Click here for the latest Sharebuilder promotion, a $50 bonus.
I have been participating in ShareBuilder’s $50 bonus promotion which offers the free cash to those who open a new account online with a certain coupon code.
Originally, I funded the account with $50 from my checking account and invested in $46 worth of IYZ, an exchange-traded fund, and paid the $4 commission. Over the las month since opening the account, the value of the fund has floated a little lower than its opening value, but I think the sector has long-term growth potential barring major catastrophes.
In any case, I received an email today from ShareBuilder notifying me that my free $50 has been deposited. I have several options. I could leave the $50 in the cash balance account, which technically invests the money in the Bedford Shares of the RBB Funds Money Market Portfolio (BDMXX) whose 7-day yield is 2.62 percent (tax-exempt), move the $50 to my ING Direct or Emigrant Direct savings account where the taxable yield would be 3.3 to 3.5 percent, or invest in another fund for a commission of $4.
Between the cash accounts, it looks like I’ll be better off in the taxable savings account. My effective tax rate for last year was 10.62 percent, so using that as a guide, after taxes the 3.3 percent yield becomes 2.9 and 3.5 percent becomes 3.1. I’ll move the $50 into my Emigrant Direct account.
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I may be misunderstanding something here, but I’m not sure you should be using your effective tax rate for this calculation. Rather, you should be looking at your marginal rate.
If you keep your money in the taxable account instead of the tax-exempt account, you would pay your marginal tax rate on that extra income.
If that’s the case, it changes things. I am in the 25% tax bracket, so apparently the 3.3 percent becomes 2.475 and 3.5 becomes 2.625. In that respect, the tax-exempt fund is more competitive.
I wanted to agree with Rabi and also add that you should project your earnings this year and see if you have any major changes (such as website revenue, side projects, etc) as that will affect your marginal tax rate (maybe not enough to change it, but one can hope right?)