Ally Bank No penalty CD for parking cash, is there a catch?

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misterno
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Re: Ally Bank No penalty CD for parking cash, is there a catch?

Post by misterno » Thu Apr 19, 2018 3:58 pm

BlackcatCA wrote:
Thu Apr 19, 2018 3:49 pm
The SEC yield of VMRXX is 1.84% today, 1.78 earlier in the week.

For tax free muni mm,
Tax equivalent yield TEY = SEC yield of muni mm (tax free)/(1- [federal marginal rate] - [state marginal rate]).
where do you see the SEC yield as 1.84%?

My tax bracket is 25% so if VMRXX is tax free investment then my effective yield is 1.84/(1-0.25) = 2.45% ?

I am shocked

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Re: Ally Bank No penalty CD for parking cash, is there a catch?

Post by BlackcatCA » Thu Apr 19, 2018 4:14 pm

I google for prime money market fund; go to the Vanguard page that comes up.
Actually SEC yield 1.84% is for the Admiral fund, which very few of us would use. Investor share VMMXX is still 1.78%.

It takes me a while to always remember to take into account of taxes when comparing yields of CD, Treasury bills and various money market funds. Tax-free yield is the 'true' yields one should compare. The issue is that tax-free yield changes from day to day, whereas CD yield is constant for a specified duration. So the comparison is not exact in a rising rate environment now, but good enough for ad hoc decision making, i.e. Should one buy CD/t-bill/mm fund in a particular week?

misterno
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Re: Ally Bank No penalty CD for parking cash, is there a catch?

Post by misterno » Thu Apr 19, 2018 4:22 pm

Now I got it

VMRXX is taxable where 7 day SEC yield is 1.84%

VTCXX is tax free where 7 day SEC yield is 1.43% so effective for me 1.43/1-0.25) = 1.91%

I would rather go to Populer Direct with guaranteed 2% savings account

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Re: Ally Bank No penalty CD for parking cash, is there a catch?

Post by BlackcatCA » Thu Apr 19, 2018 4:34 pm

If you are not in California, Vanguard muni mm fund has SEC yield of 1.5%, so TEY for you is exactly 2%, today. May go up or down next week (7day avg).

If you are in CA, the TEY of VTCXX is a bit higher than 2%. But it's close enough to that of Popular Direct, so it boils down to a matter of convenience, at the end.

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Re: Ally Bank No penalty CD for parking cash, is there a catch?

Post by rebellovw » Thu Apr 19, 2018 4:36 pm

Today I closed my No Pen CD at Ally - it was at 1.50 and my Savings there was 1.45. I moved it to their 5 year CD at 2.5%

If I need to break it - it is only 6 months penalty - no biggy.

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Re: Ally Bank No penalty CD for parking cash, is there a catch?

Post by BlackcatCA » Thu Apr 19, 2018 4:50 pm

I like Ally bank a lot but their rates are just not competitive since January. There are 5-6 other banks with 5 yr CD rates of 3% now. 3 yr CD are above 2.5%.
Personally I wouldn't buy CDs in this rising rate environment: there will be 2 or maybe 3 Fed rate increases this year so expect CD rates to rise further. Alternatively, the indicative yield of 5 yr Tresary note auction next week is about 2.75%, state tax-free.

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Re: Ally Bank No penalty CD for parking cash, is there a catch?

Post by misterno » Thu Apr 19, 2018 5:37 pm

BlackcatCA wrote:
Thu Apr 19, 2018 4:50 pm
I like Ally bank a lot but their rates are just not competitive since January. There are 5-6 other banks with 5 yr CD rates of 3% now. 3 yr CD are above 2.5%.
Personally I wouldn't buy CDs in this rising rate environment: there will be 2 or maybe 3 Fed rate increases this year so expect CD rates to rise further. Alternatively, the indicative yield of 5 yr Tresary note auction next week is about 2.75%, state tax-free.
I am not too familiar with investing in treasury notes, so this 2.75% is annual right? When is it maturing?
Last edited by misterno on Thu Apr 19, 2018 7:45 pm, edited 2 times in total.

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Re: Ally Bank No penalty CD for parking cash, is there a catch?

Post by Chuck » Thu Apr 19, 2018 5:38 pm

BlackcatCA wrote:
Thu Apr 19, 2018 3:49 pm
The SEC yield of VMRXX is 1.84% today, 1.78 earlier in the week.
Unfortunately I don't have $5M to invest, so I'm still stuck with the 1.78% SEC yield of the non-admiral fund.

misterno
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Re: Ally Bank No penalty CD for parking cash, is there a catch?

Post by misterno » Thu Apr 19, 2018 6:19 pm

Chuck wrote:
Thu Apr 19, 2018 5:38 pm
BlackcatCA wrote:
Thu Apr 19, 2018 3:49 pm
The SEC yield of VMRXX is 1.84% today, 1.78 earlier in the week.
Unfortunately I don't have $5M to invest, so I'm still stuck with the 1.78% SEC yield of the non-admiral fund.
You dont need $5mm to invest in vmrxx

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Re: Ally Bank No penalty CD for parking cash, is there a catch?

