4 thoughts on “The time I doubled my after-tax return with about 60 seconds of work

  1. You state “absolutely no downside”. I realize federal government bonds are very low risk, and state bonds only slightly higher risk. Municipal bonds are even slightly higher risk. Not to mention you are concentrating that risk inside California rather than across the US.
    Given the relatively small increase in return, wouldn’t you be better off keeping that risk diversified in the money market account which likely holds primarily federal government bonds and AAA rated corporate bonds?

    1. Well, I guess that technically the California Muni money market IS higher risk that the Federal Money Market, but we’d be talking very small fractions of a percent here.

      The fund I moved my money to is a very short term fund – average weighted maturity of 16 days (https://institutional.vanguard.com/VGApp/iip/site/institutional/investments/portfoliodetails?fundId=0062#FundamentalsTop).

      The fund only invests in high quality bonds with minimal default risk. Given that many muni bonds are separately insured by a third party, I’m not sure there’s much of a difference from a AAA corporate bond.

  2. Looking at this fund and the Fidelity equivalent, these funds are not AMT-free. Vanguard’s holdings currently include 12.4 percent subject to the AMT and may include up to 20 percent. Fido may also hold up to 20 percent non AMT-free.

    It’s not really clear what these funds actually hold. The composition of the Fido fund is concerning. I don’t find a percentage composition for the Vanguard fund.

    Composition by Instrument
    AS OF 4/30/2017
    Municipal Notes 3.94%
    Municipal Bonds 0.93%
    Tender Bonds 4.50%
    Commercial Paper 23.35%
    Variable-Rate Demand Notes 53.04%
    Other Money Market Investments 14.19%
    Net Other Assets 0.05%

    1. Yes, it’s true that private activity bonds are subject to AMT. However, let’s do the math:

      Max holdings of Vanguard CA Muni fund subject to AMT: 20%.
      Max AMT tax rate: 28%

      Max AMT tax on Vanguard CA Muni fund = 20% of 28% = 5.6%

      Current AMT tax on Vanguard CA Muni fund = 20% of 12.4% = 2.48%

      Now this assumes that you’re actually subject to the AMT. Taxpayers making between $200k and $500k are most likely to be hit by the AMT.

      So, IF you’re hit by the AMT then you’d currently pay an AMT tax of 2.48% of your income from the fund. Even factoring that it I think most people will be significantly better off in a CA Muni fund than in a taxable account.

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