Best approach to minimize taxes Fed and State (CA) calculators tools?

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carbonfiberhb8
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Best approach to minimize taxes Fed and State (CA) calculators tools?

Post by carbonfiberhb8 »

Everytime I ask a question on this forum I get smarter thanks for this great community.

It is tax time again, I'm dreading what I will owe. I'm curious if there are any tools or calculators, which can take different senarios and run the numbers based on existing data.

For example; Take $1M sitting in a Vanguard settlement fund, it is taxed at both state and fed level, however, with almost zero risk. I recently got wind of VUSXX, it is mostly state (CA) tax free, but still federally taxed with similar if not slightly better returns than the high yield VMFXX settlement fund.

I see there is other options like VCADX and VCITX, which are both Fed and State tax exempt mostly (...at least 80% of the fund’s assets will be invested in securities whose income is exempt from federal and California state taxes) These have much higher risk, and returns are 1%> less than VMFXX/VUSXX.

I'm looking for a tool or calculator which can take an initial input like $1M for example, using historical known data from the prior year, to calculate what the growth is for each account, figure out the tax benefit which makes the most sense. Sure VCADX and VCITX has a lower yield, but that could very well result in better returns due to lack of taxes.

I'm sure there is something out there and someone has already figured it out, any help is appreciate to make me smarter and more informed for FY25

Cheers
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Re: Best approach to minimize taxes Fed and State (CA) calculators tools?

Post by CAsage »

All you need is excel or a calculator, and you need to know which tax bracket you are in. For example, we are in the 24% IRS and 9.3% CA FTB brackets. I would suggest using the current SEC 30 day yield, since yields move fast. I have owned several of the Vanguard Ca funds, currently own the CA Money Market and VTEC.

CD/MM/Corp interest equals Taxable rate times tax hit, or Net% = Rate* (1-.24-.093) = Rate*.667.
Treasury Net Interest equals Rate times Fed only (not CA) = Rate * (1-.24) = Rate*.76.
Last edited by CAsage on Fri Jan 31, 2025 10:48 am, edited 1 time in total.
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Re: Best approach to minimize taxes Fed and State (CA) calculators tools?

Post by stan1 »

Tax equivalent yield calculators are plentiful on the internet, search for that and see which ones best meet your needs. Use the 30 day SEC yield. Or build one yourself in a spreadsheet if you want to understand the calculation.

You have:
- FDIC bank account (fully taxable)
- State muni bonds (no federal or state tax)
- National muni bonds (no federal, yes state)
- Treasury (yes federal, no state)

You can pick more than one.

You might be paying NIIT so make sure you take that higher rate into account as well.
Yields change over time. Tax laws change too.
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Re: Best approach to minimize taxes Fed and State (CA) calculators tools?

Post by Hacksawdave »

carbonfiber248 wrote: Thu Jan 30, 2025 7:26 pm I'm looking for a tool or calculator which can take an initial input like $1M for example, using historical known data from the prior year, to calculate what the growth is for each account, figure out the tax benefit which makes the most sense. Sure VCADX and VCITX has a lower yield, but that could very well result in better returns due to lack of taxes.

I'm sure there is something out there and someone has already figured it out, any help is appreciate to make me smarter and more informed for FY25

Cheers
Tax software or Excel spreadsheets can do what you want. I do not use tax software, so I use Excel to make a 12-month comparison using today’s price and the last 12 months of distribution per share (assuming taken in cash). The taxable example of VUSXX is assuming a 32% plus NIIT federal tax bracket with 100% USGOs and the tax-exempt fund is the CA intermediate VCADX.

The trend of per share distributions is on the decline for the MMF while it is on the rise for the intermediate bond fund.

Image
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Re: Best approach to minimize taxes Fed and State (CA) calculators tools?

Post by carbonfiberhb8 »

CAsage wrote: Fri Jan 31, 2025 10:42 am All you need is excel or a calculator, and you need to know which tax bracket you are in. For example, we are in the 24% IRS and 9.3% CA FTB brackets. I would suggest using the current SEC 30 day yield, since yields move fast. I have owned several of the Vanguard Ca funds, currently own the CA Money Market and VTEC.

CD/MM/Corp interest equals Taxable rate times tax hit, or Net% = Rate* (1-.24-.093) = Rate*.667.
Treasury Net Interest equals Rate times Fed only (not CA) = Rate * (1-.24) = Rate*.76.
Thanks for the response, i'm not sure why I'm having a hard time following your forumula.

In your example 0.667 is the percent x 1M which is the net not taxed correct? Where does the fund SEC yield come into play is that the Rate?

Example using your tax rate, VUSXX (~4.3%) x .76 = 0.03268 x $1M = $32,680 take home?
Example using your tax rate, VCADX (~3.4%) x .667 = 0.022678 x $1M = $22,678 take home?

Using your formula it is clear that VUSXX is better due to the higher return and actually less risk compared to VCADX. I'm I interpretting this correctly?
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Re: Best approach to minimize taxes Fed and State (CA) calculators tools?

