Choosing muni bond funds

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neveragain
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Choosing muni bond funds

Post by neveragain » Fri Feb 09, 2018 5:38 pm

I am interested in muni bond funds to invest outside of my IRA.

I am in the 10% tax bracket for 2017. (According to this calculator I found online, if that's not reliable I will need to talk to my CPA). We are in Texas, so no state income tax. In previous years, my spouse earned 80 to 100K, but last year was unemployed for a period of time. I earn about 6K from some contract work every year. We are in our early 50s with young children (not teenagers). Our home will be paid off in 3 years. We contribute to IRAs, the max, every year and have three 529 plans for three kids which I contribute to. I visited a CPA, he recommended muni bond funds but didn't recommend a specific one.

I am currently trying to invest some inheritance money and want lower-risk investments. I am also confused about why munis are not good for people in lower tax brackets. I understand why muni funds are recommended for people in higher tax brackets, but not sure why that would rule them out for people in lower tax brackets. Can I just calculate this way: TEY = the muni's SEC yield / (1 - your fed tax bracket)? and see if the Vanguard fund mentioned here would work for my situation?

Here is how I determined my tax bracket. https://www.taxact.com/tools/tax-bracket-calculator
Last edited by neveragain on Sun Feb 11, 2018 11:37 am, edited 4 times in total.

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MP123
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Re: Choosing muni bond funds

Post by MP123 » Fri Feb 09, 2018 5:58 pm

Looks like both have front load fees as well as high ER.

Vanguard has several muni funds worth checking out...

btenny
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Re: Choosing muni bond funds

Post by btenny » Fri Feb 09, 2018 6:11 pm

Fidelity is not your friend. Both of these funds have 4.75% front end loads and then ongoing 1% carrying loads. They will most likely lose money for years as the loads will eat all the earnings for years. The returns you see are before loads are subtracted.

https://finance.yahoo.com/quote/MEMTX/profile?p=MEMTX
https://finance.yahoo.com/quote/GSMIX/profile?p=GSMIX

The sooner you recognize that Fidelity is not your friend and do your own research and become educated the better off you will be. Yes Fidelity has some good funds but you have to search for them. They will not be recommended.

I like Vanguard funds for this reason. They are almost all good and designed for the betterment of the average investor. Look up VWITX = Vanguard Intermediate Term Muni

https://finance.yahoo.com/quote/VWITX/profile?p=VWITX
https://investor.vanguard.com/mutual-fu ... nd-returns

Good Luck.

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dratkinson
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Re: Choosing muni bond funds

Post by dratkinson » Fri Feb 09, 2018 7:26 pm

BH Choosing muni bond funds


The short answer. Move your IRA to Vanguard and buy VWITX.

This answer is the one most often recommended---it's the main road to Dublin---but it may not be the best answer for your financial situation.



The long answer.

You may need to buy a muni ETF at Fidelity to get the lowest price shares.
--Can search for the ETF share class of the recommended Vanguard funds.
--Have heard others mention using MUB from another fund family.
--There may be other acceptable muni bond fund/ETF options, but you'll need to search for them.

Another potential gotcha. Have recently read that some investment companies (Fidelity,...) are charging an additional fee (0.05% AUM) to own Vanguard products. So if Fidelity charges any fee to own a Vanguard muni ETF, that's a fee you can avoid by moving your IRA to Vanguard. (Start the process at Vanguard to have them pull your IRA from Fidelity.)


Due diligence. If a financial advisor is selling something, it's not worth buying.

Find, read the Wiki topic on "municipal bonds" for it recommendations.

Search forum for "municipal bonds" to see what others have done and why.

Find Wiki topic on recommended "books" and read two on bonds. Why two? Where recommended authors agree, that is the central route; where they disagree, those are option routes to be considered by those who can withstand the additional risk.


Example. I prefer mutual funds (can buy fractional shares, so can reinvest distributions) to ETFs (can't, can't), but can't buy Vanguard's lower-cost Admiral share class at Fidelity. So (most of) my muni bond funds are held at Vanguard.


