Why not Munis in taxable vs TB in IRA?

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dickenjb
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Why not Munis in taxable vs TB in IRA?

Post by dickenjb »

So I hold some Total Bond Admiral in my tax deferred accounts. TB yields 2.35% and has an average duration of 5.2 years.

Intermediate Term Admiral Index has a similar yield and duration.

Looking at Intermediate Term Tax Exempt Admiral, it has a yield of 2.59% and a duration of 5.4 years.

It seems to me I would be better off holding the muni fund in taxable at any tax bracket! FWIW I am in the 35% bracket and subject to AMT. Checked and it holds 0% AMT securities.

What am I missing? Should I sell Total Bond in tax deferred to buy TSM and sell TSM in taxable to hold the muni fund?

I guess where I am going with this, if muni bonds pay more nominal interest than taxable bonds, why would I own taxable bonds?
natureexplorer
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Re: Why not Munis in taxable vs TB in IRA?

Post by natureexplorer »

A few people actually do what you propose (e.g. TFB).

Most people think there is a risk story behind this.
dbr
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Re: Why not Munis in taxable vs TB in IRA?

Post by dbr »

natureexplorer wrote:A few people actually do what you propose (e.g. TFB).

Most people think there is a risk story behind.
In any case, TBM and muni's are not the same bonds. Even at the same duration the properties are not the same; apparently the market agrees that muni's need to return more to justify the investment, whatever the tax bracket.
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baw703916
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Re: Why not Munis in taxable vs TB in IRA?

Post by baw703916 »

dbr wrote:
natureexplorer wrote:A few people actually do what you propose (e.g. TFB).

Most people think there is a risk story behind.
In any case, TBM and muni's are not the same bonds. Even at the same duration the properties are not the same; apparently the market agrees that muni's need to return more to justify the investment, whatever the tax bracket.
There's some more things going on. The Fed is a major buyer of Treasuries, with the explicit objective of forcing down long-term interest rates on Treasuries. They're not going to start buying munis no matter what the spread is...neither are foreign banks (central or commercial). For these large players, liquidity and market size is what matters. To the extent that these don't matter to individuals, it can be a free lunch.
Most of my posts assume no behavioral errors.
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brisni
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Re: Why not Munis in taxable vs TB in IRA?

Post by brisni »

TBM yield has gone down as treasury yield has gone down. Muni yield has not gone down as much,
but there is more risk than treasuries. Corporate bonds, of course, have greatest yield and risk.
I'm no expert, but it does look like municipals are in the sweet spot at the moment.

- Brian
YDNAL
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Re: Why not Munis in taxable vs TB in IRA?

Post by YDNAL »

dickenjb wrote:So I hold some Total Bond Admiral in my tax deferred accounts. TB yields 2.35% and has an average duration of 5.2 years.

Intermediate Term Admiral Index has a similar yield and duration.

Looking at Intermediate Term Tax Exempt Admiral, it has a yield of 2.59% and a duration of 5.4 years.

It seems to me I would be better off holding the muni fund in taxable at any tax bracket! FWIW I am in the 35% bracket and subject to AMT. Checked and it holds 0% AMT securities.

What am I missing? Should I sell Total Bond in tax deferred to buy TSM and sell TSM in taxable to hold the muni fund?

I guess where I am going with this, if muni bonds pay more nominal interest than taxable bonds, why would I own taxable bonds?
You compare apples and oranges.... TBM <> Munis. (I believe you know this!)
  • That said, if you don't mind having your bond exposure in the latter, and the return/risk appeals to you, then by all means you can go with Munis in taxable and Equities in tax-advantaged.
  • If you do this, there's an added benefit since you save taxes on Equity distributions (dividends). For instance, Total Stock paid the last 12 months:
    Vanguard wrote:Dividend $0.13900 09/23/2011
    Dividend $0.12800 06/24/2011
    Dividend $0.12800 03/25/2011
    Dividend $0.16200 12/22/2010
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
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dickenjb
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Re: Why not Munis in taxable vs TB in IRA?