Post by carbonfiberhb8 »

stan1 wrote: Fri Jan 31, 2025 10:47 am Tax equivalent yield calculators are plentiful on the internet, search for that and see which ones best meet your needs. Use the 30 day SEC yield. Or build one yourself in a spreadsheet if you want to understand the calculation.

You have:
- FDIC bank account (fully taxable)
- State muni bonds (no federal or state tax)
- National muni bonds (no federal, yes state)
- Treasury (yes federal, no state)

You can pick more than one.

You might be paying NIIT so make sure you take that higher rate into account as well.
Yields change over time. Tax laws change too.
Thanks, do you have a calculator you have used and recommend?
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Re: Best approach to minimize taxes Fed and State (CA) calculators tools?

Post by retired@50 »

carbonfiber248 wrote: Sat Feb 01, 2025 2:47 pm
CAsage wrote: Fri Jan 31, 2025 10:42 am All you need is excel or a calculator, and you need to know which tax bracket you are in. For example, we are in the 24% IRS and 9.3% CA FTB brackets. I would suggest using the current SEC 30 day yield, since yields move fast. I have owned several of the Vanguard Ca funds, currently own the CA Money Market and VTEC.

CD/MM/Corp interest equals Taxable rate times tax hit, or Net% = Rate* (1-.24-.093) = Rate*.667.
Treasury Net Interest equals Rate times Fed only (not CA) = Rate * (1-.24) = Rate*.76.
Thanks for the response, i'm not sure why I'm having a hard time following your forumula.

In your example 0.667 is the percent x 1M which is the net not taxed correct? Where does the fund SEC yield come into play is that the Rate?

Example using your tax rate, VUSXX (~4.3%) x .76 = 0.03268 x $1M = $32,680 take home?
Example using your tax rate, VCADX (~3.4%) x .667 = 0.022678 x $1M = $22,678 take home?

Using your formula it is clear that VUSXX is better due to the higher return and actually less risk compared to VCADX. I'm I interpretting this correctly?
If you're a CA resident, then you get to keep the entire yield from a CA muni bond fund like VCADX. No taxes at the Federal or State level.
CAsage's post didn't include any math for VCADX because you get to keep the entire yield.

Regards,
"All of us would be better investors if we just made fewer decisions." - Daniel Kahneman
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Re: Best approach to minimize taxes Fed and State (CA) calculators tools?

Post by carbonfiberhb8 »

Hacksawdave wrote: Fri Jan 31, 2025 11:14 am
carbonfiber248 wrote: Thu Jan 30, 2025 7:26 pm I'm looking for a tool or calculator which can take an initial input like $1M for example, using historical known data from the prior year, to calculate what the growth is for each account, figure out the tax benefit which makes the most sense. Sure VCADX and VCITX has a lower yield, but that could very well result in better returns due to lack of taxes.

I'm sure there is something out there and someone has already figured it out, any help is appreciate to make me smarter and more informed for FY25

Cheers
Tax software or Excel spreadsheets can do what you want. I do not use tax software, so I use Excel to make a 12-month comparison using today’s price and the last 12 months of distribution per share (assuming taken in cash). The taxable example of VUSXX is assuming a 32% plus NIIT federal tax bracket with 100% USGOs and the tax-exempt fund is the CA intermediate VCADX.

The trend of per share distributions is on the decline for the MMF while it is on the rise for the intermediate bond fund.

Image
Can you please share this excel sheet possibly so i can see the formulas and how they interact?

Curious what Row 1 and column A,B,C,D,E and F mean and how they are used same with clumn I,J,K,L as well?

Just based on what you shared it seems very clear the VUSXX even with the Fed taxes will yield a better after tax result. Perhaps thinking about VCADX is not ideal. Assuming a lower Fed tax rate like 24% and no NIIT the results would be even more favorable for VUSXX if I'm understanding the output.

When would VCADX be beneficail, only if the rates were the same i assume?
Last edited by carbonfiberhb8 on Sat Feb 01, 2025 3:01 pm, edited 1 time in total.
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Re: Best approach to minimize taxes Fed and State (CA) calculators tools?

Post by carbonfiberhb8 »

retired@50 wrote: Sat Feb 01, 2025 2:53 pm
carbonfiber248 wrote: Sat Feb 01, 2025 2:47 pm

Thanks for the response, i'm not sure why I'm having a hard time following your forumula.

In your example 0.667 is the percent x 1M which is the net not taxed correct? Where does the fund SEC yield come into play is that the Rate?

Example using your tax rate, VUSXX (~4.3%) x .76 = 0.03268 x $1M = $32,680 take home?
Example using your tax rate, VCADX (~3.4%) x .667 = 0.022678 x $1M = $22,678 take home?

Using your formula it is clear that VUSXX is better due to the higher return and actually less risk compared to VCADX. I'm I interpretting this correctly?
If you're a CA resident, then you get to keep the entire yield from a CA muni bond fund like VCADX. No taxes at the Federal or State level.
CAsage's post didn't include any math for VCADX because you get to keep the entire yield.