Bottom line. The investing route you take must be based on knowledge applied to your personal situation. You've got to do the reading (recommended books, Wiki, forum) to get the knowledge. With the knowledge you'd have known that a load-fund was a nonstarter.

N.B. There are many other reasons to reject a muni fund/ETF, and you'll identify them during your due diligence. Once you know how to winnow the list of candidate muni fund/ETF options, selection from the remainder becomes easier.



Another option. If you want the forum to take a closer look at your financial situation, then post it in the format requested in the sticky "Asking Portfolio Questions". Omit nothing. (Omitted detail = omitted answer.)

This will give you a head start on your due diligence---use the forum's knowledge applied to your accurately described financial situation.
Last edited by dratkinson on Fri Feb 09, 2018 7:34 pm, edited 2 times in total.
d.r.a, not dr.a. | I'm a novice investor, you are forewarned.

neveragain
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Re: Choosing muni bond funds

Post by neveragain » Fri Feb 09, 2018 7:30 pm

dratkinson wrote:
Fri Feb 09, 2018 7:26 pm
BH Choosing muni bond funds


The short answer. Move your IRA to Vanguard and buy VWITX.

This is not in my IRA. It would be an independent investment, outside of my IRA.

I will look into VWITX if it's a good muni bond fund.

neveragain
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Re: Choosing muni bond funds

Post by neveragain » Fri Feb 09, 2018 7:34 pm

btenny wrote:
Fri Feb 09, 2018 6:11 pm
Fidelity is not your friend. Both of these funds have 4.75% front end loads and then ongoing 1% carrying loads. They will most likely lose money for years as the loads will eat all the earnings for years. The returns you see are before loads are subtracted.
Thanks. I do not want loaded funds so I will forget about these altogether.

CppCoder
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Re: Choosing muni bond funds

Post by CppCoder » Fri Feb 09, 2018 7:40 pm

There is some lousy advice so far on this thread from people who clearly have a beef with Fidelity. It's not terribly helpful. I have accounts at Fidelity, I like Fidelity, but I will admit that I'm not in love with their municipal bond funds. Vanguard does have better options here. That said, all hope is not lost at Fidelity. One has good, just not great options.

Assuming you are not looking for a state specific fund, I see four reasonable choices for intermediate-ish term muni bonds. You can either go the ETF route, where you can choose from iShares MUB or Vanguard VTEB. MUB is commission free but 0.25% ER, while VTEB will have a $4.95 commission but is a lower ER (0.09%). If you want to go the fund route, you'll likely want to choose from FTABX or FLTMX. Their expense ratios are 0.25% and 0.35% respectively. Both are fairly low expense, managed funds differing largely in duration and average maturity. I think both have similar credit quality, which is, overall, lower than the equivalent Vanguard funds.

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dratkinson
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Re: Choosing muni bond funds

Post by dratkinson » Fri Feb 09, 2018 7:45 pm

neveragain wrote:
Fri Feb 09, 2018 7:30 pm
dratkinson wrote:
Fri Feb 09, 2018 7:26 pm
BH Choosing muni bond funds


The short answer. Move your IRA to Vanguard and buy VWITX.

This is not in my IRA. It would be an independent investment, outside of my IRA.

I will look into VWITX if it's a good muni bond fund.

Doh! I knew that... you can't (shouldn't) buy a muni inside an IRA. :oops:
d.r.a, not dr.a. | I'm a novice investor, you are forewarned.

neveragain
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Re: Choosing muni bond funds

Post by neveragain » Fri Feb 09, 2018 7:46 pm

I just checked out VWITX on Morningstar. Looks like it's risk level is better than the other ones recommended by Fidelity. Returns are above average. I will see about setting this up with Vanguard. I'd like to invest around 10-20K in it. Not sure what the minimum is, though.

Interesting enough morningstar gives it fewer stars than the loaded muni bond funds.