Post by misterno » Thu Apr 19, 2018 7:45 pm

misterno wrote:
Thu Apr 19, 2018 5:37 pm
BlackcatCA wrote:
Thu Apr 19, 2018 4:50 pm
I like Ally bank a lot but their rates are just not competitive since January. There are 5-6 other banks with 5 yr CD rates of 3% now. 3 yr CD are above 2.5%.
Personally I wouldn't buy CDs in this rising rate environment: there will be 2 or maybe 3 Fed rate increases this year so expect CD rates to rise further. Alternatively, the indicative yield of 5 yr Tresary note auction next week is about 2.75%, state tax-free.
I am not too familiar with investing in treasury notes, so this 2.75% is annual right? When is it maturing?
EDIT: I realize it is 5 yr notes. So what is the total return on these? Is it sold at par?

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Re: Ally Bank No penalty CD for parking cash, is there a catch?

Post by Kevin M » Thu Apr 19, 2018 7:51 pm

misterno wrote:
Thu Apr 19, 2018 3:33 pm
Kevin

I looked at the webpage for Vanguard California muni MM

But I am not seeing any 2.17% even I backed federal and state taxes

What is the base rate?

I am looking at its webpage and the returns are less than 1%

https://advisors.vanguard.com/web/cf/fa ... 2/overview
You're looking at returns, not yield. Past returns are low because past yields were low. Now that yield is higher, return will be higher.

On that page you see SEC yield = 1.43%. This is the annualized return you've earned over the last 7 days.

As posted above, taxable equivalent yield (TEY) is TF / (1 - f - s), where TF = fully tax-free yield, f = marginal fed tax rate and s = marginal state tax rate (this formula applies if you don't itemize and deduct state taxes on federal return, which is the case for me). My marginal tax rates are 27% and 8%, so TEY = 1.43% / (1 - 27% - 8%) = 2.20%.

If you itemize TEY = TF / (1 - f - s + f*s), which can also be written as TEY = TF / ((1-f)*(1-s)). So slightly less if you itemize.

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Re: Ally Bank No penalty CD for parking cash, is there a catch?

Post by Kevin M » Thu Apr 19, 2018 8:46 pm

BlackcatCA wrote:
Thu Apr 19, 2018 4:14 pm
The issue is that tax-free yield changes from day to day, whereas CD yield is constant for a specified duration.
Not exactly, but kind of.

With a brokered CD yield to maturity changes as yields change and as maturity decreases, just as with any other fixed income security that trades on a secondary market. A direct CD is different because there is no secondary market, so liquidation value is always current value of CD with accrued interest minus the early withdrawal penalty.

With a brokered CD you are taking term risk, as the coupon rate is fixed, while with a money market fund or savings account there is no term risk, but the "coupon rate" can change as often as daily.

Tax-free yield of muni bonds or muni bond funds changes daily just like any other brokered fixed income security.

I wouldn't compare a money market fund, whether tax-exempt or not, to a CD or other fixed income security, other than to set the 0-year yield that you compare to in taking on term risk.

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Re: Ally Bank No penalty CD for parking cash, is there a catch?

Post by Chuck » Thu Apr 19, 2018 8:47 pm

misterno wrote:
Thu Apr 19, 2018 6:19 pm
You dont need $5mm to invest in vmrxx
Do you have it available in a 401k or something?

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Re: Ally Bank No penalty CD for parking cash, is there a catch?

Post by Kevin M » Thu Apr 19, 2018 8:48 pm

rebellovw wrote:
Thu Apr 19, 2018 4:36 pm
Today I closed my No Pen CD at Ally - it was at 1.50 and my Savings there was 1.45. I moved it to their 5 year CD at 2.5%

If I need to break it - it is only 6 months penalty - no biggy.
As already mentioned, 2.5% is not competitive for a 5-year CD. Three-year brokered CD yields are just shy of 3% for good deals on secondary market. Not a lot of term risk in 3-year maturity, and I'd rather take the term risk to earn almost 3% than earn 2.5% with the EWP.

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Re: Ally Bank No penalty CD for parking cash, is there a catch?

Post by rebellovw » Thu Apr 19, 2018 9:24 pm

Kevin M wrote:
Thu Apr 19, 2018 8:48 pm

As already mentioned, 2.5% is not competitive for a 5-year CD. Three-year brokered CD yields are just shy of 3% for good deals on secondary market. Not a lot of term risk in 3-year maturity, and I'd rather take the term risk to earn almost 3% than earn 2.5% with the EWP.

Kevin
3% only provides 143.00 per year more than 2.5% and you are talking less than 3% - and Ally is very easy to deal with - I don't have to deal with a brokered CD.

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Re: Ally Bank No penalty CD for parking cash, is there a catch?

Post by SrGrumpy » Thu Apr 19, 2018 11:34 pm

Kevin M wrote:
Thu Apr 19, 2018 7:51 pm

If you itemize TEY = TF / (1 - f - s + f*s), which can also be written as TEY = TF / ((1-f)*(1-s)). So slightly less if you itemize.

Kevin
Thanks, but I think I'll stick to "Ally for Dummies."

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Re: Ally Bank No penalty CD for parking cash, is there a catch?