Regards,
So my understanding and the formula i used is completely incorrect. Is this the correct interpretation?

Example using your tax rate, VUSXX (~4.3%) x .76 = 0.03268 x $1M = $32,680 take home?
Example using your tax rate, VCADX (~3.4%) x 1.0 = 0.034 x $1M = $34,000 take home?


This seems contradictory to what HawksawDave provided with his excel formula. Likely i'm not calculating it correct?
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Re: Best approach to minimize taxes Fed and State (CA) calculators tools?

Post by retired@50 »

carbonfiber248 wrote: Sat Feb 01, 2025 3:00 pm
So my understanding and the formula i used is completely incorrect. Is this the correct interpretation?

Example using your tax rate, VUSXX (~4.3%) x .76 = 0.03268 x $1M = $32,680 take home?
Example using your tax rate, VCADX (~3.4%) x 1.0 = 0.034 x $1M = $34,000 take home?


This seems contradictory to what HawksawDave provided with his excel formula. Likely i'm not calculating it correct?
The green lines above look correct. Keep in mind that Hacksawdave was probably using the past 12 months distribution yield (if I'm reading his sheet correctly) not the forward looking SEC Yield (which is what the 4.3% and 3.4% numbers above are).

Another point is that the VUSXX fund is a Treasury money market fund with a stable $1.00 share price and VCADX is an intermediate term bond fund, so they have very different risks.

Regards,
"All of us would be better investors if we just made fewer decisions." - Daniel Kahneman
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Re: Best approach to minimize taxes Fed and State (CA) calculators tools?

Post by carbonfiberhb8 »

retired@50 wrote: Sat Feb 01, 2025 3:05 pm
carbonfiber248 wrote: Sat Feb 01, 2025 3:00 pm
So my understanding and the formula i used is completely incorrect. Is this the correct interpretation?

Example using your tax rate, VUSXX (~4.3%) x .76 = 0.03268 x $1M = $32,680 take home?
Example using your tax rate, VCADX (~3.4%) x 1.0 = 0.034 x $1M = $34,000 take home?


This seems contradictory to what HawksawDave provided with his excel formula. Likely i'm not calculating it correct?
The green lines above look correct. Keep in mind that Hacksawdave was probably using the past 12 months distribution yield (if I'm reading his sheet correctly) not the forward looking SEC Yield (which is what the 4.3% and 3.4% numbers above are).

Another point is that the VUSXX fund is a Treasury money market fund with a stable $1.00 share price and VCADX is an intermediate term bond fund, so they have very different risks.

Regards,
Thanks that makes sense now, I'm curoius if Hacksawdave can chime in more and share his spreadsheet.

With the feds holding steady i would not expect a rate change for VUSXX but VCADX is a different story.

I'm curious why anyone would use VCADX type fund given the returns.
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Re: Best approach to minimize taxes Fed and State (CA) calculators tools?

Post by retired@50 »

carbonfiber248 wrote: Sat Feb 01, 2025 3:19 pm
I'm curious why anyone would use VCADX type fund given the returns.
VCADX is more useful if you're in the higher tax brackets. 37% Federal and 13.3% CA is onerous. It can be an important way to hold some fixed income assets for those folks.

Regards,
"All of us would be better investors if we just made fewer decisions." - Daniel Kahneman
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Re: Best approach to minimize taxes Fed and State (CA) calculators tools?

Post by carbonfiberhb8 »

Got it that makes sense. I will foregoe VCADX than for now and continue with the existing strategy.
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Re: Best approach to minimize taxes Fed and State (CA) calculators tools?

Post by CAsage »

My (simple) formula was meant to calculate the net after-tax yield of broad categories. First, there are 3 categories of income which are taxed differently - some fully taxed by IRS and FTB, some just the IRS (treasury) and some neither the IRS nor the FTB (Ca bond funds). Then compare yields - those annoyingly fluctuate, but the 30 day SEC yield at least gives you a current snapshot and allows you to compare funds. Money markets are more stable, but bond funds return more over time. Another consideration - in my case, any CA muni income helps us remain below MAGI income limits for IRMAA Medicare pricing and reduce NIIT. I don't optimize these accounts; majority bond allocation is in my IRA.
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Re: Best approach to minimize taxes Fed and State (CA) calculators tools?

Post by carbonfiberhb8 »

CAsage wrote: Sat Feb 01, 2025 5:53 pm My (simple) formula was meant to calculate the net after-tax yield of broad categories. First, there are 3 categories of income which are taxed differently - some fully taxed by IRS and FTB, some just the IRS (treasury) and some neither the IRS nor the FTB (Ca bond funds). Then compare yields - those annoyingly fluctuate, but the 30 day SEC yield at least gives you a current snapshot and allows you to compare funds. Money markets are more stable, but bond funds return more over time. Another consideration - in my case, any CA muni income helps us remain below MAGI income limits for IRMAA Medicare pricing and reduce NIIT. I don't optimize these accounts; majority bond allocation is in my IRA.
Interesting perspective, i didn't take into consideration IRMAA, when you state "... any CA muni income helps us remain below the MAGI income limits..." I assume you mean having a fund like VCTXX reduces your FTB tax liability but how does that impact MAGI and Medicare since that is a federal program?
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Re: Best approach to minimize taxes Fed and State (CA) calculators tools?

