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Muni funds help – CA

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  • xraygoggles xraygoggles 
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    What are the main disadvantages to investing in the Vanguard CA Long-Term Tax-Exempt Fund  (VCITX) instead of Vanguard California Intermediate-Term Tax-Exempt Fund (VCAIX)?

    This money will likely be needed within 1-2 years (RE savings), does it matter which one I choose? The long-term fund has higher returns in the past.

    “Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.”

    #235073 Reply
    Avatar jz 
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    The effective DURATION is the difference. If the Fed raises short term  rates , VCITX, with a duration of 6.76 years, will drop in asset value by 6.76% for every 1% rise  in short term rates.  VCAIX, with a duration of 5.05 years, will drop in value 5.05% for every 1% rise in short term rates.  In reality the changes are not that precise nor predictable because the long duration bonds tend to be influenced by more factors than just short term Fed rates. Because you can not predict the Fed decisions,  and you need the asset soon, put them into the shortest available duration fund.

    #235084 Reply
    Avatar Peds 
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    1-2 years maybe not recommend if you actually need the money.
    Good time to learn about bonds and how they work.

    #235097 Reply
    Liked by DCdoc
    Avatar DCdoc 
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    A lot of interest rate risk in bonds at current yield level for such a short duration. Probably better to do a MMF or CD

    #235100 Reply
    xraygoggles xraygoggles 
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    You’re right in that I am a complete novice when it comes to Bonds. What resources do you recommend?

    I’m really trying to avoid a savings account or money market fund. I’d like to save on state taxes, if possible. I am in the 12.3% bracket.

    “Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.”

    #235102 Reply
    Lordosis Lordosis 
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    Depending on your tax bracket this might be useful

     

    https://investor.vanguard.com/mutual-funds/profile/VCTXX

    “Never let your sense of morals prevent you from doing what is right.”

    #235103 Reply
    TrumpMD TrumpMD 
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    Low yield on that one and other money market munis. Are they worth it compared to Wealthfront paying 2.5% on savings? Money market munis I’ve seen yield around 1%, not even above inflation

    "Tax loss harvesting": buy high and sell low to achieve true wealth

    #235105 Reply
    Liked by xraygoggles
    xraygoggles xraygoggles 
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    Depending on your tax bracket this might be useful

     

    https://investor.vanguard.com/mutual-funds/profile/VCTXX

    Click to expand…

    I’m not sure that’s what I would choose.

    Sure, rates could fluctuate over the next few quarters. But even if they did, it might still be worth it to invest in the higher yielding funds I mentioned above, particularly VCITX. 5.92% returns since inception.

    “Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.”

    #235117 Reply
    DMFA DMFA 
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    Low yield on that one and other money market munis. Are they worth it compared to Wealthfront paying 2.5% on savings? Money market munis I’ve seen yield around 1%, not even above inflation

    Click to expand…

    VCTXX – 1.29% 12-month trailing, no tax

    Wealthfront: 2.5% pretax, so if if your marginal rate is 48.4% or greater, you’d be better off in VCTXX.  In CA, that can be plausible; for single filers earning $286,500 the CA marginal rate is 10.3%, so it would take being in the 35% bracket for it to be close (would see 35% + 11.3%), and in the 37% bracket (11.3 – 12.3% CA tax) to put it all the way over.

    CA tax is a beast.  Also be aware that high-yield savings is very likely to drop their rates going forward, if the most recent drops by a tenth over the past week or so have been any indication.  It’s all an arms race.

    If you’re looking at regular munis and not a muni money market fund, like VCITX/VCLAX (long-term) vs VCAIX/VCADX (intermediate-term), what you’re looking at is duration.  Both have had a lot of their recent trailing 12 month returns mostly related to an increase in NAV instead of yield because duration risk worked out in their favor (lower new rates increased the value of longer-term bonds at higher rates).  So if you sell those shares at a gain in NAV, then even though the income you earned on those bonds is tax-free, the capital gain you’ve realized is still taxed, and often at usual income rates if you’ve held the lot for under a year.

    "I like money." - Frito Pendejo (Idiocracy)

    [Not a financial professional (yet), lawyer, or employee of The White Coat Investor]

    #235118 Reply
    Liked by TrumpMD, jz

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