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December 11, 2004 07:02 AM

Taxable And Tax-Exempt Not So Different?


Excerpt: You're absolutely right, my eagle-eyed friend. In some cases, taxable money funds and tax-exempt funds are throwing off yields that are pretty close even before taking the tax-exempt fund's tax advantages into account.


I'm looking to park some cash in a money-market fund and I've noticed that some companies' taxable and tax-exempt money funds are paying roughly the same yields. Am I missing something, or in such a case should I go with the tax-exempt money market?

-- Anonymous, New York

You're absolutely right, my eagle-eyed friend. In some cases, taxable money funds and tax-exempt funds are throwing off yields that are pretty close even before taking the tax-exempt fund's tax advantages into account.

Case in point: the seven-day yield on Vanguard's Prime Money Market fund as of November 30 was 1.73 percent, according to the iMoneyNet Web site, compared with a 1.58 percent for Vanguard's Tax-Exempt Money fund.

Assuming you're in the 25 percent tax bracket, that means the tax-exempt fund would pay you a taxable equivalent of 2.11 percent, or close to half a percentage point more than you would get in the taxable fund.

You'd do even better in the tax-exempt fund, if you're in a higher tax bracket, and less well, naturally, if you're in a lower bracket (although even in the 10 percent bracket, you would still come out slightly ahead).

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Read all 40 posts in the same category of Investment:

Gifts to Fidelity Employees Attract Investigators - Dec 17, 2004
Bottom Line at Fannie Mae: Looking Safe vs. Being Safe - Dec 17, 2004
Assessing What Will Now Happen to Fannie Mae - Dec 17, 2004
Brokerages Battle for 'Active Traders' - Dec 14, 2004
The Dollar Dilemma - Dec 08, 2004
Fear Itself - Dec 08, 2004
Wall St. Turns To The Time Out As Punishment - Dec 08, 2004
How To Profit On A Weak Dollar - Dec 08, 2004
Zhou Comments Boost Yuan Forwards - Dec 07, 2004
SEC: Hedge Fund Advisers Must Register - Dec 06, 2004
Should You Be Buying Gold? - Dec 06, 2004
Money Market Funds Reinflate Fees - Dec 06, 2004
The Tax Man May Take a Bite - Dec 05, 2004
China Pledges Stable Policies - Dec 05, 2004
The Insiders Are Selling. But Is That So Bad? - Dec 05, 2004
Fed President: Measured Hikes Ahead - Dec 03, 2004
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Dollar Struggles From New Lows - Dec 02, 2004
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Nothing Ventured, Everything Gained - Dec 02, 2004
The Right (and Wrong) Way To Protect Yourself Against The Falling Dollar - Dec 01, 2004
Fidelity Tightens Trading Policy - Nov 30, 2004
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