Archive for the 'Savings Bonds' Category
Tuesday, March 13th, 2007
There are many investments out there that are exempt from certain taxes. For example, U.S. Savings Bonds and Treasury Bonds are exempt from state and local income taxes. In addition, there are money market funds available that are exempt from federal income tax and others that are even exempt from a specific state or city’s income taxes.
Therefore, it is desirable to know what the equivalent fully-taxable rate is for one of these investments. For example, is it more profitable to earn a federal tax-exempt interest rate of 3.8% or a fully taxable 5.0%? How about a Treasury Bill paying 4.8%? Several variables affect this rate, including your marginal tax brackets for each area, as well as if you itemize your state and local taxes on your federal tax return. I could not find a calculator that accurately captured all of this, so I made my own.
Example
Let’s say you live in California, and your marginal federal tax rate is 25%, your state rate is 9.3%, and you have no local income taxes. You do not itemize your taxes. You are trying to compare the taxable Vanguard Prime Money Market Fund (VMMXX, yielding 5.08%), the federally exempt Vanguard Tax-Exempt Money Market Fund (VMSXX, yielding 3.48%), and the state and federal tax-exempt Vanguard California Tax-Exempt Money Market Fund (VCTXX, yielding 3.38%).
With that profile, the tax equivalent 7-day yields would be 4.804% for VMSXX, and 5.145% for VCTXX, making the California Tax-Exempt Fund the best bet currently for this specific situation.
How It Works (Warning: Math Ahead!)
The calculator computes the tax-equivalent rates by comparing after-tax returns. That is:
AfterTaxReturnEquivalentTaxableRate = AfterTaxReturnTaxAdvantagedRate
Using the California Tax-Exempt Fund example above:
EquivalentRate x (1 - FederalTaxes - StateTaxes) = 3.38%
EquivalentRate x (1 - 0.25 - 0.093) = 0.0338
EquivalentRate = 5.145%
So earning 3.38% free from federal and state taxes is the same as earning 5.145% in a fully taxable account.
Note that itemizing deductions means that you deduct your state income taxes from your federal taxable income. The effect is that your overall tax liability is reduced, which lowers the benefit of any tax-exemptions and thus the equivalent rates. That would change the previous equation to:
EquivalentRate x (1 - FederalTaxes - StateTaxes + (FederalTaxes x StateTaxes)) = 3.38%
EquivalentRate = 4.969%
The inclusion of this option may give different results from some of the other online calculators out there, but I believe it makes the results more complete. Another fully-worked-out example can be found here for savings bonds.
Finally, it may be handy to use this in conjunction with my Ultimate Interest Rate Chaser Calculator. Be sure to compare APRs to APRs and APYs to APYs.
Useful Resources
2007 Federal Tax Rates
State Income Tax Rates
Recent Treasury Bill Auction Results
Savings Bonds Rates
Posted in Banking, Savings Bonds, Tools & Calculators, Treasury Bills and Bonds | 19 Comments »
Wednesday, January 3rd, 2007
As suggested by my When Should You Redeem I Savings Bonds Calculator, I redeemed a $5,000 I-Bond purchased in October 2005 on Tuesday. I ended up receiving $298 in interest over a holding period of 14 months (I bought at the very end of October). Since the interest is exempt from state-income taxes, my effective interest rate was around 5.8%. I did it all online at TreasuryDirect.gov and the money should be in my bank account within two days.
Posted in Savings Bonds | 6 Comments »
Tuesday, November 7th, 2006
As predicted in October, the new inflation portion of I-Bonds is 3.12% and the new fixed rate is 1.4%, for a total of 4.52%. This is still lower than what is available via Treasury Bills and online savings accounts, so those of us with older Savings Bonds should really think about cashing them in. But when is the best time to do it? Here how I try to figure it out, and a quick calculator that does it for you.
Should you redeem?
But first, let’s make sure you want to redeem. I-Bonds have several tax-advantages:
- Interest is exempt from state and local income taxes (although so is T-Bill/T-Bond interest)
- Interest can be tax-free for certain educational expenses
- You can choose when to pay taxes on it with cash basis reporting (and thus possibly delay until when you are in a lower tax bracket)
Read the rest of this entry…
Posted in Savings Bonds, Tools & Calculators | 17 Comments »
Wednesday, October 18th, 2006
It’s time again to predict the upcoming I-Bond rate announcement for November, as the September CPI-U numbers were just announced. We did this successfully for both last October and April, using the information in my How To Predict I-Bond Savings Bond Rates post.
For more information on savings bonds in general, check out my Savings Bond category. Otherwise, let’s get to it:
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Posted in Savings Bonds | 11 Comments »
Wednesday, April 19th, 2006
Just like last October, using the information in my How To Predict I-Bond Savings Bond Rates post, we can now try to predict the upcoming I-Bond rate announcement on May 1st. For more information on savings bonds, check out my Savings Bond category, starting with my intro to I and EE bonds. Let’s just jump into it:
The CPI-U in September 2005 was 198.8.
The CPI-U in March 2006 was 199.8.
Read the rest of this entry…
Posted in Savings Bonds | 4 Comments »
Tuesday, January 10th, 2006
I whipped out my ancient how-to-make-a-website book, and made a simple but handy JavaScript calculator for calculating the equivalent bank CD rate for a given T-Bill or Savings Bond rate, as the interest from them are exempt from local and state taxes. This uses the rate conversion formula previously given. Remember, marginal means the tax rate at which your last earned dollar is taxed. Please try it out and let me know if something’s broken:
Calculator:
For example, at my 25% Fed and 9% State tax rates, the current 4.14% rate for a 4-week T-Bill is the equivalent of a 1-month bank CD earning 4.70% annualized.