Post by Kevin M » Fri Apr 20, 2018 1:53 am

rebellovw wrote:
Thu Apr 19, 2018 9:24 pm
Kevin M wrote:
Thu Apr 19, 2018 8:48 pm

As already mentioned, 2.5% is not competitive for a 5-year CD. Three-year brokered CD yields are just shy of 3% for good deals on secondary market. Not a lot of term risk in 3-year maturity, and I'd rather take the term risk to earn almost 3% than earn 2.5% with the EWP.

Kevin
3% only provides 143.00 per year more than 2.5% and you are talking less than 3% - and Ally is very easy to deal with - I don't have to deal with a brokered CD.
Yeah, when you're talking relatively small amounts of money at the low yields we're at, it doesn't matter much in dollar terms. I'm dealing with much larger amounts in fixed income, so it makes a much bigger difference to me.

On the other hand, you could make the same argument about 2.5% vs. 2% in a savings account or money market. And the latter has no term risk at all.

I love Ally as a hub bank, and yes, they are very easy to deal with. But I won't accept inferior CD rates because of that. Buying a brokered CD is super easy, and can be done with a few mouse clicks online.

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Re: Ally Bank No penalty CD for parking cash, is there a catch?

Post by Kevin M » Fri Apr 20, 2018 2:02 am

SrGrumpy wrote:
Thu Apr 19, 2018 11:34 pm
Kevin M wrote:
Thu Apr 19, 2018 7:51 pm

If you itemize TEY = TF / (1 - f - s + f*s), which can also be written as TEY = TF / ((1-f)*(1-s)). So slightly less if you itemize.

Kevin
Thanks, but I think I'll stick to "Ally for Dummies."
You don't have to do any math to know that 1.78% in Prime money market is more than 1.45% in Ally savings. And if you want the FDIC insurance, you can earn 2% in a savings account at another bank.

Again, love Ally as a hub bank, and do all of my basic banking there, but won't keep much money there unless their rates are competitive, and currently, they are not. Takes one or two business days to transfer from a Vanguard money market fund to Ally, so I'll happily take the 2.20% taxable-equivalent yield in Vanguard CA muni money market over the 1.45% in Ally savings (but I'll keep enough in Ally savings to meet any expected or unexpected need for cash in less than two business days, and that I can't pay with a credit card).

But hey, simplicity has its virtues, and for many people simplicity is worth giving up a few bucks (or hundreds or thousands of bucks) of earnings--sometimes even for me. No one can argue with that.

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Re: Ally Bank No penalty CD for parking cash, is there a catch?

Post by ivk5 » Fri Apr 20, 2018 4:38 am

BlackcatCA wrote:
Thu Apr 19, 2018 3:49 pm
For tax free muni mm,
Tax equivalent yield TEY = SEC yield of muni mm (tax free)/(1- [federal marginal rate] - [state marginal rate]).
Kevin M wrote:
Thu Apr 19, 2018 7:51 pm
On that page you see SEC yield = 1.43%. This is the annualized return you've earned over the last 7 days.

As posted above, taxable equivalent yield (TEY) is TF / (1 - f - s), where TF = fully tax-free yield, f = marginal fed tax rate and s = marginal state tax rate (this formula applies if you don't itemize and deduct state taxes on federal return, which is the case for me). My marginal tax rates are 27% and 8%, so TEY = 1.43% / (1 - 27% - 8%) = 2.20%.
There's a simple Tax Equivalent Yield (TEY) calculator here, assuming not itemizing: https://www.calcxml.com/do/inc11.

For example, today Vanguard shows 7-day SEC yield of 1.79% for Prime MM and 1.51% for Muni MM. The Muni rate beats Prime if you are at 22% marginal federal rate (TEY 1.94%). If you are at top rate of 40.8% inc. Net Investment Income Tax, TEY for Muni MM is 2.55%. I don't know of anything better right now at comparable liquidity and zero duration.

I already parked a bunch in Muni MM last week, but now moving my Ally no-penalty CD funds there too. Thanks Kevin M for the nudge (and education on all this).

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Re: Ally Bank No penalty CD for parking cash, is there a catch?

Post by MikeG62 » Fri Apr 20, 2018 7:05 am

BlackcatCA wrote:
Thu Apr 19, 2018 4:50 pm

...Personally I wouldn't buy CDs in this rising rate environment: there will be 2 or maybe 3 Fed rate increases this year so expect CD rates to rise further.
+1

I'd try and stick to no penalty CD's for this reason (for the next couple of years), unless you come upon an extraordinary deal.

Edit:

I should have added "if I were inclined to buy a CD at all".
Last edited by MikeG62 on Fri Apr 20, 2018 3:50 pm, edited 1 time in total.
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Re: Ally Bank No penalty CD for parking cash, is there a catch?

Post by sperry8 » Fri Apr 20, 2018 8:55 am

Kevin M wrote:
Wed Apr 18, 2018 4:26 pm
Chuck wrote:
Wed Apr 18, 2018 3:46 pm
As mentioned in other threads, Vanguard's Prime Money Market fund is now yielding 1.78%.
Exactly. The Ally no-penalty CD is no longer competitive for short-term cash. You can open a trust account at Vanguard.

Another option is Popular Direct savings paying 2.00% APY. https://www.depositaccounts.com/savings/. Minimum deposit to open is $5,000, minimum balance to avoid $4 monthly fee is $500. I don't know if you can open a trust account there or not; in the first screen of the online application, I only see Individual and Joint as choices, but I would call to check if interested.

