What to do with single state muni fund?

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indexfundfan
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What to do with single state muni fund?

Post by indexfundfan » Mon Nov 06, 2017 4:36 pm

I moved out of California this year. Currently, I still have CA state muni bond funds with capital gains ranging from 10% to 20%.

Given that I want to keep my MAGI from next year onwards to below 400% FPL, my options are

1. Take the bullet now : liquidate all CA muni bond funds and pay CG tax on them this year. I do not need to keep below 400% FPL this year. The marginal federal + state tax hit is about 22%.

2. Liquidate the CA bond funds over the next several years, such that the CG does not add too much to my MAGI. The marginal federal + state tax hit is about 16%.

3. Continue to hold the CA bond funds, even though I no longer benefit from the state income tax exemption.

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bberris
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Re: What to do with single state muni fund?

Post by bberris » Mon Nov 06, 2017 8:25 pm

I assume your new state has an income tax. Otherwise there's no harm in keeping CA only funds, except for lack of diversification.

Even if you stay below the ACA cliff, you will effectively be taxed 9.5 % for loss of subsidy. So your marginal capital gains rate on ACA will be not 16 % but 25.5 % assuming you don't fall off the cliff.

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Re: What to do with single state muni fund?

Post by indexfundfan » Mon Nov 06, 2017 9:11 pm

bberris wrote:
Mon Nov 06, 2017 8:25 pm
I assume your new state has an income tax. Otherwise there's no harm in keeping CA only funds, except for lack of diversification.

Even if you stay below the ACA cliff, you will effectively be taxed 9.5 % for loss of subsidy. So your marginal capital gains rate on ACA will be not 16 % but 25.5 % assuming you don't fall off the cliff.
Actually it will not be 25.5%. The 16% in my option 2 comes from the 9.5% ACA loss of subsidy plus a 6% state tax, giving a total of about 16%.

I think I have more or less decided not to liquidate the CA funds. I will liquidate them as and when I have losses harvested from elsewhere to offset the gains. No point paying CG taxes now when perhaps in the next years there could be a huge equity correction for me to harvest losses.
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Re: What to do with single state muni fund?

Post by Clever_Username » Tue Nov 07, 2017 3:10 pm

indexfundfan wrote:
Mon Nov 06, 2017 9:11 pm
bberris wrote:
Mon Nov 06, 2017 8:25 pm
I assume your new state has an income tax. Otherwise there's no harm in keeping CA only funds, except for lack of diversification.

Even if you stay below the ACA cliff, you will effectively be taxed 9.5 % for loss of subsidy. So your marginal capital gains rate on ACA will be not 16 % but 25.5 % assuming you don't fall off the cliff.
Actually it will not be 25.5%. The 16% in my option 2 comes from the 9.5% ACA loss of subsidy plus a 6% state tax, giving a total of about 16%.

I think I have more or less decided not to liquidate the CA funds. I will liquidate them as and when I have losses harvested from elsewhere to offset the gains. No point paying CG taxes now when perhaps in the next years there could be a huge equity correction for me to harvest losses.
At the very least, redirect the distributions to MM or bank and reallocate those. They're coming out (and getting taxed in your new state, if it taxes these things) anyway.
"What was true then is true now. Have a plan. Stick to it." -- XXXX, [i]Layer Cake[/i]

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Re: What to do with single state muni fund?

Post by Artsdoctor » Tue Nov 07, 2017 4:51 pm

The CA fund has out-performed the national fund so far this year so it's not as if you're holder a slacker fund!

All of that said, you may as well benefit from the diversification of the national fund but I don't see why you'd have to "pay for the privilege" by incurring significant capital gains tax.

I would first turn off the dividend reinvestment option if you haven't already, as mentioned above. I don't know what sort of balance you're talking about here, but you might then consider transferring the shares with the highest cost basis into the national fund to get it started ($50,000 minimum for Admiral shares, for example). You can then redirect the CA dividends directly into the national fund. You'd then sell shares gradually from the CA to the national fund according to your needs.

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Re: What to do with single state muni fund?

Post by inbox788 » Tue Nov 07, 2017 5:57 pm

If you knew you would be holding on to these for the next 10 years, would it change your mind as to what to do?

I've been sitting on a single stock that has appreciated quite a bit for many years. I now wish I had simply taken the tax hit at the beginning and diversified into total market fund. Every year, I keep making the same mistake not diversifying/optimizing.

I would expect the yield/after tax return for a single state to lag the national fund by a little each year. Over a decade, that might be a couple of percent. Will you really have an opportunity to benefit from the tax deferment? If the total dollar amount isn't that much, I'd go for simplification and risk reduction.

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Artsdoctor
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Re: What to do with single state muni fund?

Post by Artsdoctor » Tue Nov 07, 2017 7:36 pm

^ Actually, the CA intermediate fund beats the national intermediate fund most years although you wouldn't want to make decisions going forward based on past returns.

The OP will be paying state income tax on both funds (provided the state has income tax). Aside from diversification, I don't see the benefit of incurring capital gains tax by selling the CA fund for the national fund. If dividends were routed elsewhere as mentioned and then specific lots were exchanged to the national fund as the NAV dropped, it would be a natural transfer to the national fund without significant cost (and perhaps even tax-loss harvesting opportunities).

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Re: What to do with single state muni fund?

Post by indexfundfan » Tue Nov 07, 2017 8:05 pm

Thanks for the responses.

I don't automatically reinvest dividends in taxable accounts. Creates too many tax lots for my taste.

Another wrinkle for me is that in my future tax bracket, muni bond funds actually don't make sense for me anymore. I plan to sell the CA bond funds as long as I have losses to offset. The proceeds are going into either the short term bond index or the intermediate government bond fund.

I also have the national muni bond funds (limited term and intermediate term). Not action planned for those yet.
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Re: What to do with single state muni fund?

Post by indexfundfan » Tue Nov 07, 2017 8:10 pm

inbox788 wrote:
Tue Nov 07, 2017 5:57 pm
If you knew you would be holding on to these for the next 10 years, would it change your mind as to what to do?

I've been sitting on a single stock that has appreciated quite a bit for many years. I now wish I had simply taken the tax hit at the beginning and diversified into total market fund. Every year, I keep making the same mistake not diversifying/optimizing.
I know what you are saying. I still have some former employer shares (with large capital gains) which I have to liquidate. Might be better to take the bullet earlier than later since the CG could just grow larger with time, compounding the "problem".

But this scenario does not really apply to muni bond funds because the price appreciation on muni bond funds does not grow like that of a stock.
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