Note: The above calculator does not assume that you will itemize deductions and deduct your state taxes from your federal taxes. Even if you do itemize, I would note that everyone gets the standard deduction, so it’s not necessarily fully deductible.
Useful Resources:
Recent T-Bill auction results
2006 Federal Tax Rates
State Income Tax Rates
Posted in Savings Bonds, Tools & Calculators, Treasury Bills and Bonds | 23 Comments »
Monday, November 28th, 2005
(Please also see the previous discussion of Savings Bonds)
The end of November has snuck up on me, and I’ve been putting off until now deciding whether to buy more I-Type Savings Bonds. I already did the math to see the rates for the worst case scenario (deflation), but that is pretty unlikely. The CPI-U, which is what the inflation component of I-Bonds is based on, only rose 0.2% in October. Instead of trying to predict inflation rates, let’s just see what the overall rate will be for different rates of inflation. I will compare rates for holding the I-Bond for 12 months and then redeeming them with the associated penalties, in order to compare it with a 1-Year Bank CD. I will also assume that you can buy at the end of the month to shorten the actual hold time to 11 months.
Read the rest of this entry…
Posted in Savings Bonds | 14 Comments »
Thursday, November 3rd, 2005
So what’s the worst case scenario with I-Bonds if you cash out in a year? Well, that would mean deflation. Contrary to what some believe, the fixed rate is not the minimum you get. The minimum return is zero (see #5 of FAQ), meaning at least you don’t lose anything.
So 6 months at 6.73%, and then 6 months at 0.0% (3-month penalty of… well, nothing). Buying late in November, you’d actually be holding it for 11 months, working out to an annual rate of about 3.67%, not including tax benefits. Of course, deflation is very unlikely. But that’s still the worse case scenario (barring Armageddon).
Posted in Savings Bonds | 12 Comments »
Tuesday, November 1st, 2005
The new fixed rate for I-type Savings Bonds was announced today, and it has decreased from 1.2% to 1.0%, matching the lowest historical fixed rate. This was within my prediction of 1.0 to 1.4%, but one has to wonder if all the mid-October buzz caused them to make the rate lower. Oh well, I bought $5,000 worth in October with the higher fixed rate, so I have until the end of this month to decide whether to buy more. No need to buy now, since they credit you interest for the whole month anways as long as you buy it within November.
If you do buy in November, it will earn 6.73% for 6 months, then 1.0% + a variable rate depending on future inflation adjusted every 6 months. You have to hold at least a year, and you lose the last 3 months interest if you redeem within 5 years.
Posted in Savings Bonds | 14 Comments »
Monday, October 31st, 2005
One perk of U.S. Savings Bonds (USSB) and Treasury Bills is that they are exempt from state and local income taxes. For comparison, what would be useful is a quick way of comparing those tax-advantaged rates with the regular interest rates from a bank savings account or CD. So let’s do that. To start, we agree that we want find the equivalent bank rate that gives us the same after-tax return.
AfterTaxReturnBank = AfterTaxReturnUSSB
RateBank * (1 - Fed Tax Rate - State/Local Tax Rate) =
RateUSSB * (1 - Fed Tax Rate)
This gives us:
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Posted in Savings Bonds, Treasury Bills and Bonds | 26 Comments »
Tuesday, October 25th, 2005
My $5,000 I-Bond online purchase looks like it went off today without a hitch at Treasury Direct. Well, almost. I didn’t pay attention to my BillPay along with my checking account balance and I ended up going below the $1,000 minimum on my Presidential checking account. Doh! At least it’s only a $5 low-balance fee and not a bounced check.
There was also a good question about partial redemptions of Savings Bonds - If you withdraw any of it early (less than 5 years), will you be paying a penalty on all future withdrawals, even if you wait more than 5 years? I e-mailed them (they don’t seem to have a phone number?), and the answer I got was no. Here’s my e-mail and their response:
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Posted in Savings Bonds | 3 Comments »
Wednesday, October 19th, 2005
A relatively unpublicized new feature of buying your Savings Bonds online is the ability to cash out only part of your bonds, mentioned briefly here. I just noticed this recently, and explored it further in my account with my paper bonds that were recently converted to electronic format. Now that they are electronic - I can partially cash out those too! Apparently the only two restrictions are:
1) The minimum amount you can redeem is $25
2) The remaining value of the bond cannot be less than $25
Here is a screen shot of me trying to partially redeem my bonds:
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Posted in Savings Bonds | 10 Comments »
Monday, October 17th, 2005
[Continued from Part 1.]
Previously I went over the return that I could expect from buying I-type Savings Bonds at the end of October. While the numbers for buying in October are pretty much set, predicting the rates for buying in November will require a lot of guessing and hand-waving.
Short answer: It’s a toss-up. I’m buying half now and half next month.
Long answer:
Read the rest of this entry…
Posted in Savings Bonds | 4 Comments »
Saturday, October 15th, 2005
Well, there goes another Saturday devoted to watching college football. Now back to the issue at hand - Should I buy I-Bonds now or later? I’m definitely buying some, since the higher rate, low risk, and 1-year minimum hold time matches my Mid-Term goal needs very well. As I and others have mentioned, as long as you buy sometime during the month, you get interest for the entire month. So if you buy at the very end of the month (I’ll call this ‘buying late’), you can view it as getting 12 months of interest in only 11 months. So, we should buy either at the end of October or the end of November. There is a difference, so let’s compare:
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Posted in Savings Bonds | 5 Comments »