Also look at municipal money market funds. Vanguard California muni MM taxable equivalent yield (TEY) for me is 2.17%, so that's where I'm holding my cash reserves. This is at federal and state marginal tax rates of 27% and 8%. The (national) muni MM TEY is 2.11% for me.

I recently did early withdrawals from my Ally no-penalty CDs at 1.75% and moved the cash to VG CA MM fund. With a MM fund, you have complete control over distributions. You can have interest reinvested, and then sell shares at the end of the year in an amount equal to the interest, and have the money transferred to your external bank account, if that's what you want to do.

Kevin
This is exactly what I'm doing these days. Popular Direct (2%), and VG Municipal (1.99% for 22% bracket). I also hold CIT Banks 11 mo no penalty CD at 1.85%. I'll break it at some point if muni yields stay this high, but for now... I'm holding. I don't trust this spread on muni rates to stay this high vs Prime. I broke one Ally 1.75% no penalty CD already and will likely break the other in a few weeks.
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Re: Ally Bank No penalty CD for parking cash, is there a catch?

Post by BusterMcTaco » Fri Apr 20, 2018 9:20 am

Kevin, how do you have a federal rate of 27%? The brackets go from 24% to 32%...

misterno
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Re: Ally Bank No penalty CD for parking cash, is there a catch?

Post by misterno » Fri Apr 20, 2018 9:21 am

So here is the summary

1) Popular Direct Bank 2% savings no penalty no max no fees

2) Vanguard California Muni Money Market sec yield 1.43%/(1-tax bracket). If you think interest rates will go up, ride this horse because it tracks bond market unlike CDs or savings account where you are stuck with.

3) Brokered CD? Can someone explain?

4) Get a 5 year CD for 3% and when you need the money pay the penalty which is 6 months interest. (Does the penalty vary depending on the bank?)

If you close the CD account in 6 months you earn no interest

If you close the CD account in 1 year, you earn only 6 months interest (1.5%)

If you close the CD account in 1 year 6 months, you earn only 1 year interest 3%

Can someone confirm?
Last edited by misterno on Fri Apr 20, 2018 9:58 am, edited 2 times in total.

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Re: Ally Bank No penalty CD for parking cash, is there a catch?

Post by jayk238 » Fri Apr 20, 2018 9:22 am

Am i missing something. My ally savings is 1.45...

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Re: Ally Bank No penalty CD for parking cash, is there a catch?

Post by Darth Xanadu » Fri Apr 20, 2018 9:52 am

jayk238 wrote:
Fri Apr 20, 2018 9:22 am
Am i missing something. My ally savings is 1.45...
I believe folks are referencing the no-penalty CD at ally, which earlier this year hit 1.75% for a couple months. Regular savings is still at 1.45% at Ally.
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Re: Ally Bank No penalty CD for parking cash, is there a catch?

Post by geospatial » Fri Apr 20, 2018 11:42 am

Can someone explain how the gross expense ratio and/or net expense ratio affects the yield (both 7-day and TEY) of a muni money market fund? Is it already accounted for in those reported numbers? I'm still trying to wrap my head around the math involved in comparing CDs vs. MMMFs. If it helps to get specific, I'm looking at SWTXX.

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Re: Ally Bank No penalty CD for parking cash, is there a catch?

Post by misterno » Fri Apr 20, 2018 2:29 pm


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Re: Ally Bank No penalty CD for parking cash, is there a catch?

Post by Kevin M » Fri Apr 20, 2018 2:58 pm

MikeG62 wrote:
Fri Apr 20, 2018 7:05 am
BlackcatCA wrote:
Thu Apr 19, 2018 4:50 pm

...Personally I wouldn't buy CDs in this rising rate environment: there will be 2 or maybe 3 Fed rate increases this year so expect CD rates to rise further.
+1

I'd try and stick to no penalty CD's for this reason (for the next couple of years), unless you come upon an extraordinary deal.
First, it's already been pointed out that Ally no-penalty CD is no longer competitive--you can do better in money market fund or savings account at another bank.

Next, it's important to understand changes in the 2-year and 3-year (and longer) CD rates do not track changes in the federal funds rate. Even Treasuries of maturities beyond a few months don't track changes in the FFR. The FFR is an overnight rate, so only the shortest-term Treasuries track changes in it. It's easy to find periods when the FFR increased a lot, but intermediate-term Treasuries did not. And CDs march somewhat to their own drummer, so even more disconnected from FFR.

Just because bond yields have been rising does not mean that they will continue to rise. It's well established that even economists are poor at predicting changes in interest rates, so why should we think we're any better at it?

In retrospect, we probably would have been better off in savings accounts or money market funds or no-penalty CDs than in short-term or intermediate-term taxable bond funds over the last year. Interestingly, long-term bond funds have done relatively well over the last year (but YTD have not). Also interestingly, intermediate-term and long-term muni bond funds have done relatively well over the last year.

https://investor.vanguard.com/mutual-fu ... nd-returns

(You can filter to just see the bond funds).

All of this goes to show that returns of different types of bonds and different maturities can be quite different, so to peg your expected bond returns to the expected increases in FFR is not rational.