Post by CAsage »

carbonfiber248 wrote: Sat Feb 01, 2025 6:13 pm
CAsage wrote: Sat Feb 01, 2025 5:53 pm ...Another consideration - in my case, any CA muni income helps us remain below MAGI income limits for IRMAA Medicare pricing and reduce NIIT. I don't optimize these accounts; majority bond allocation is in my IRA.
Interesting perspective, i didn't take into consideration IRMAA, when you state "... any CA muni income helps us remain below the MAGI income limits..." I assume you mean having a fund like VCTXX reduces your FTB tax liability but how does that impact MAGI and Medicare since that is a federal program?
I was partially correct - having less income makes it easier to stay under MAGI limits, though they still add it back in to calculate MAGI, the number is smaller on the total income side, so... it's slightly better. The amount you pay monthly for Medicare (which is not calculated on your 1040 tax return) is a sliding scale, and you pay more as your income increases. Basically another couple points of tax....

https://www.bogleheads.org/wiki/Income- ... nt_(IRMAA)
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Re: Best approach to minimize taxes Fed and State (CA) calculators tools?

Post by carbonfiberhb8 »

CAsage wrote: Sat Feb 01, 2025 6:37 pm
carbonfiber248 wrote: Sat Feb 01, 2025 6:13 pm

Interesting perspective, i didn't take into consideration IRMAA, when you state "... any CA muni income helps us remain below the MAGI income limits..." I assume you mean having a fund like VCTXX reduces your FTB tax liability but how does that impact MAGI and Medicare since that is a federal program?
I was partially correct - having less income makes it easier to stay under MAGI limits, though they still add it back in to calculate MAGI, the number is smaller on the total income side, so... it's slightly better. The amount you pay monthly for Medicare (which is not calculated on your 1040 tax return) is a sliding scale, and you pay more as your income increases. Basically another couple points of tax....

https://www.bogleheads.org/wiki/Income- ... nt_(IRMAA)
Ok thanks, this IRMAA is a little foreign to me as I'm not quite in the retirement age to consider Medicare but it is something I'm planning to spend more time to learn in ins and out and this is helpful information.

So ultimately having a VCTXX and VCADX reduces your MAGI income to keep your IRMAA within the limits to minimize how much extra you pay for Medicare Part B and D which is the reason to get into these kinds of accounts. Very helpful.

Correct me if I'm wrong but these funds appear to be more beneficial for those like you mentioned in much higher tax bracket or in retirement as they stand now.
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Re: Best approach to minimize taxes Fed and State (CA) calculators tools?

Post by Hacksawdave »

carbonfiber248 wrote: Sat Feb 01, 2025 2:55 pm
Hacksawdave wrote: Fri Jan 31, 2025 11:14 am
Tax software or Excel spreadsheets can do what you want. I do not use tax software, so I use Excel to make a 12-month comparison using today’s price and the last 12 months of distribution per share (assuming taken in cash). The taxable example of VUSXX is assuming a 32% plus NIIT federal tax bracket with 100% USGOs and the tax-exempt fund is the CA intermediate VCADX.

The trend of per share distributions is on the decline for the MMF while it is on the rise for the intermediate bond fund.

Image
Can you please share this excel sheet possibly so i can see the formulas and how they interact?

Curious what Row 1 and column A,B,C,D,E and F mean and how they are used same with clumn I,J,K,L as well?

Just based on what you shared it seems very clear the VUSXX even with the Fed taxes will yield a better after tax result. Perhaps thinking about VCADX is not ideal. Assuming a lower Fed tax rate like 24% and no NIIT the results would be even more favorable for VUSXX if I'm understanding the output.

When would VCADX be beneficail, only if the rates were the same i assume?
The other numbers on row 1 can be ignored as there are multiple spreadsheets within the sheet. Only H1 is used with the $1M hypothetical figure. I turned on the formulas. Sorry for the small print. It is simple per share distributions times number of shares. The calculation on the left deducts taxes on the monthly gross distribution.

I would not necessarily say VCADX was not an ideal choice. The last 12 months had the inverted yield curve and short-term holdings react quicker to changes than longer maturity holdings. This is why I use a monthly display instead of just an annual summed number. I hold all three Vanguard CA tax-exempt funds.

This would explain why the graded color scale on the net amounts are getting greener for VCADX and moving from green to a lighter green yellow for VUSXX. VCADX switched to be the better choice in November. One would have to continue adding the data points to see if this holds true going forward.
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Re: Best approach to minimize taxes Fed and State (CA) calculators tools?

