun Apr 22, 2018 1:17 pm

I recently moved some funds from Ally's no-penalty CD into limited-term tax exempt.

I'm comfortable with the term risk. Vanguard states the average duration is 2.5 years.

There is also some credit risk. I'm not sure how to evaluate this. Reading about unsustainable pension obligations has made me uneasy. I suspect there won't be a reckoning in the next 2.5 years, but who knows? Also, VMLUX holds some bonds with longer maturities than the average.

You might also consider a 3-year treasury (or equivalent mutual fund) as an alternative. In the 32% tax bracket you would be giving up some yield relative to the muni fund - but perhaps not a huge amount. If you pay state income tax, that boosts the tax-equivalent yield of the treasury bond.

aaronl
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Re: Anyone in high bracket using short or Ltd. term muni for EF?

Post by aaronl » Sun Apr 22, 2018 1:21 pm

Also, I am curious how you calculate the 3.27% TEY. Vanguard's website gives the SEC yield as 2.04% for VMLUX (this is the Admiral share class of limited-term tax exempt). Divide by (1-0.32) and you get 3% TEY. If one is subject to the 3.8% NIIT, that boosts TEY to 3.18%. This differs from your figure by exactly the 0.09% expense ratio, so I suspect you're using the yield to maturity of the underlying bonds rather than the fund's (post-expenses) SEC yield. It's a minor difference, but could be a factor if you're comparing against other alternatives such as CDs or treasuries.

BigJohn
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Re: Anyone in high bracket using short or Ltd. term muni for EF?

Post by BigJohn » Sun Apr 22, 2018 1:23 pm

I use limited term fund as my second tier emergency fund (first tier is in savings account linked to checking account with overdraft protection).

am
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Re: Anyone in high bracket using short or Ltd. term muni for EF?

Post by am » Sun Apr 22, 2018 1:23 pm

aaronl wrote:
Sun Apr 22, 2018 1:17 pm
I recently moved some funds from Ally's no-penalty CD into limited-term tax exempt.

I'm comfortable with the term risk. Vanguard states the average duration is 2.5 years.

There is also some credit risk. I'm not sure how to evaluate this. Reading about unsustainable pension obligations has made me uneasy. I suspect there won't be a reckoning in the next 2.5 years, but who knows? Also, VMLUX holds some bonds with longer maturities than the average.

You might also consider a 3-year treasury (or equivalent mutual fund) as an alternative. In the 32% tax bracket you would be giving up some yield relative to the muni fund - but perhaps not a huge amount. If you pay state income tax, that boosts the tax-equivalent yield of the treasury bond.
The day of reckoning for municipalities worries me, especially during the next crisis. But I remember reading that even during the Great Depression investment grade munis did fine and the market has priced the risks in. Municipalities will not default in my opinion, but either the pensions will be reduced, tax payers pay more or more likely a combination. I like that vanguard does their own credit analysis and the funds are actively managed,

am
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Re: Anyone in high bracket using short or Ltd. term muni for EF?

Post by am » Sun Apr 22, 2018 1:25 pm

aaronl wrote:
Sun Apr 22, 2018 1:21 pm
Also, I am curious how you calculate the 3.27% TEY. Vanguard's website gives the SEC yield as 2.04% for VMLUX (this is the Admiral share class of limited-term tax exempt). Divide by (1-0.32) and you get 3% TEY. If one is subject to the 3.8% NIIT, that boosts TEY to 3.18%. This differs from your figure by exactly the 0.09% expense ratio, so I suspect you're using the yield to maturity of the underlying bonds rather than the fund's (post-expenses) SEC yield. It's a minor difference, but could be a factor if you're comparing against other alternatives such as CDs or treasuries.
I live in a state where I pay close to 5% in state tax, and am talking about the national muni fund. So 32+5+3.8.

This is my favorite calculator: https://funds.eatonvance.com/tax-equiva ... ulator.php

midagelawyer
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Re: Anyone in high bracket using short or Ltd. term muni for EF?

Post by midagelawyer » Sun Apr 22, 2018 2:08 pm

I kind of do. I used to use short term muni mutual funds as my EF for a bit. Then I started to invest in actual muni bonds maturing within the time frame I was comfortable with. I kind of eventually gave up on an EF because I always had bonds maturing soon enough for my risk tolerance. Depending on the yield differential, fees and your time, you could similarly set up a "ladder" of actual muni bonds for your EF.