If you can predict interest rates or yields of specific fixed-income securities, then you can make a ton of money through a combination of short and long positions, perhaps in futures or options, rather than just keeping it in a low-yield no-penalty CD. Good luck with that.

I think the best we can do is evaluate yield curves and relative yield premiums (TEY if in taxable), and pick the fixed-income securities that seem to offer the best risk-adjusted expected returns. Most people probably are better off just sticking off with a bond fund in a 3-fund portfolio, and keeping their "cash" in the highest yielding fixed-income option with no term risk, or if they prefer simplicity, just sticking with their bank or MM fund of choice.

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Re: Ally Bank No penalty CD for parking cash, is there a catch?

Post by Kevin M » Fri Apr 20, 2018 3:02 pm

BusterMcTaco wrote:
Fri Apr 20, 2018 9:20 am
Kevin, how do you have a federal rate of 27%? The brackets go from 24% to 32%...
I expect to be in 12% bracket with ordinary income, but qualified dividends will span the 0% and 15% QD/LTCG brackets. Visualize QD/LTCG stacked on top of ordinary income--if ordinary income is in 12% bracket, but QD/LTCG stacked on top pushes it from 0% to 15%, then marginal tax rate is 27% = 12% + 15%.

This is the rate that matters in making decisions about adding ordinary income to the 12% bracket, so is the rate I use to compute taxable-equivalent yield of munis (including muni MM funds) and Treasuries held in taxable.

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Re: Ally Bank No penalty CD for parking cash, is there a catch?

Post by Kevin M » Fri Apr 20, 2018 3:20 pm

geospatial wrote:
Fri Apr 20, 2018 11:42 am
Can someone explain how the gross expense ratio and/or net expense ratio affects the yield (both 7-day and TEY) of a muni money market fund? Is it already accounted for in those reported numbers? I'm still trying to wrap my head around the math involved in comparing CDs vs. MMMFs. If it helps to get specific, I'm looking at SWTXX.
SEC yield, or 7-day yield for a MM fund, is net of expenses, so it's what you actually earned over the last seven days, annualized. So yes, already accounted for. So the SEC yield is approximately what you are earning right now, but of course it can go up or down in the next seven days. Lately these yields have been just going up.

TEY for a MM fund is just calculated from the SEC yield, so yes, it also is net of expenses.

M* reports 7-day yield for SWTXX as 1.41%. The exact TEY depends on your marginal tax rates, and whether or not you itemize and deduct state taxes on your federal income tax return. FYI, Vanguard muni MM SEC yield is 1.51%--Schwab's ER is 0.42%, compare to Vanguard at 0.15%.

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Re: Ally Bank No penalty CD for parking cash, is there a catch?

Post by misterno » Fri Apr 20, 2018 3:32 pm

Kevin M wrote:
Fri Apr 20, 2018 3:20 pm
geospatial wrote:
Fri Apr 20, 2018 11:42 am
Can someone explain how the gross expense ratio and/or net expense ratio affects the yield (both 7-day and TEY) of a muni money market fund? Is it already accounted for in those reported numbers? I'm still trying to wrap my head around the math involved in comparing CDs vs. MMMFs. If it helps to get specific, I'm looking at SWTXX.
SEC yield, or 7-day yield for a MM fund, is net of expenses, so it's what you actually earned over the last seven days, annualized. So yes, already accounted for. So the SEC yield is approximately what you are earning right now, but of course it can go up or down in the next seven days. Lately these yields have been just going up.

TEY for a MM fund is just calculated from the SEC yield, so yes, it also is net of expenses.

M* reports 7-day yield for SWTXX as 1.41%. The exact TEY depends on your marginal tax rates, and whether or not you itemize and deduct state taxes on your federal income tax return. FYI, Vanguard muni MM SEC yield is 1.51%--Schwab's ER is 0.42%, compare to Vanguard at 0.15%.

Kevin
Kevin did you look at everbank 2.1% CD?

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Re: Ally Bank No penalty CD for parking cash, is there a catch?

Post by TonyUncleJohnny » Fri Apr 20, 2018 3:33 pm

The California muni MMF is federal and state tax exempt only for CA residents, correct?

Given my MA residence, would my best money market option be VMSXX? Yield is 1.51% but state tax would have to be paid.

VMATX is Federal and MA state tax exempt. Yield is 2.7%, but the 6-10 yr duration makes the yield highly sensitive to interest rate changes.

Given I may need this money on short notice (2-4 weeks) for a house purchase, I'm probably better off going with VMSXX.

Am I thinking through this correctly?

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Re: Ally Bank No penalty CD for parking cash, is there a catch?

Post by Kevin M » Fri Apr 20, 2018 4:07 pm

TonyUncleJohnny wrote:
Fri Apr 20, 2018 3:33 pm
The California muni MMF is federal and state tax exempt only for CA residents, correct?

Given my MA residence, would my best money market option be VMSXX? Yield is 1.51% but state tax would have to be paid.

VMATX is Federal and MA state tax exempt. Yield is 2.7%, but the 6-10 yr duration makes the yield highly sensitive to interest rate changes.

Given I may need this money on short notice (2-4 weeks) for a house purchase, I'm probably better off going with VMSXX.