Post by grabiner »

carbonfiber248 wrote: Sat Feb 01, 2025 2:55 pm Just based on what you shared it seems very clear the VUSXX even with the Fed taxes will yield a better after tax result. Perhaps thinking about VCADX is not ideal. Assuming a lower Fed tax rate like 24% and no NIIT the results would be even more favorable for VUSXX if I'm understanding the output.

When would VCADX be beneficail, only if the rates were the same i assume?
It doesn't make sense to compare VUSXX (Vanguard Treasury Money Market) and VCADX (Vanguard CA Intermediate-Term Tax-Exempt). You have two separate choices to make: whether to use a money-market or an intermediate-term bond fund, and which fund to use.

An intermediate-term bond fund will outperform a money-market fund of the same time if interest rates change as expected, but with more risk. If intermediate-term yields are lower than money-market yields, this implies that bond traders expect rates to fall, so that the one-year return of the bond fund will be higher than the current yield. The risk is that rates might rise, or fall less than expected, and then the intermediate-term fund will underperform and could even lose value.

The current yield of Vanguard Intermediate-Term Treasury is 4.38%, and of Vanguard CA Intemediate-Term Tax-Exempt is 3.38%. In a 24% tax bracket, the after-tax yield of Vanguard Intermediate-Term Treasury would be 3.33%. That makes it a better choice that CA Intermediate-Term Tax-Exempt, as 0.05% in investment returns is not worth the difference in risk. But in a 32% tax bracket with 3.8% NIIT, the after-tax yield of Vanguard Intermediate-Term Treasury would be 2.82%, so at that tax rate I would recommend the muni fund.
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Re: Best approach to minimize taxes Fed and State (CA) calculators tools?

Post by carbonfiberhb8 »

Hacksawdave wrote: Sun Feb 02, 2025 10:53 am
carbonfiber248 wrote: Sat Feb 01, 2025 2:55 pm

Can you please share this excel sheet possibly so i can see the formulas and how they interact?

Curious what Row 1 and column A,B,C,D,E and F mean and how they are used same with clumn I,J,K,L as well?

Just based on what you shared it seems very clear the VUSXX even with the Fed taxes will yield a better after tax result. Perhaps thinking about VCADX is not ideal. Assuming a lower Fed tax rate like 24% and no NIIT the results would be even more favorable for VUSXX if I'm understanding the output.

When would VCADX be beneficail, only if the rates were the same i assume?
The other numbers on row 1 can be ignored as there are multiple spreadsheets within the sheet. Only H1 is used with the $1M hypothetical figure. I turned on the formulas. Sorry for the small print. It is simple per share distributions times number of shares. The calculation on the left deducts taxes on the monthly gross distribution.

I would not necessarily say VCADX was not an ideal choice. The last 12 months had the inverted yield curve and short-term holdings react quicker to changes than longer maturity holdings. This is why I use a monthly display instead of just an annual summed number. I hold all three Vanguard CA tax-exempt funds.

This would explain why the graded color scale on the net amounts are getting greener for VCADX and moving from green to a lighter green yellow for VUSXX. VCADX switched to be the better choice in November. One would have to continue adding the data points to see if this holds true going forward.
Image
Thanks for the feedback on the spreadsheet.

I'm trying better to understand when switching to VCADX would make more sense, just based on the historical information you used in your spreadsheet it seems clear the the choice is still to stick with other option like VUSXX. If the rates were similar, than it would be a no brainier to switch to VCADX.

You mention if the trends continue from Nov, I guess I'm looking at it from a yield perspective, as long as it is about ~1% less that is the primary indicator. Or am I simplifying it looking at just 30day yields to gauge switching?
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Re: Best approach to minimize taxes Fed and State (CA) calculators tools?

Post by carbonfiberhb8 »

grabiner wrote: Sun Feb 02, 2025 7:47 pm
carbonfiber248 wrote: Sat Feb 01, 2025 2:55 pm Just based on what you shared it seems very clear the VUSXX even with the Fed taxes will yield a better after tax result. Perhaps thinking about VCADX is not ideal. Assuming a lower Fed tax rate like 24% and no NIIT the results would be even more favorable for VUSXX if I'm understanding the output.

When would VCADX be beneficail, only if the rates were the same i assume?
It doesn't make sense to compare VUSXX (Vanguard Treasury Money Market) and VCADX (Vanguard CA Intermediate-Term Tax-Exempt). You have two separate choices to make: whether to use a money-market or an intermediate-term bond fund, and which fund to use.

An intermediate-term bond fund will outperform a money-market fund of the same time if interest rates change as expected, but with more risk. If intermediate-term yields are lower than money-market yields, this implies that bond traders expect rates to fall, so that the one-year return of the bond fund will be higher than the current yield. The risk is that rates might rise, or fall less than expected, and then the intermediate-term fund will underperform and could even lose value.