Iliketoridemybike
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Re: Choosing muni bond funds

Post by Iliketoridemybike » Fri Feb 09, 2018 7:56 pm

SNTIX blows VWITX out of the water for returns at every interval. Check it out. 2x the Sharpe ratio and a 30% higher yield.
Last edited by Iliketoridemybike on Fri Feb 09, 2018 7:59 pm, edited 1 time in total.

neveragain
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Re: Choosing muni bond funds

Post by neveragain » Fri Feb 09, 2018 7:57 pm

CppCoder wrote:
Fri Feb 09, 2018 7:40 pm
If you want to go the fund route, you'll likely want to choose from FTABX or FLTMX. Their expense ratios are 0.25% and 0.35% respectively. Both are fairly low expense, managed funds differing largely in duration and average maturity. I think both have similar credit quality, which is, overall, lower than the equivalent Vanguard funds.
I was considering FTABX, but decided against it as I thought it was a longer term bond fund. Do they charge loading fees for FTABX?

Iliketoridemybike
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Re: Choosing muni bond funds

Post by Iliketoridemybike » Fri Feb 09, 2018 8:05 pm

neveragain wrote:
Fri Feb 09, 2018 7:57 pm
CppCoder wrote:
Fri Feb 09, 2018 7:40 pm
If you want to go the fund route, you'll likely want to choose from FTABX or FLTMX. Their expense ratios are 0.25% and 0.35% respectively. Both are fairly low expense, managed funds differing largely in duration and average maturity. I think both have similar credit quality, which is, overall, lower than the equivalent Vanguard funds.
I was considering FTABX, but decided against it as I thought it was a longer term bond fund. Do they charge loading fees for FTABX?
FTABX is no load at Fidelity, but there are better options like I mentioned above.

CppCoder
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Re: Choosing muni bond funds

Post by CppCoder » Fri Feb 09, 2018 8:12 pm

neveragain wrote:
Fri Feb 09, 2018 7:57 pm
CppCoder wrote:
Fri Feb 09, 2018 7:40 pm
If you want to go the fund route, you'll likely want to choose from FTABX or FLTMX. Their expense ratios are 0.25% and 0.35% respectively. Both are fairly low expense, managed funds differing largely in duration and average maturity. I think both have similar credit quality, which is, overall, lower than the equivalent Vanguard funds.
I was considering FTABX, but decided against it as I thought it was a longer term bond fund. Do they charge loading fees for FTABX?
There are no additional fees on this fund (or FLTMX). I agree that the duration for FTABX is on the long end. To be fair, Fidelity does benchmark this fund to long term muni funds. FLTMX is of shorter duration and benchmarked against intermediate term funds. Unfortunately, it seems that the shorter the duration, the higher the ER. The shorter term FSTFX is even higher ER. Honestly, the ETF options are better at Fidelity for muni bonds. Some, however, will advise against buying bond ETFs. I'm undecided on the issue myself, but it's academic for me as I still have room in my 401k for all of my bond holdings.

wrl
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Re: Choosing muni bond funds

Post by wrl » Fri Feb 09, 2018 9:03 pm

Have you looked at your state specific funds for full triple tax free interest? I live in Maryland and invest in the Trowe MDXBX fund. BTW I have my account at fidelity and have been very happy with them.

neveragain
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Re: Choosing muni bond funds

Post by neveragain » Fri Feb 09, 2018 9:08 pm

wrl wrote:
Fri Feb 09, 2018 9:03 pm
Have you looked at your state specific funds for full triple tax free interest? I live in Maryland and invest in the Trowe MDXBX fund. BTW I have my account at fidelity and have been very happy with them.
No, I haven't but I thought all municipal bond funds were completely tax free?

