tax free savings or higher interest with tax?

[jeff5656]

Let's say I have $30,000 in a minincipal money market. It is 3.11% but it is tax free.
Is it cheaper to keep 30K in this tax free but lower interest account, or move it to one of those online savings accounts that earn 5.25% interest, but the interest is taxed? I called an advisor at fidelity to ask them, but they had no clue.

[bjl584]

If you know your tax bracket it is easy to figure out. I don't know how a financial advisor wouldn't know.

[jeff5656]

I told him to assume that it was 28% and he didn't (or wouldn't) tell me. I guess fidelity has good commercials but maybe they aren't the brightest people in the world when it comes to financial matters (rather ironic).

[bjl584]

I don't know what your tax bracket is, but in my case, I would make around an extra $100 by keeping it in the 5.25% account and paying the taxes.

[jIM_Ohio]

The higher the tax bracket, the more important the decision.

The math (1-tax rate)*yield=after tax return

Two examples:
25% tax rate on both

(1-.00)*3.11%=3.11%
(1-.25)*5.25%=3.93%

conclusion- invest in taxable account/ it's better to pay taxes.

33% tax rate
1-.00*3.11%=3.11%
(1-.33)*5.25%=3.465

then factor in state taxes and you see why people in high tax brackets need this. If person is in second highest tax bracket (33%) and the additional interest bumps rate up to 35%, that is an expensive investment decision.

For people in lower tax brackets, it is better to pay the taxes.

[scfr]

Click on this link, and then click were it says "Taxable Yield Equivalent Calculator," and you should find your answer.

Calculators

[jeff5656]

Thanks for the replies (calculatore and the other post showing the math). Unfortunately, in this day and age, that 5.25 went poof. ING orange savings account now offers 3.40% instead of the 5%! So I guess it makes sense to keep it in the munincipal tax-free account for now...

[Slug]

Is this municipal money market tax free on both a state and national level? I was running similar calcs for my T-bill ladder that convinced me to switch it to Paypal's money market. T-bills have only gotten worse since then.