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welderwannabe
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Re: Anyone in high bracket using short or Ltd. term muni for EF?

Post by welderwannabe » Sun Apr 22, 2018 2:15 pm

Municipal money market fund is 1.52% right now. Not sure how long that will hold, but its hard to beat at the moment.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

jebmke
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Re: Anyone in high bracket using short or Ltd. term muni for EF?

Post by jebmke » Sun Apr 22, 2018 2:35 pm

We don't have an emergency fund but we do have a position in Limited Term Munis.
When you discover that you are riding a dead horse, the best strategy is to dismount.

am
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Re: Anyone in high bracket using short or Ltd. term muni for EF?

Post by am » Sun Apr 22, 2018 2:42 pm

welderwannabe wrote:
Sun Apr 22, 2018 2:15 pm
Municipal money market fund is 1.52% right now. Not sure how long that will hold, but its hard to beat at the moment.
With rates moving higher, not sure why you say that?

am
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Re: Anyone in high bracket using short or Ltd. term muni for EF?

Post by am » Sun Apr 22, 2018 2:44 pm

midagelawyer wrote:
Sun Apr 22, 2018 2:08 pm
I kind of do. I used to use short term muni mutual funds as my EF for a bit. Then I started to invest in actual muni bonds maturing within the time frame I was comfortable with. I kind of eventually gave up on an EF because I always had bonds maturing soon enough for my risk tolerance. Depending on the yield differential, fees and your time, you could similarly set up a "ladder" of actual muni bonds for your EF.
My ef is not big enough in my opinion. Plus I want to keep it simple.I like the diversification of the national muni fund.
Last edited by am on Sun Apr 22, 2018 2:45 pm, edited 1 time in total.

jdb
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Re: Anyone in high bracket using short or Ltd. term muni for EF?

Post by jdb » Sun Apr 22, 2018 2:45 pm

Yes, use the Vanguard short term muni bond fund for all our cash equivalents, including EF. Have done so for a few years, keep our bank checking account which we use to pay most bills via online billpay with only enough to cover immediate expenses and when need additional funds do ACH transfers from the short term muni fund to bank account. And don’t pay attention to fluctuations in the short term fund, better things to concentrate on like harvesting my tomatoes. Good luck.

am
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Re: Anyone in high bracket using short or Ltd. term muni for EF?

Post by am » Sun Apr 22, 2018 2:51 pm

jdb wrote:
Sun Apr 22, 2018 2:45 pm
Yes, use the Vanguard short term muni bond fund for all our cash equivalents, including EF. Have done so for a few years, keep our bank checking account which we use to pay most bills via online billpay with only enough to cover immediate expenses and when need additional funds do ACH transfers from the short term muni fund to bank account. And don’t pay attention to fluctuations in the short term fund, better things to concentrate on like harvesting my tomatoes. Good luck.
Does every sell of shares result in a 30 day freeze on buys?

jdb
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Re: Anyone in high bracket using short or Ltd. term muni for EF?

Post by jdb » Sun Apr 22, 2018 2:54 pm

am wrote:
Sun Apr 22, 2018 2:51 pm
jdb wrote:
Sun Apr 22, 2018 2:45 pm
Yes, use the Vanguard short term muni bond fund for all our cash equivalents, including EF. Have done so for a few years, keep our bank checking account which we use to pay most bills via online billpay with only enough to cover immediate expenses and when need additional funds do ACH transfers from the short term muni fund to bank account. And don’t pay attention to fluctuations in the short term fund, better things to concentrate on like harvesting my tomatoes. Good luck.
Does every sell of shares result in a 30 day freeze on buys?
No, not the short term muni fund.

am
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Re: Anyone in high bracket using short or Ltd. term muni for EF?

Post by am » Sun Apr 22, 2018 2:55 pm

jdb wrote:
Sun Apr 22, 2018 2:54 pm
am wrote:
Sun Apr 22, 2018 2:51 pm
jdb wrote:
Sun Apr 22, 2018 2:45 pm
Yes, use the Vanguard short term muni bond fund for all our cash equivalents, including EF. Have done so for a few years, keep our bank checking account which we use to pay most bills via online billpay with only enough to cover immediate expenses and when need additional funds do ACH transfers from the short term muni fund to bank account. And don’t pay attention to fluctuations in the short term fund, better things to concentrate on like harvesting my tomatoes. Good luck.
Does every sell of shares result in a 30 day freeze on buys?
No, not the short term muni fund.
Do you know if ltd term does?

