Tax Exempt Bond Funds Questions

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CaptainMarvel
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Tax Exempt Bond Funds Questions

Post by CaptainMarvel » Mon Jun 12, 2017 2:11 pm

I recently moved from California to Texas and am in a high tax bracket. As a result, I will no longer be using Vanguard's California tax exempt bond fund for my taxable account. I'm looking for a Vanguard tax exempt bond fund that I'd now be able to invest in as a Texas resident and for my taxable account. I've narrowed it down to either VWITX, VMLTX, or VWSTX. Does anyone have any thoughts on which of these three funds is preferable?

These funds are intended to be used as long-term investments and for retirement at age 65. My wife and I are 43 and 40 respectively.

Also, a general question regarding taxation of bond funds: My understanding is that interest and dividend income from the three Vanguard bond funds above would be exempt from federal taxation. Does this include the capital gains on the liquidation of the fund once we reach retirement? I wasn't sure if the capital gains reflecting the increased value of the fund on the date of sale vs. the date of purchase is taxable for these tax-exempt bond funds.

Thank you.

aristotelian
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Re: Tax Exempt Bond Funds Questions

Post by aristotelian » Mon Jun 12, 2017 2:29 pm

Capital gains would be taxable, I believe.

bloom2708
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Re: Tax Exempt Bond Funds Questions

Post by bloom2708 » Mon Jun 12, 2017 2:36 pm

I am 46, we use VWITX (Int-Term Tax-Exempt) in taxable.

Interest is Federal tax-exempt. If the value of your shares increases (say $500), the gain (or loss) is a taxable event, but only when you sell shares.

Short (held less than 1 year) or Long (held more than 1 year) gains apply in taxable.

I am quite happy with the fund. It provides stability in our taxable account and throws off some interest that doesn't get lopped off by 25% at tax time. I think as long as you are in the 25% or higher tax bracket you will be good.

The share price does go down in a rising interest rate environment. If you look at YTD or 1 year performance you will see that.
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jaxsonritz
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Re: Tax Exempt Bond Funds Questions

Post by jaxsonritz » Mon Jun 12, 2017 8:01 pm

I am a Texas resident. As a previous poster noted, the capital gains (if any) would be taxable on the current fund's liquidation or exchange. Since we do not have a state or local income tax, any muni fund will provide tax free income. Welcome to Texas.

CaptainMarvel
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Re: Tax Exempt Bond Funds Questions

Post by CaptainMarvel » Mon Jun 19, 2017 1:04 pm

Thanks for these responses. A follow up question: For purposes of long-term investing (i.e., a time horizon of twenty+ years), does it make any real difference whether the municipal bond fund chosen focuses on short-term, intermediate term, or long-term bonds? I realize there's more fluctuation potentially the longer term of the bonds, however, it would seem that's almost if not entirely irrelevant if you're planning on holding the fund indefinitely and would ride out any bond bear market and/or interest rate spike.

preach
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Re: Tax Exempt Bond Funds Questions

Post by preach » Mon Jun 19, 2017 1:54 pm

CaptainMarvel wrote:Thanks for these responses. A follow up question: For purposes of long-term investing (i.e., a time horizon of twenty+ years), does it make any real difference whether the municipal bond fund chosen focuses on short-term, intermediate term, or long-term bonds? I realize there's more fluctuation potentially the longer term of the bonds, however, it would seem that's almost if not entirely irrelevant if you're planning on holding the fund indefinitely and would ride out any bond bear market and/or interest rate spike.


That is essentially what it comes down to. I held some positions in long-term tax exempt last year and during the big selloff that caused bonds to drop everywhere, I observed that longer-term bonds are susceptible to larger percentage swings in events like that or when a new interest rate is set by the Fed. You just need to determine what your outlook is and how comfortable you are with fluctuations in price.

Naikansha
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Re: Tax Exempt Bond Funds Questions

Post by Naikansha » Mon Jun 19, 2017 2:10 pm

I use the intermediate fund in my taxable account. On two occasions I was able to do a tax loss harvesting, buying the limited term fund which I held for several months until I could shift back to the intermediate fund. I was able to save two quarter's worth of estimated federal taxes this way during an unusually large bond fund fluctuation. This tax loss harvesting is a good thing to keep in mind with both bond and equity funds in your taxable account.

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Kevin M
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Re: Tax Exempt Bond Funds Questions

Post by Kevin M » Mon Jun 19, 2017 2:29 pm

CaptainMarvel wrote:Thanks for these responses. A follow up question: For purposes of long-term investing (i.e., a time horizon of twenty+ years), does it make any real difference whether the municipal bond fund chosen focuses on short-term, intermediate term, or long-term bonds? I realize there's more fluctuation potentially the longer term of the bonds, however, it would seem that's almost if not entirely irrelevant if you're planning on holding the fund indefinitely and would ride out any bond bear market and/or interest rate spike.

It can indeed matter with a 20-year investment horizon. For the period 1962-1981 (inclusive), long-term Treasuries had a cumulative real return of -51%, while the same measure for intermediate-term Treasuries was -29%, and for short-term Treasuries it was -5%.

This shows that a long period of rising rates with some of that occurring along with high inflation can be devastating for longer-term bonds. Shorter-term bonds can be rolled over more frequently as rates increase, reducing the damage.

Kevin
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aristotelian
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Re: Tax Exempt Bond Funds Questions

Post by aristotelian » Mon Jun 19, 2017 2:37 pm

CaptainMarvel wrote:Thanks for these responses. A follow up question: For purposes of long-term investing (i.e., a time horizon of twenty+ years), does it make any real difference whether the municipal bond fund chosen focuses on short-term, intermediate term, or long-term bonds? I realize there's more fluctuation potentially the longer term of the bonds, however, it would seem that's almost if not entirely irrelevant if you're planning on holding the fund indefinitely and would ride out any bond bear market and/or interest rate spike.


Don't just look at the name of the fund, look at the duration. For some reason, many muni bond funds are in the "long" category with a duration of 6-7 years (e.g Vanguard Long Term Tax Exempt, VWLUX has average duration of 7.0 years), while Vanguard Long Term Government (VGLT), for example, has a duration of 17.5 years! Then take a look at the annual returns and you can see that VGLT is orders of magnitude riskier than VWLUX even though they are both described as "long term".

I would not want to invest in a bond fund with a horizon of 17.5 years. Do you really want to wait 15 years for your fund to return positive if the Fed raises rates? I want stability from bonds and something like VGLT is way too risky for my purposes. For a horizon of 20 years, you are just as well off with stocks, with higher expected returns.

However, a "long term" fund with a duration of 7 years does not seem too risky to me.

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