Am I thinking through this correctly?
Yes to all, assuming your marginal tax rate is high enough to make the TEY of VMSXX higher than Prime MM at 1.79% (went up a point yesterday), and assuming you're just looking at Vanguard MM funds (I don't see a state MM fund for MA).

Oh, and assuming TEY is higher than 2%, and you don't want to open a bank account at Popular Direct.

Kevin
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Re: Ally Bank No penalty CD for parking cash, is there a catch?

Post by TonyUncleJohnny » Fri Apr 20, 2018 7:38 pm

Kevin,

Thank you for your time, your help is greatly appreciated.

Currently,
VMSXX yield is 1.52%
VMMXX yield is 1.79%

My marginal tax rate will be 24% this year, so the TEY for VMSXX should be 1.52/(1-0.24) = 2%. Correct?

That is greater than 1.79%, so VMSXX seems to be a better choice than VMMXX.

These yields are pre-expense, I presume? So the post-expense TEY for VMSXX will then be 2% - 0.15% = 1.85%.

This is for a newly formed trust which doesn't have a brokerage account yet, so I'm faced with the choice of Vanguard, Fidelity, etc. When I looked at the Fidelity equivalent money market funds, I noticed their yields were slightly lower and expenses higher (0.3% to 0.46%). Why is that? I had assumed Fidelity would be competitive with Vanguard when it came to expenses, but I guess not.

Popular Direct is showing 2% for their Savings Account. Accounting for VMSXX's expense fee of 0.15%, this is indeed better, but I'm not sure I want yet another bank account to keep track of.

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Re: Ally Bank No penalty CD for parking cash, is there a catch?

Post by Kevin M » Fri Apr 20, 2018 8:10 pm

TonyUncleJohnny wrote:
Fri Apr 20, 2018 7:38 pm
Kevin,

Thank you for your time, your help is greatly appreciated.

Currently,
VMSXX yield is 1.52%
VMMXX yield is 1.79%

My marginal tax rate will be 24% this year, so the TEY for VMSXX should be 1.52/(1-0.24) = 2%. Correct?
If you don't have state income tax, or if you itemize deductions and deduct state income tax, then yes. Either way, close enough.
That is greater than 1.79%, so VMSXX seems to be a better choice than VMMXX.
Yep.
These yields are pre-expense, I presume? So the post-expense TEY for VMSXX will then be 2% - 0.15% = 1.85%.
Nope. SEC yield is net of expenses, so you don't subtract it again. Your TEY is 2% or close to that.
This is for a newly formed trust which doesn't have a brokerage account yet, so I'm faced with the choice of Vanguard, Fidelity, etc. When I looked at the Fidelity equivalent money market funds, I noticed their yields were slightly lower and expenses higher (0.3% to 0.46%). Why is that? I had assumed Fidelity would be competitive with Vanguard when it came to expenses, but I guess not.
The yield at Fidelity is lower partially because the ER is higher--remember that the SEC yield is net of expenses. Fidelity generally has higher expenses for money market funds and bond funds, with some exceptions (I assume to compete with Vanguard for popular types of funds). Fidelity is better for some brokerage stuff, like muni bonds, and many like the service better, but Vanguard has generally lower cost funds.
Popular Direct is showing 2% for their Savings Account. Accounting for VMSXX's expense fee of 0.15%, this is indeed better, but I'm not sure I want yet another bank account to keep track of.
No, VMSXX is just as good for you.

Kevin
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Re: Ally Bank No penalty CD for parking cash, is there a catch?

Post by TonyUncleJohnny » Fri Apr 20, 2018 8:23 pm

Thanks, Kevin. A friend of mine who is also a forum member and manages assets of similar size and structure uses Fidelity for reasons you mention, especially customer service.

I'll give it some more thought over the weekend before pulling the trigger Sunday night, but leaning towards Vanguard right now. I have IRA and 529 accounts with them, and have gotten by fine handling stuff mostly on my own. Eventually I will open a Fidelity account as well for diversification reasons.

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Re: Ally Bank No penalty CD for parking cash, is there a catch?

Post by Kevin M » Fri Apr 20, 2018 8:26 pm

TonyUncleJohnny wrote:
Fri Apr 20, 2018 8:23 pm
Thanks, Kevin. A friend of mine who is also a forum member and manages assets of similar size and structure uses Fidelity for reasons you mention, especially customer service.

I'll give it some more thought over the weekend before pulling the trigger Sunday night, but leaning towards Vanguard right now. I have IRA and 529 accounts with them, and have gotten by fine handling stuff mostly on my own. Eventually I will open a Fidelity account as well for diversification reasons.
Yeah, I have trust accounts at both, so I can take advantage of whatever each is best at.

Kevin
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Re: Ally Bank No penalty CD for parking cash, is there a catch?

Post by BusterMcTaco » Fri Apr 20, 2018 8:48 pm

Kevin M wrote:
Fri Apr 20, 2018 3:02 pm
I expect to be in 12% bracket with ordinary income, but qualified dividends will span the 0% and 15% QD/LTCG brackets. Visualize QD/LTCG stacked on top of ordinary income--if ordinary income is in 12% bracket, but QD/LTCG stacked on top pushes it from 0% to 15%, then marginal tax rate is 27% = 12% + 15%.
Got it. I wasn't considering the capital gains rate. Since I'm already in the 24% bracket and all my capital gains would thus (I think) be in the 15% bracket up until $479k, I don't need to consider it yet. But when I my capital gains push my income past $479k, I then need to consider an extra 5% to my effective tax rate... do I have that right?