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cfs
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Re: Anyone in high bracket using short or Ltd. term muni for EF?

Post by cfs » Sun Apr 22, 2018 2:59 pm

Checking Vanguard money markets, found this interesting.

Daily market value from Vanguard: The net asset value of a money market fund's holdings based on the market prices of the fund's securities. This value is calculated out to 4 decimal places.

So, I checked the daily market value on these three (as of 04/20/2018):

Federal Money Market: $1.0000
California Money Market: $0.9999
Municipal Money Market: $0.9998

Good luck with your investments, y gracias por leer ~cfs~
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dratkinson
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Re: Anyone in high bracket using short or Ltd. term muni for EF?

Post by dratkinson » Sun Apr 22, 2018 3:05 pm

am wrote:
Sun Apr 22, 2018 1:25 pm
aaronl wrote:
Sun Apr 22, 2018 1:21 pm
Also, I am curious how you calculate the 3.27% TEY. Vanguard's website gives the SEC yield as 2.04% for VMLUX (this is the Admiral share class of limited-term tax exempt). Divide by (1-0.32) and you get 3% TEY. If one is subject to the 3.8% NIIT, that boosts TEY to 3.18%. This differs from your figure by exactly the 0.09% expense ratio, so I suspect you're using the yield to maturity of the underlying bonds rather than the fund's (post-expenses) SEC yield. It's a minor difference, but could be a factor if you're comparing against other alternatives such as CDs or treasuries.
I live in a state where I pay close to 5% in state tax, and am talking about the national muni fund. So 32+5+3.8.

This is my favorite calculator: https://funds.eatonvance.com/tax-equiva ... ulator.php
Correction: 32+3.8?

Why? A national muni fund is state-taxed.
d.r.a, not dr.a. | I'm a novice investor, you are forewarned.

am
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Re: Anyone in high bracket using short or Ltd. term muni for EF?

Post by am » Sun Apr 22, 2018 3:10 pm

dratkinson wrote:
Sun Apr 22, 2018 3:05 pm
am wrote:
Sun Apr 22, 2018 1:25 pm
aaronl wrote:
Sun Apr 22, 2018 1:21 pm
Also, I am curious how you calculate the 3.27% TEY. Vanguard's website gives the SEC yield as 2.04% for VMLUX (this is the Admiral share class of limited-term tax exempt). Divide by (1-0.32) and you get 3% TEY. If one is subject to the 3.8% NIIT, that boosts TEY to 3.18%. This differs from your figure by exactly the 0.09% expense ratio, so I suspect you're using the yield to maturity of the underlying bonds rather than the fund's (post-expenses) SEC yield. It's a minor difference, but could be a factor if you're comparing against other alternatives such as CDs or treasuries.
I live in a state where I pay close to 5% in state tax, and am talking about the national muni fund. So 32+5+3.8.

This is my favorite calculator: https://funds.eatonvance.com/tax-equiva ... ulator.php
Correction: 32+3.8?

Why? A national muni fund is state-taxed.
Its for calculating tax equivalent compared to say amex savings

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welderwannabe
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Re: Anyone in high bracket using short or Ltd. term muni for EF?

Post by welderwannabe » Sun Apr 22, 2018 4:55 pm

am wrote:
Sun Apr 22, 2018 2:42 pm
welderwannabe wrote:
Sun Apr 22, 2018 2:15 pm
Municipal money market fund is 1.52% right now. Not sure how long that will hold, but its hard to beat at the moment.
With rates moving higher, not sure why you say that?
Because the Municipal money market yield seems unusually high right now as compared to the federal MM or the prime money market. The spread seems too narrow to me. Unless the risk of municipal short term paper has skyrocketed in the last 2 months I am not sure what explains it. If it sticks around, great, but I am not counting on it.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

Dandy
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Re: Anyone in high bracket using short or Ltd. term muni for EF?

Post by Dandy » Sun Apr 22, 2018 5:58 pm

I have a decent allocation to Ltd Term Tax exempt fund. I had it for several years and plan to keep it. Decent yield and pretty steady.

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