VWITX(Intermediate term muni) vs I-Bonds

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rex
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VWITX(Intermediate term muni) vs I-Bonds

Post by rex »

I know this is probably not an apples to apples comparison but just curious if anyone has already done the math. If i invested 10k in VWITX 10 years back - would it have given me a better return than i-bonds for the same period of time ?

thanks,
Rex.
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stevewolfe
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Re: VWITX(Intermediate term muni) vs I-Bonds

Post by stevewolfe »

Let's say it was I-Bonds for a second, what would that mean for an investment made today?
OK, now let's say it was VWITX, what would that mean for an investment made today?

See what I mean? You can't invest in the last 10 years of returns, so I'm not sure that it matters which has had a better return (BTW - were you referring to real return or nominal return?).

That said, this chart from Morningstar will show $10k in VWITX grew to $15,564.94: VWITX Growth of $10k. While this calculator Savings Bond Calculator shows a $10k I-Bond with issue date of 3/2003 grew to $15,392 - however, you will still owe Federal tax on this bond when you redeem it.
lighthouse084
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Re: VWITX(Intermediate term muni) vs I-Bonds

Post by lighthouse084 »

Your goals matter.
Consider the fact that market fluctuations can affect the principal invested into the bond fund. Maybe not by much in the long run, but the principal is not guaranteed!
I-Bonds can also turn into an emergency fund that let you redeem them with a loss of 3 months interest after 12 months and no loss of interest after a certain number of years (look it up). A sweet deal if you're looking to build a long-term emergency fund.
I would place money I MAY need to see in the next 30 years into I-Bonds. The rest goes into municipal bond funds and other bond funds you deem appropriate.
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rex
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Re: VWITX(Intermediate term muni) vs I-Bonds

Post by rex »

thanks folks for the guidance and the link to the savings bond calculator - this is exactly what i was looking for.
lighthouse084
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Re: VWITX(Intermediate term muni) vs I-Bonds

Post by lighthouse084 »

How would you calculate exemption from state taxes on funds like these?
Let's say you live in CA or NY, you would be exempt (mostly) from federal taxes, however, how do you not pay taxes on the interest paid to you via the portion of the fund that obtains its profits from bonds in your state?
investnoob13
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Re: VWITX(Intermediate term muni) vs I-Bonds

Post by investnoob13 »

lighthouse084 wrote:How would you calculate exemption from state taxes on funds like these?
Let's say you live in CA or NY, you would be exempt (mostly) from federal taxes, however, how do you not pay taxes on the interest paid to you via the portion of the fund that obtains its profits from bonds in your state?
I am pretty new into invest tax-exempt muni funds. Please correct me if I am wrong: I live in CA. I don't have to pay interest/dividends taxes on my federal and state if I invested in CA tax-exempt fund, right? I only have to pay my capital gain (or loss) when I sold the fund, right?

Thanks,
Call_Me_Op
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Re: VWITX(Intermediate term muni) vs I-Bonds

Post by Call_Me_Op »

rex wrote:I know this is probably not an apples to apples comparison but just curious if anyone has already done the math. If i invested 10k in VWITX 10 years back - would it have given me a better return than i-bonds for the same period of time ?

thanks,
Rex.
I certainly hope that you are aware that the answer to this question has little relevance to the next 10 years.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
z3r0c00l
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Re: VWITX(Intermediate term muni) vs I-Bonds

Post by z3r0c00l »

Although I think this comparison was interesting, I would not expect it to help us much for the next 10 years. Those bonds saw strong cap gains as well as income, and inflation has been rather tame.
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#Cruncher
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Re: VWITX(Intermediate term muni) vs I-Bonds

Post by #Cruncher »

stevewolfe, Call_Me_Op, and z3r0c00l are correct that the results of the past 10 years help little in predicting the future relative performance of I Bonds and a tax exempt bond fund. However, you can polish up your crystal ball and make some assumptions for the next 10 years. It's then relatively easy to calculate comparative results. For example, given the following assumptions:

Code: Select all

   0.00%   I Bond Fixed Rate
   1.54%   Muni SEC Yield (1)
   2.00%   CPI Annual Increase
  25%      Federal Tax Rate
   5%      State Tax Rate
   1.463%  After Tax Muni Yield (1.54% X 95%)
Here are the comparative results after 10 years for a $1,000 investment in each:

Code: Select all

  I Bond        Muni
  --------    --------
  1,000.00                Pretax Real Value
  1,218.99    1,165.12    Pretax Nominal Value (2) (3)
    (54.75)               Federal Tax (4)
                 (8.81)   State Tax (5)
  --------    --------
  1,164.25    1,156.32    Aftertax Nominal Value (6)
Notes:
  1. The 1.54% is for Vanguard Intermediate-Term Tax-Exempt Fund Investor Shares (VWITX)
  2. Pretax I Bond value = 1000 X 1.02 ^ 10
  3. Pretax Muni value = 1000 X 1.0154 ^ 10
  4. The federal tax on I Bonds is deferred until redemption. = (1218.99 - 1000) X 25%
  5. The state tax on municipal bonds is deducted each year. So this figure is "backed into" by subtracting the aftertax value from the pretax value.
  6. Aftertax Muni value = 1000 X 1.01463 ^ 10
lighthouse084 wrote:... how do you not pay taxes on the interest paid to you via the portion of the fund that obtains its profits from bonds in your state?
Most state income tax forms have a section for excluding interest income on tax-exempt bonds issued by the state itself and localities and agencies within the state. Vanguard -- and other fund companies I assume -- provide a breakdown of income received by state. However, some states have a minimum percentage when considering a mutual fund. I believe in California, for example, unless at least 50% of the fund's income is from within California, none of the income can be excluded. If you invest in a single state fund, it is easy: you exclude all the dividends received from the fund.
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