The current yield of Vanguard Intermediate-Term Treasury is 4.38%, and of Vanguard CA Intemediate-Term Tax-Exempt is 3.38%. In a 24% tax bracket, the after-tax yield of Vanguard Intermediate-Term Treasury would be 3.33%. That makes it a better choice that CA Intermediate-Term Tax-Exempt, as 0.05% in investment returns is not worth the difference in risk. But in a 32% tax bracket with 3.8% NIIT, the after-tax yield of Vanguard Intermediate-Term Treasury would be 2.82%, so at that tax rate I would recommend the muni fund.
I'm looking at it from a total net output perspective and I don't see the issue of comparing the two funds. Sure they are in a different category of class funds with different risk profiles. However, it doesn't take away from the fact there is benefits to be in one versus the other. I'm just looking for the ideal and optimal fund which results in the highest net possible at this time.

"An intermediate-term bond fund will outperform a money-market fund of the same time if interest rates change as expected, but with more risk."
At what rate does the intermediate bond become advantageous, when rates are near 1-2%? Currently with rates between 4-5% the clear winner has been VUSXX?

If intermediate-term yields are lower than money-market yields, this implies that bond traders expect rates to fall, so that the one-year return of the bond fund will be higher than the current yield.
Curious if you can please explain this in the current market situation we are in.
VCDAX is currently lower then VUSXX/VMFXX(FMM) tracking, if bond traders expect rates to fall, despite feds holding steady for now i would hedge they eventually fall, but would that not mean the one-year return of VCADX if I'm understanding your statement should be higher than the current yield which is between 4-5%?

The current yield of Vanguard Intermediate-Term Treasury is 4.38%, and of Vanguard CA Intemediate-Term Tax-Exempt is 3.38%. In a 24% tax bracket, the after-tax yield of Vanguard Intermediate-Term Treasury would be 3.33%. That makes it a better choice that CA Intermediate-Term Tax-Exempt, as 0.05% in investment returns is not worth the difference in risk. But in a 32% tax bracket with 3.8% NIIT, the after-tax yield of Vanguard Intermediate-Term Treasury would be 2.82%, so at that tax rate I would recommend the muni fund.
Agree, the risk is not worth the difference at 24%, it does in some way tie back to what I'm asking which is if the rates are the same than an extra 1% would make it more compelling to go into VCADX.

Thoughts?
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Hacksawdave
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Re: Best approach to minimize taxes Fed and State (CA) calculators tools?

Post by Hacksawdave »

carbonfiber248 wrote: Mon Feb 03, 2025 3:18 pm Thanks for the feedback on the spreadsheet.

I'm trying better to understand when switching to VCADX would make more sense, just based on the historical information you used in your spreadsheet it seems clear the the choice is still to stick with other option like VUSXX. If the rates were similar, than it would be a no brainier to switch to VCADX.

You mention if the trends continue from Nov, I guess I'm looking at it from a yield perspective, as long as it is about ~1% less that is the primary indicator. Or am I simplifying it looking at just 30day yields to gauge switching?
Switching is when you are ready to make that decision. I do not switch funds or flip-flop between taxable and tax-exempt funds. Yield curves get inverted, and the short-term then pays higher than long-term. On the flipside, ZIRP was in place from 2009-2022 with a brief hiatus in 2016-2020 to turn a near four-figure monthly money market distribution into something that would not afford a takeout pizza.

From the time the fed started raising rates, 5.25% of VCADX’s holdings matured and were replaced. For the next two years or so, the same will happen as 5.11% are expected to age out. Rates will be unknown, so watching the monthly per share distribution will tell one if higher coupons are contributing to the return.

I made my last purchase of VCADX on 12/14/20. I had acquired more of the VCLAX longs as I was in early retirement and began using them for generating monthly cashflow. The only municipals I have bought since the rate hikes have been in place are the longs in December of 2023 and 2024.
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Re: Best approach to minimize taxes Fed and State (CA) calculators tools?

Post by grabiner »

carbonfiber248 wrote: Mon Feb 03, 2025 3:34 pm
grabiner wrote: Sun Feb 02, 2025 7:47 pm
If intermediate-term yields are lower than money-market yields, this implies that bond traders expect rates to fall, so that the one-year return of the bond fund will be higher than the current yield.
Curious if you can please explain this in the current market situation we are in.
VCDAX is currently lower then VUSXX/VMFXX(FMM) tracking, if bond traders expect rates to fall, despite feds holding steady for now i would hedge they eventually fall, but would that not mean the one-year return of VCADX if I'm understanding your statement should be higher than the current yield which is between 4-5%?
Yes, this is correct. The current yield on VCADX is 3.38%. If the yields on the bonds in the fund do not change, the fund will earn 3.38%. Since the fund has a duration of 5.4 years, it will gain 1.35% if the yields on its bonds fall by a quarter of a percent; this would give it a one-year return of 4.51% if the decline occurs steadily over the year (so that the average yield during the year is 3.26%, dropping to 3.13% at the end).
"An intermediate-term bond fund will outperform a money-market fund of the same time if interest rates change as expected, but with more risk."
At what rate does the intermediate bond become advantageous, when rates are near 1-2%? Currently with rates between 4-5% the clear winner has been VUSXX?
There is no clear winner going forward for everyone, because you cannot effectively time the bond market. In an efficient market, the expected return of intermediate-term bonds should be slightly higher than the expected return of money-market funds, because of the risk; investors will only take a risk if they get a premium for that risk. There may be a clear winner for you based on your risk tolerance and intended use of the money.