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Re: Ally Bank No penalty CD for parking cash, is there a catch?

Post by BusterMcTaco » Fri Apr 20, 2018 8:53 pm

Check me on this, please. I'm in the 24% federal bracket, 9.3% California bracket, and subject to the 3.8% Medicare (NIIT) tax. So my TEY for VCAIX (CA intermediate tax-exempt bond fund) based on today's 2.20% SEC yield is:

Code: Select all

2.2% / (1-.24-.093-.038) = 3.5%
Is that right?

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Re: Ally Bank No penalty CD for parking cash, is there a catch?

Post by rebellovw » Sat Apr 21, 2018 11:05 am

Kevin M wrote:
Fri Apr 20, 2018 1:53 am
rebellovw wrote:
Thu Apr 19, 2018 9:24 pm
Kevin M wrote:
Thu Apr 19, 2018 8:48 pm

As already mentioned, 2.5% is not competitive for a 5-year CD. Three-year brokered CD yields are just shy of 3% for good deals on secondary market. Not a lot of term risk in 3-year maturity, and I'd rather take the term risk to earn almost 3% than earn 2.5% with the EWP.

Kevin
3% only provides 143.00 per year more than 2.5% and you are talking less than 3% - and Ally is very easy to deal with - I don't have to deal with a brokered CD.
Yeah, when you're talking relatively small amounts of money at the low yields we're at, it doesn't matter much in dollar terms. I'm dealing with much larger amounts in fixed income, so it makes a much bigger difference to me.

On the other hand, you could make the same argument about 2.5% vs. 2% in a savings account or money market. And the latter has no term risk at all.

I love Ally as a hub bank, and yes, they are very easy to deal with. But I won't accept inferior CD rates because of that. Buying a brokered CD is super easy, and can be done with a few mouse clicks online.

Kevin
Thanks Kevin. Yeah this is my emergency fund and not the main fixed asset portion of my portfolio which is 100% BND etf like fund

I probably should have shopped around but I can live with my selection as I do need to keep my income down to hopefully take advantage of the tax reform.

So far my emergency fund is 65% in two 5 year cds 2.25 and 2.5 and savings the rest at 1.45. Ally is cool cause I can see the combined daily interest - it gives me a free lunch every day.

I love that daily interest feature Ally has - never seen such a thing at Wells Fargo over the last 30+ years probably because it would be insulting.

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Re: Ally Bank No penalty CD for parking cash, is there a catch?

Post by Kevin M » Sat Apr 21, 2018 12:01 pm

BusterMcTaco wrote:
Fri Apr 20, 2018 8:53 pm
Check me on this, please. I'm in the 24% federal bracket, 9.3% California bracket, and subject to the 3.8% Medicare (NIIT) tax. So my TEY for VCAIX (CA intermediate tax-exempt bond fund) based on today's 2.20% SEC yield is:

Code: Select all

2.2% / (1-.24-.093-.038) = 3.5%
Is that right?
No. The SEC yield 1.44%, not 2.20%.

Also, with the correct numerator of 1.44%, this formula would be correct if not itemizing deductions. If itemizing and fully deducting state income tax on Schedule A, there is an extra factor of +24%*9.3% in the denominator. If not itemizing, TEY is 2.29%, and if itemizing it's 2.21%.

Kevin
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Re: Ally Bank No penalty CD for parking cash, is there a catch?

Post by Kevin M » Sat Apr 21, 2018 12:09 pm

BusterMcTaco wrote:
Fri Apr 20, 2018 8:48 pm
Kevin M wrote:
Fri Apr 20, 2018 3:02 pm
I expect to be in 12% bracket with ordinary income, but qualified dividends will span the 0% and 15% QD/LTCG brackets. Visualize QD/LTCG stacked on top of ordinary income--if ordinary income is in 12% bracket, but QD/LTCG stacked on top pushes it from 0% to 15%, then marginal tax rate is 27% = 12% + 15%.
Got it. I wasn't considering the capital gains rate. Since I'm already in the 24% bracket and all my capital gains would thus (I think) be in the 15% bracket up until $479k, I don't need to consider it yet. But when I my capital gains push my income past $479k, I then need to consider an extra 5% to my effective tax rate... do I have that right?
That sounds correct. I haven't paid any attention to the higher incomes, but I think that if you were in middle of 35% bracket, say $450K of ordinary income MFJ for example, and QD/LTCG stacked on top was higher than $479K, each extra dollar of ordinary income would push a dollar of QD/LTCG from 15% to 20%, so marginal tax rate would be 35% + 5% = 40%.

Kevin
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Re: Ally Bank No penalty CD for parking cash, is there a catch?

Post by BusterMcTaco » Sat Apr 21, 2018 12:49 pm

Kevin M wrote:
Sat Apr 21, 2018 12:01 pm
No. The SEC yield 1.44%, not 2.20%.
Vanguard and Morningstar both say 2.20%. Am I looking at the wrong thing?

