Question re "house fund" in a high tax bracket

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
themesrob
Posts: 284
Joined: Fri Jul 15, 2016 1:58 pm

Question re "house fund" in a high tax bracket

Post by themesrob »

My fiancee and I anticipate buying a home in ~3 years. After bonuses and a Volkswagen diesel payout, we have about $100,000 in cash on hand which we would like to stash someplace for that anticipated purchase, with the expectation of contributing more on a regular basis. (We do already max out our respective 401ks and have separate emergency funds. I have a Vanguard taxable account that is mostly index funds.) After checking out some previous bogleheads threads about this, my first inclination was to open a high-yield savings account and/or laddered CDs and let it sit.

We do, however, live in New York City, and are both high earners. If we end up filing jointly for 2017, I estimate that our tax brackets will be 39.6% federal and 10.73% state/local. (It is possible that we end up filing married/separately. For reference, my marginal rate for 2016 filing single will be 33% federal and 10.5% state/local.) So either way, that takes some of the oomph out of the "high-yield" part of an HYSA.

The answer is probably still "no," but are there other options we should be considering? For example, the bond portion of my taxable Vanguard account is in VNYTX (Vanguard New York Long-Term Tax-Exempt bond fund). The thought had crossed my mind to stash the money in that fund, but that would be risky compared to an HYSA, obviously. (We could also simply invest the money according to our planned allocation, though the accepted wisdom from previous threads seemed to be that if the money was likely to be needed with five years, you should not do that.) Any thoughts would be welcome! Thank you.
PFInterest
Posts: 2684
Joined: Sun Jan 08, 2017 12:25 pm

Re: Question re "house fund" in a high tax bracket

Post by PFInterest »

could stick with limited term TE, not NY specific given length of time.
sounds like you have enough money, so if you were to invest it and lose some...would it put a damper on your overall plan?
User avatar
Meg77
Posts: 2663
Joined: Fri May 22, 2009 1:09 pm
Location: Dallas, TX

Re: Question re "house fund" in a high tax bracket

Post by Meg77 »

Cash is king. You're not going to earn much on this money regardless without putting it at risk, so I wouldn't worry about the tax implications of the interest earned on it. With an average balance of $150,000 at 1.25%, that's still only about $2250 a year. Sure, taxes will wipe out nearly half of that, but your ending account balance will only be down around $3K because of the tax bite - not enough of a percentage change to your savings to warrant a riskier allocation to bonds (which would put the principal at risk of dropping by as much or more of the tax hit.).

If you were talking about a longer term hold, I might recommend individual muni bonds. But with the short duration you're talking about it's not worth the hassle and it would be hard to find decent bonds to fit within your timeframe. Plus the spread above what you could make in a MMA or savings account, even after taxes, wouldn't be large on that short of a term.

Besides, once you've decided to buy a home and start looking around , those "3 year" time horizons have a way of shrinking fast...
"An investment in knowledge pays the best interest." - Benjamin Franklin
Topic Author
themesrob
Posts: 284
Joined: Fri Jul 15, 2016 1:58 pm

Re: Question re "house fund" in a high tax bracket

Post by themesrob »

PFInterest wrote:could stick with limited term TE, not NY specific given length of time.
sounds like you have enough money, so if you were to invest it and lose some...would it put a damper on your overall plan?
it would not put a damper on the overall plan, because we are investing long-term. But if we wanted to access this cash for a home purchase in the next couple years, putting it into the market today only to watch the indices drop 20% between now and when we needed it would be a bummer.

Meg77 wrote:Cash is king. You're not going to earn much on this money regardless without putting it at risk, so I wouldn't worry about the tax implications of the interest earned on it. With an average balance of $150,000 at 1.25%, that's still only about $2250 a year. Sure, taxes will wipe out nearly half of that, but your ending account balance will only be down around $3K because of the tax bite - not enough of a percentage change to your savings to warrant a riskier allocation to bonds (which would put the principal at risk of dropping by as much or more of the tax hit.).

If you were talking about a longer term hold, I might recommend individual muni bonds. But with the short duration you're talking about it's not worth the hassle and it would be hard to find decent bonds to fit within your timeframe. Plus the spread above what you could make in a MMA or savings account, even after taxes, wouldn't be large on that short of a term.

Besides, once you've decided to buy a home and start looking around , those "3 year" time horizons have a way of shrinking fast...
thanks for this -- it's pretty close to my thinking as well. and I hear you about time horizons...
thecage411
Posts: 1
Joined: Wed Jan 11, 2017 9:16 pm

Re: Question re "house fund" in a high tax bracket

Post by thecage411 »

I am in a similar situation to you in terms of tax bracket / location (NYC). I have a 3-year CD coming due in late 2018, so targeting around then for a home. That timeline works decently well with VMLTX/VMLUX, which has an average duration of 2.5 years. Have you thought of those funds? I'll probably diversify a bit in terms of keeping some in a high-yield savings account and the muni fund. I haven't seen any attractive CD rates at that maturity recently, but I'd also consider one of those.
Topic Author
themesrob
Posts: 284
Joined: Fri Jul 15, 2016 1:58 pm

Re: Question re "house fund" in a high tax bracket

Post by themesrob »

thecage411 wrote:I am in a similar situation to you in terms of tax bracket / location (NYC). I have a 3-year CD coming due in late 2018, so targeting around then for a home. That timeline works decently well with VMLTX/VMLUX, which has an average duration of 2.5 years. Have you thought of those funds? I'll probably diversify a bit in terms of keeping some in a high-yield savings account and the muni fund. I haven't seen any attractive CD rates at that maturity recently, but I'd also consider one of those.
I will take a look at VMLTX. a 3-year CD could be a good option too (and would definitely help with not getting out over our skis in terms of time horizon!) thanks!
Post Reply