Any reason not to exit muni bonds now?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
User avatar
ClevrChico
Posts: 1279
Joined: Tue Apr 03, 2012 8:24 pm

Any reason not to exit muni bonds now?

Post by ClevrChico » Sat Dec 02, 2017 3:21 pm

Crunching the numbers in a spreadsheet, my personal tax situation will make muni bonds the non-optimal choice with the tax bill that just passed. Calculating state & federal income tax, non-muni bonds will net 3.5% more dividends annually for me at current yields after my tax bracket drops. (That isn't much, but it will add up over time.)

Is there any reason I should not harvest a small capital gains loss and change to a non-muni bond fund?

livesoft
Posts: 62699
Joined: Thu Mar 01, 2007 8:00 pm

Re: Any reason not to exit muni bonds now?

Post by livesoft » Sat Dec 02, 2017 3:27 pm

Well, one reason is that there is no tax bill that has been signed into law.

You should tax-loss harvest any short-term losses though. Expect more losses next week and perhaps the week after, so I don't think there is any rush to do anything in the next 27 days.
Wiki This signature message sponsored by sscritic: Learn to fish.

am
Posts: 2726
Joined: Sun Sep 30, 2007 9:55 am

Re: Any reason not to exit muni bonds now?

Post by am » Sat Dec 02, 2017 3:53 pm

Can someone explain why munis are expected to be less valuable?

livesoft
Posts: 62699
Joined: Thu Mar 01, 2007 8:00 pm

Re: Any reason not to exit muni bonds now?

Post by livesoft » Sat Dec 02, 2017 4:09 pm

The OP is going to be in a much lower tax bracket in the future. I suspect the reason for that is that they will stop working. So it is not that munis will be less valuable, but that munis will be less valuable to the OP.
Wiki This signature message sponsored by sscritic: Learn to fish.

jbranx
Posts: 258
Joined: Thu Feb 09, 2017 6:57 pm

Re: Any reason not to exit muni bonds now?

Post by jbranx » Sat Dec 02, 2017 4:11 pm

am wrote:
Sat Dec 02, 2017 3:53 pm
Can someone explain why munis are expected to be less valuable?
I assume the lowering of the top rates would lead some to conclude that munis would be less in demand. However, other provisions would cut muni issuance by one-third, according to Joe Mysak, a Bloomberg columnist who has spent a career following the sector. That would create some scarcity potentially as stadium bonds and other private activity bonds are restricted. I guess the demand would be highest in states most affected by not being able to take full advantage of state and local taxes.

I'm sticking with my muni allocations in taxable and dollar-cost averaging monthly with Vanguard's VTEB muni index ETF and Fido's FTABX as both have low ER's and good quality, intermediate duration. I keep a good helping of Tips and treasuries in my IRA's so I have some insurance against inflation and potential muni defaults.

Longdog
Posts: 1105
Joined: Sun Feb 09, 2014 6:56 pm
Location: Philadelphia

Re: Any reason not to exit muni bonds now?

Post by Longdog » Sat Dec 02, 2017 4:23 pm

I am very curious what your current marginal tax rate is now and what you expect it to be.
Steve

User avatar
Artsdoctor
Posts: 3496
Joined: Thu Jun 28, 2012 3:09 pm
Location: Los Angeles, CA

Re: Any reason not to exit muni bonds now?

Post by Artsdoctor » Sat Dec 02, 2017 5:08 pm

I think it would be a mistake to make changes based on a bill that's not final. There were some significant changes to the original bill within the past 24 hours and I wouldn't make big moves unless I had a clear understanding of what changes may occur. How can the OP, or anyone else, know what his/her marginal tax rate might be for dividends? Even the AMT appears to be in question so it's just too early.

The only thing I might consider doing is to strategically sell specific shares at a loss or even a small gain if I would be doing it away; the Senate bill contained (contains?) a change which will no longer allow specific lot ID identification for cost basis calculation (for mutual funds and possibly some ETFs). However, even that may not make it through.

EddyB
Posts: 545
Joined: Fri May 24, 2013 3:43 pm

Re: Any reason not to exit muni bonds now?

Post by EddyB » Sat Dec 02, 2017 5:22 pm

Longdog wrote:
Sat Dec 02, 2017 4:23 pm
I am very curious what your current marginal tax rate is now and what you expect it to be.

Obviously I’m not the OP, but this is one of those things where the directional changes aren’t generalizable. I’m in the 39.6% bracket now, but generally an AMT payer, so really 28%. I don’t yet understand how the AMT would work in the Senate proposal, but I assume that I would not itemize and expect that means it’s very unlikely I’d be subject to the AMT. I expect my new marginal rate under the Senate proposal would be 35%, plus the 3.8% NIIT. So notwithstanding the reduction in my statutory marginal rate, I’m looking at an increase in my actual marginal rate.
Last edited by EddyB on Sat Dec 02, 2017 7:34 pm, edited 1 time in total.

User avatar
ClevrChico
Posts: 1279
Joined: Tue Apr 03, 2012 8:24 pm

Re: Any reason not to exit muni bonds now?

Post by ClevrChico » Sat Dec 02, 2017 5:48 pm

Longdog wrote:
Sat Dec 02, 2017 4:23 pm
I am very curious what your current marginal tax rate is now and what you expect it to be.
Current: Fed (28%) State (8.9%)
Future: Fed (25%) State (8.9%)

I'm considering moving from Vanguard Inter-Term Tax-Exempt Adm (VWIUX) > Vanguard Inter-Term Bond Index Adm (VBILX). VBILX has 52.2% of bonds in treasuries, which would be state tax exempt. Given my high state tax rate, this seems to tip the advantage to a non-muni for me.

Post Reply