What is a better option - a tax free mutual...

[Droppin Knowledge]

...fund at 3% or a taxable savings account at 5.8%? I'm selling my condo and have about $117K to invest until I buy another property. Morgan Stanely can get me 3.5% on a tax free money market however I pay .5% in commission. I can get 5.8% in a savings account but taxed on the interest. My tax rate is very high....highest braket....what will provide the largest return?

[Shawn C]

Tax Free only -- and consider using a different company than Morgan Stanely.-- you deserve to keep all your dough.Schwab or Fidelity will have better choices for you based on the total amount. Tax free Money Markets.

[Aaralyn]

The only way to answer that is to calculate what is going to be your contribution. And based on the numbers what is going to be the better return.

[chslaw]

Non tax mutual funds. No taxes no problems. Even with the higher rate of return, each time you with draw from it you will be taxed because it is such a high rate that it is always producing money. And with the mutual fund you don't have to report the tax. I don't know of any bank that gives that kind of return. The most I see is round 2-3%

[sandyjean]

Do the math....You say you are in the top tax bracket (AGI over $175,000) = 35%.On the taxable account you will earn 65% of 5.8% = 3.77%On the tax free account tou will earn 3%.Taxable savings account wins...and you don't have to pay MS that ridiculous 0.5% fee.

[CogWork]

It depends on the tax bracket you fall into. In general though, the higher your tax rate the better a tax free fund wil be for you. There is a simple formula you can use to deterime which investment option is better for your individual case.Tax exempt rate--------------------- = Comparable rate(1-your tax rate)Using the above example (3% tax free rate & 25% tax rate) you would get the following: 3/(1-.25) = 4%Compare this 4% to the 5.8% taxable savings account and you'll make more money investing in the taxable savings account.

[BosCFA]

The highest tax bracket in 2006 was 35%.So, let's compare:Taxable yield is easy. It's 5.8%*(1-.35)= 3.77% after taxes. That's actually enough information to make a decision, but we'll do the other side, too.On the tax exempt side, you will only be able to invest 116,415 because of the commission. On that you will earn 3.5%, which is 4,074. That means that your effective yield is 3.48%. So...as it turns out, the spread between the two accounts is enough that the taxable account is actually better for you..

[Brenda L]

You will still make more money after tax by taking the 5.8%, even if you are in a 35% tax bracket.116,415 X 3.5% = $4074.53 (assumes .5% comm)117,000 X 5.8% = $6786.00 minus 35% fed tax = $4410.90If you have to pay state income tax over 5% (acutally 4.9569%), you will actually do better in the tax free.