And as for munis versus Treasuries, the winner depends on your tax situation. The current yield on Vanguard Intermediate-Term Treasury Index is 4.42%. In a 22% or 24% bracket, the Treasury fund will have about the same return as the muni fund, which makes the Treasury fund better because it has less risk. In a 32% bracket, you would prefer munis for the higher after-tax yield.
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Re: Best approach to minimize taxes Fed and State (CA) calculators tools?

Post by carbonfiberhb8 »

Hacksawdave wrote: Mon Feb 03, 2025 7:45 pm
carbonfiber248 wrote: Mon Feb 03, 2025 3:18 pm Thanks for the feedback on the spreadsheet.

I'm trying better to understand when switching to VCADX would make more sense, just based on the historical information you used in your spreadsheet it seems clear the the choice is still to stick with other option like VUSXX. If the rates were similar, than it would be a no brainier to switch to VCADX.

You mention if the trends continue from Nov, I guess I'm looking at it from a yield perspective, as long as it is about ~1% less that is the primary indicator. Or am I simplifying it looking at just 30day yields to gauge switching?
Switching is when you are ready to make that decision. I do not switch funds or flip-flop between taxable and tax-exempt funds. Yield curves get inverted, and the short-term then pays higher than long-term. On the flipside, ZIRP was in place from 2009-2022 with a brief hiatus in 2016-2020 to turn a near four-figure monthly money market distribution into something that would not afford a takeout pizza.

From the time the fed started raising rates, 5.25% of VCADX’s holdings matured and were replaced. For the next two years or so, the same will happen as 5.11% are expected to age out. Rates will be unknown, so watching the monthly per share distribution will tell one if higher coupons are contributing to the return.

I made my last purchase of VCADX on 12/14/20. I had acquired more of the VCLAX longs as I was in early retirement and began using them for generating monthly cashflow. The only municipals I have bought since the rate hikes have been in place are the longs in December of 2023 and 2024.
Your situation might be unique in that you are retired. I'm not a proponent of flipping and not a day trader, I'm considering what is the best option in the coming years given the current economic situation with potential of a few more rate drops in the coming years if inflation figures go down. I've been in the same fund for years.

Looking at the total return by NAV for VCADX 2022 was not a good year which ties into the risk associated with the fund. I guess collectively over a 5-10 year period unless you are in some of those special circumstances like higher tax bracket or trying to stay within a certain MAGI it makes little sense from my perspective to go into this account relative to the settlement or VUSXX fund.
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Re: Best approach to minimize taxes Fed and State (CA) calculators tools?

Post by carbonfiberhb8 »

grabiner wrote: Mon Feb 03, 2025 10:22 pm
carbonfiber248 wrote: Mon Feb 03, 2025 3:34 pm

Curious if you can please explain this in the current market situation we are in.
VCDAX is currently lower then VUSXX/VMFXX(FMM) tracking, if bond traders expect rates to fall, despite feds holding steady for now i would hedge they eventually fall, but would that not mean the one-year return of VCADX if I'm understanding your statement should be higher than the current yield which is between 4-5%?
Yes, this is correct. The current yield on VCADX is 3.38%. If the yields on the bonds in the fund do not change, the fund will earn 3.38%. Since the fund has a duration of 5.4 years, it will gain 1.35% if the yields on its bonds fall by a quarter of a percent; this would give it a one-year return of 4.51% if the decline occurs steadily over the year (so that the average yield during the year is 3.26%, dropping to 3.13% at the end).

At what rate does the intermediate bond become advantageous, when rates are near 1-2%? Currently with rates between 4-5% the clear winner has been VUSXX?
There is no clear winner going forward for everyone, because you cannot effectively time the bond market. In an efficient market, the expected return of intermediate-term bonds should be slightly higher than the expected return of money-market funds, because of the risk; investors will only take a risk if they get a premium for that risk. There may be a clear winner for you based on your risk tolerance and intended use of the money.

And as for munis versus Treasuries, the winner depends on your tax situation. The current yield on Vanguard Intermediate-Term Treasury Index is 4.42%. In a 22% or 24% bracket, the Treasury fund will have about the same return as the muni fund, which makes the Treasury fund better because it has less risk. In a 32% bracket, you would prefer munis for the higher after-tax yield.
Thanks, great explanations.
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Re: Best approach to minimize taxes Fed and State (CA) calculators tools?