Post by dickenjb »

Thanks to all for the quick answers. Yes I understand that munis and TB are different securities - much of TB is risk free treasuries although there are some corporates in there and MBS. It does seem to me for this 35% bracket individual (me) that intermediate munis are tres attractive right now wrt to taxable bonds.
natureexplorer
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Re: Why not Munis in taxable vs TB in IRA?

Post by natureexplorer »

dickenjb wrote:risk free treasuries
The Greek once thought their own government's debt is risk-free too. S&P tells us it ain't so.
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baw703916
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Re: Why not Munis in taxable vs TB in IRA?

Post by baw703916 »

Here's an interesting chart comparing muni and Treasury yields:

http://www.marketoracle.co.uk/images/20 ... hart-b.gif

FYI, the majority of my bond holdings are in Munis

Brad
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SunDevil
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Re: Why not Munis in taxable vs TB in IRA?

Post by SunDevil »

An added benefit to holding TSM in a (roth) IRA is that the assets with the highest growth expectancy can be withdrawn tax-free at retirement.
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dave66
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Re: Why not Munis in taxable vs TB in IRA?

Post by dave66 »

This is something that I've flip-flopped with for a while now... and whenever I can't make up my mind, I usually split the difference. So I'm thinking I will probably start doing 1/4 or so munis, the rest int. treasuries. Or there about. I don't see that big a risk in a fund. Individuals might be a different thing.
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steve roy
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Re: Why not Munis in taxable vs TB in IRA?

Post by steve roy »

natureexplorer wrote:
dickenjb wrote:risk free treasuries
The Greek once thought their own government's debt is risk-free too. S&P tells us it ain't so.
And our friends at Standard and Poor once told us that bundled, sub-prime mortgages were "AAA."

How did that work out?
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Mel Lindauer
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Re: Why not Munis in taxable vs TB in IRA?

Post by Mel Lindauer »

You shouldn't compare your current high tax rate with tax-deferred money that may well be taxed at a much lower rate when withdrawn in retirement.
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2beachcombers
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Re: Why not Munis in taxable vs TB in IRA?

Post by 2beachcombers »

Can someone tell me why my Muni ladder cost basis has improved about 3.3% avg. over the past 2 yrs?? :sharebeer

Is this just more people buying Muni's??

jerry
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dickenjb
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Re: Why not Munis in taxable vs TB in IRA?

Post by dickenjb »

dave66 wrote:This is something that I've flip-flopped with for a while now... and whenever I can't make up my mind, I usually split the difference. So I'm thinking I will probably start doing 1/4 or so munis, the rest int. treasuries. Or there about. I don't see that big a risk in a fund. Individuals might be a different thing.
Exactly where my head is at. Not wholesale selling of Total Bond Market but just putting a fraction of my fixed income allocation into VWIUX. In taxable of course.

Taylor thanks for pointing out the tax bracket thingy. Unfortunately (or fortunately?) I expect to be in the 25% bracket even many years into retirement. The 35% thing is an artifact of some deferred compensation I am receiving for the next couple of years, then I expect about 8 years of low bracket and Roth conversions, followed by 25% once SS and wife's pension and RMD's kick in.
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dave66
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Re: Why not Munis in taxable vs TB in IRA?

Post by dave66 »

It's funny, I have a way harder time with bonds than stocks. The stock stuff is kind of a no-brainer, but the bonds always seem to be a more difficult choice. Especially if you're talking about taxable. I have a low bracket now, but climbing... and I live in CA (fairly high tax). So in taxable, the whole thing between treasuries, tax exempt and the TIPS fund, starts being 6 of one, half dozen... when it comes to how you look at taxes and other things. You can look at it 10 ways and make yourself crazy. I was comparing the 5-10 year on numerous bonds last night. Honestly, most of the time in past history at least, the munis don't really seem to serve a huge purpose. And just about everything except the treasuries took a dive in 08, like everything else. Seems like... If you're main goal is protection against major dips, those are your best bet. The other bonds perform similar to stocks in a way, just not extremely. So I guess it comes down to what you think the purpose of bonds are. I think it's easy to get hung up on the whole tax thing and forget about that.
dbr
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Re: Why not Munis in taxable vs TB in IRA?

Post by dbr »

Maybe stocks vs. bonds is like steak and potatoes. How you want your bonds is like rare vs medium rare, a question that can raise serious debate.
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