Are you perhaps looking at the VCTXX municipal money market fund? I'm looking at VCAIX, the intermediate CA tax-exempt bond fund.
Also, with the correct numerator of 1.44%, this formula would be correct if not itemizing deductions. If itemizing and fully deducting state income tax on Schedule A, there is an extra factor of +24%*9.3% in the denominator. If not itemizing, TEY is 2.29%, and if itemizing it's 2.21%.
I itemize but am beyond the $10,000 SALT cap just from property taxes.

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Re: Ally Bank No penalty CD for parking cash, is there a catch?

Post by Kevin M » Sat Apr 21, 2018 2:44 pm

BusterMcTaco wrote:
Sat Apr 21, 2018 12:49 pm
Are you perhaps looking at the VCTXX municipal money market fund? I'm looking at VCAIX, the intermediate CA tax-exempt bond fund.
Oops, my bad. Then yeah, looks correct.
I itemize but am beyond the $10,000 SALT cap just from property taxes.
Then your formula is correct, since you don't get state income tax deduction on your marginal income. So yep, 3.50% TEY.

Now here are a couple of things to consider. A 3-year secondary CD just broke the 3% threshold for me at 27% + 8% marginal on Friday. The muni yield curve flattens out a lot after 3-year maturity, so the reward for taking the extra term risk is not nearly as good beyond three years as it is up to three years.

Kevin
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Re: Ally Bank No penalty CD for parking cash, is there a catch?

Post by TonyUncleJohnny » Mon Apr 23, 2018 9:52 am

Kevin M wrote:
Fri Apr 20, 2018 8:10 pm

Nope. SEC yield is net of expenses, so you don't subtract it again. Your TEY is 2% or close to that.
Kevin,

You pointed out that the SEC yield is net of expenses. How about the average annual returns presented under the Price & Performance section on Vanguard. Are those figures also net of expenses?

Thank you.

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Re: Ally Bank No penalty CD for parking cash, is there a catch?

Post by Kevin M » Mon Apr 23, 2018 11:11 am

TonyUncleJohnny wrote:
Mon Apr 23, 2018 9:52 am
Kevin M wrote:
Fri Apr 20, 2018 8:10 pm

Nope. SEC yield is net of expenses, so you don't subtract it again. Your TEY is 2% or close to that.
Kevin,

You pointed out that the SEC yield is net of expenses. How about the average annual returns presented under the Price & Performance section on Vanguard. Are those figures also net of expenses?

Thank you.
Yes.
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Re: Ally Bank No penalty CD for parking cash, is there a catch?

Post by protagonist » Tue Apr 24, 2018 9:40 am

No catch. But the rate is unremarkable.

My online savings account at SFGI is earning 1.61%.

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Re: Ally Bank No penalty CD for parking cash, is there a catch?

Post by sperry8 » Tue Apr 24, 2018 10:40 am

protagonist wrote:
Tue Apr 24, 2018 9:40 am
No catch. But the rate is unremarkable.

My online savings account at SFGI is earning 1.61%.
And switching to Popular Direct would get you 2% APY. A few minutes of your time and it's done.
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Re: Ally Bank No penalty CD for parking cash, is there a catch?

Post by protagonist » Tue Apr 24, 2018 10:50 am

sperry8 wrote:
Tue Apr 24, 2018 10:40 am
protagonist wrote:
Tue Apr 24, 2018 9:40 am
No catch. But the rate is unremarkable.

My online savings account at SFGI is earning 1.61%.
And switching to Popular Direct would get you 2% APY. A few minutes of your time and it's done.
True. That would earn me about $39 per year more on every $10K in the bank. Yesterday my sweetie and I spent exactly $39 on sandwiches and a couple of beers. SPGI has been near the top in interest rates since I opened the account, probably over 5 years ago. I don't know how long People's Direct will be in the same position. Maybe I will switch someday. Today I would rather go out and rake my leaves.

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Re: Ally Bank No penalty CD for parking cash, is there a catch?

Post by sperry8 » Tue Apr 24, 2018 11:23 am

protagonist wrote:
Tue Apr 24, 2018 10:50 am
sperry8 wrote:
Tue Apr 24, 2018 10:40 am
protagonist wrote:
Tue Apr 24, 2018 9:40 am
No catch. But the rate is unremarkable.

My online savings account at SFGI is earning 1.61%.
And switching to Popular Direct would get you 2% APY. A few minutes of your time and it's done.
True. That would earn me about $39 per year more on every $10K in the bank. Yesterday my sweetie and I spent exactly $39 on sandwiches and a couple of beers. SPGI has been near the top in interest rates since I opened the account, probably over 5 years ago. I don't know how long People's Direct will be in the same position. Maybe I will switch someday. Today I would rather go out and rake my leaves.
If all you have is $10k in savings, I'd tend to agree. However, if one keeps $250,000 in savings that .004% spread is an extra $1,000 per year. Worth the change imo.

Popular Direct as been at or near the top the past 2 years (since it started). I too belong to SFGI Direct and it used to be right near the top. The past 2 years it isn't. It isn't low mind you... but it doesn't stay near the top 5 anymore. Might be time for a switch either way since it takes about 5 minutes and then you can go out and rake leaves after. With an extra $39 in your pocket.
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