Post by Hacksawdave »

carbonfiber248 wrote: Tue Feb 04, 2025 2:10 pm Your situation might be unique in that you are retired. I'm not a proponent of flipping and not a day trader, I'm considering what is the best option in the coming years given the current economic situation with potential of a few more rate drops in the coming years if inflation figures go down. I've been in the same fund for years.

Looking at the total return by NAV for VCADX 2022 was not a good year which ties into the risk associated with the fund. I guess collectively over a 5-10 year period unless you are in some of those special circumstances like higher tax bracket or trying to stay within a certain MAGI it makes little sense from my perspective to go into this account relative to the settlement or VUSXX fund.
Not a unique situation as I have planned for an early retirement around 2014 going back to 1998. The municipal funds had a long-term plan in all three phases of accumulation, transition, and decumulation. If the goal is to provide a short-term parking place for the $1M, then do not pick a bond fund. If it is longer term purpose, pick a duration to match the time length of the planned purpose.

I started with the MMF in 1996 as CD rates after taxes were counterproductive. I then added the VCAIX CA intermediates in 1997 (admiral class funds did not exist then) for better tax-exempt income over the MMF and reinvested the income in various other funds to grow those with tax-exempt Dollars. At the time we still had a pension with an early retirement provision that would pay 75% at age 50. This tax-exempt income would then be to cover the period of early retirement to eventual SS and 401k withdrawals. The pension was dissolved before that event happened.

I acquired the longs beginning in 2018 specifically for generating the maximum amount of tax-exempt income in early retirement with a forever holding period. Now, all tax-exempt income from the three funds feeds the cashflow process in early retirement, even though I am in miniscule federal and CA tax brackets. I ignore the NAV and any capital appreciation/loss on the bond funds as their sole purpose is to provide as much tax-exempt income as possible into cashflow without ever selling.

As you mention 2022 was not a good year for VCADX, could you point me to a bond or bond fund that had a good year in 2022? I have received consistent income from this fund ever since I bought it in 1997 while MMFs have fluctuated from a distribution as high as $946 that went down to around $5, and back up again to a new high of $1,498, only to drop again.
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Re: Best approach to minimize taxes Fed and State (CA) calculators tools?

Post by carbonfiberhb8 »

You are right 2022 is an outlier year. However, long term I would hedge on equities over bonds from a savings perspective. Sure you want to remain diversified, but the growth from a VTI over the same time period I have to imagine would have yielded a much better return than any bond fund or money market account.

You planned well in advance, but some might consider that potential losses by remaining in these funds during the same period. Not saying you had a bad stretegy at all, eveyrone has different circumstances and plans for how they invest.

For someone not planning like the way you have since pensions are a thing of the past, and far from retirement, diversifying high liquidy assets like cash while minimizing tax liability is really the point I'm trying to better understand with this post. Correct me if I'm wrong but based on all the information shared including your excel sheet, my assertion is correct? "...unless you are in some of those special circumstances like higher tax bracket or trying to stay within a certain MAGI it makes little sense from my perspective to go into this account relative to the settlement or VUSXX fund...

Thoughts?
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Re: Best approach to minimize taxes Fed and State (CA) calculators tools?

Post by Hacksawdave »

carbonfiberhb8 wrote: Tue Feb 04, 2025 6:28 pm You are right 2022 is an outlier year. However, long term I would hedge on equities over bonds from a savings perspective. Sure you want to remain diversified, but the growth from a VTI over the same time period I have to imagine would have yielded a much better return than any bond fund or money market account.

You planned well in advance, but some might consider that potential losses by remaining in these funds during the same period. Not saying you had a bad stretegy at all, eveyrone has different circumstances and plans for how they invest.

For someone not planning like the way you have since pensions are a thing of the past, and far from retirement, diversifying high liquidy assets like cash while minimizing tax liability is really the point I'm trying to better understand with this post. Correct me if I'm wrong but based on all the information shared including your excel sheet, my assertion is correct? "...unless you are in some of those special circumstances like higher tax bracket or trying to stay within a certain MAGI it makes little sense from my perspective to go into this account relative to the settlement or VUSXX fund...

Thoughts?
Cash and bonds are not intended to be growth vehicles, equities are. This is why I have a good portion of index funds in all three account types, with most in taxable. With a good cashflow plan, these get to grow unabated as I do not sell them but periodically exchange in tax-deferred for rebalancing.

When considering municipal income over taxable, there is more than just the top-line income tax number to consider. One needs to go through all the way down to the bottom-line after-tax numbers. These include any AGI/MAGI calculations, QD/LTCG rates, ACA (if applicable) and Sched A/Sched CA Part II. I have made plenty of posts about this. Feel free to review if you like.

While pensions are a thing of the past, they are interchangeable with compensation benefits of "today", such as RSUs, ESOPs, CBPs, deferred comp, and other defined compensation benefits. Any of these can be modified or taken away at any time, without notice. This is why one needs to build flexibility in why they own what they own and understand it.
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