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After Tax Yield: Doug’s Quiz Corner

Posted by Doug Hutchinson | CFA®, Director of Research and Trading

November 17, 2017

Quizmaster, Doug Hutchinson, presents his quiz for the month. Here, Doug discusses a strategy for getting a higher after tax yield.

Consider this Scenario:

Your friends George and Kathy are analyzing the holdings in their taxable joint account. They own $100,000 of an ETF that holds taxable bonds. This ETF has a yield of 2.30%. Assume George and Kathy have a federal tax rate of 28% and a state tax rate of 5%.

George and Kathy are considering replacing the taxable bond ETF with a municipal bond ETF that has a yield of 1.85%. Assume that the dividends for this municipal bond ETF are exempt from Federal and State taxes.

Does it make sense for George and Kathy to replace the taxable bond ETF with the municipal bond ETF in their taxable joint account?

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