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Re: Choosing muni bond funds

Post by patrick » Fri Feb 09, 2018 9:08 pm

Iliketoridemybike wrote:
Fri Feb 09, 2018 7:56 pm
SNTIX blows VWITX out of the water for returns at every interval. Check it out. 2x the Sharpe ratio and a 30% higher yield.
SNTIX has outperformed in the last 10 years, but if you go back its inception (in 1988) it has slightly underpformed compared to VWITX. Due to its credit quality, a better comparison would be Vanguard High-Yield Tax Exempt (VWAHX) which has outperformed for the last 10 years also.

neveragain
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Re: Choosing muni bond funds

Post by neveragain » Fri Feb 09, 2018 9:11 pm

Iliketoridemybike wrote:
Fri Feb 09, 2018 7:56 pm
SNTIX blows VWITX out of the water for returns at every interval. Check it out. 2x the Sharpe ratio and a 30% higher yield.
I have looked into this and will consider it. Morningstar says it's risk is high at 5 years although returns are high, too.

Iliketoridemybike
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Re: Choosing muni bond funds

Post by Iliketoridemybike » Fri Feb 09, 2018 9:13 pm

patrick wrote:
Fri Feb 09, 2018 9:08 pm
Iliketoridemybike wrote:
Fri Feb 09, 2018 7:56 pm
SNTIX blows VWITX out of the water for returns at every interval. Check it out. 2x the Sharpe ratio and a 30% higher yield.
SNTIX has outperformed in the last 10 years, but if you go back its inception (in 1988) it has slightly underpformed compared to VWITX. Due to its credit quality, a better comparison would be Vanguard High-Yield Tax Exempt (VWAHX) which has outperformed for the last 10 years also.
VWITX managers go back only 5 years. The early returns were achieved by people who are no longer there.

Iliketoridemybike
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Re: Choosing muni bond funds

Post by Iliketoridemybike » Fri Feb 09, 2018 9:16 pm

patrick wrote:
Fri Feb 09, 2018 9:08 pm
Iliketoridemybike wrote:
Fri Feb 09, 2018 7:56 pm
SNTIX blows VWITX out of the water for returns at every interval. Check it out. 2x the Sharpe ratio and a 30% higher yield.
SNTIX has outperformed in the last 10 years, but if you go back its inception (in 1988) it has slightly underpformed compared to VWITX. Due to its credit quality, a better comparison would be Vanguard High-Yield Tax Exempt (VWAHX) which has outperformed for the last 10 years also.
Credit quality is intermediate, not high yield.

neveragain
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Re: Choosing muni bond funds

Post by neveragain » Fri Feb 09, 2018 10:02 pm

The expense ratio for SNTIX is 0.9%, is that a little high? It also looks like I can purchase it through Fidelity.

patrick
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Re: Choosing muni bond funds

Post by patrick » Fri Feb 09, 2018 11:40 pm

Iliketoridemybike wrote:
Fri Feb 09, 2018 9:16 pm
patrick wrote:
Fri Feb 09, 2018 9:08 pm
Iliketoridemybike wrote:
Fri Feb 09, 2018 7:56 pm
SNTIX blows VWITX out of the water for returns at every interval. Check it out. 2x the Sharpe ratio and a 30% higher yield.
SNTIX has outperformed in the last 10 years, but if you go back its inception (in 1988) it has slightly underpformed compared to VWITX. Due to its credit quality, a better comparison would be Vanguard High-Yield Tax Exempt (VWAHX) which has outperformed for the last 10 years also.
Credit quality is intermediate, not high yield.
According to Morningstar both VWAHX and SNTIX have BBB average credit.

Whakamole
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Re: Choosing muni bond funds

Post by Whakamole » Fri Feb 09, 2018 11:45 pm

BMBIX (Baird Intermediate) has a very good risk profile (73% AAA, 26% AA).

neveragain
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Re: Choosing muni bond funds

Post by neveragain » Sat Feb 10, 2018 12:00 am

I wasn't aware that muni bond funds were that risky.

mega317
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Re: Choosing muni bond funds

Post by mega317 » Sat Feb 10, 2018 1:07 am

neveragain wrote:
Sat Feb 10, 2018 12:00 am
I wasn't aware that muni bond funds were that risky.
It is not correct to say that about muni bond funds as a whole.

Iliketoridemybike
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Re: Choosing muni bond funds

Post by Iliketoridemybike » Sat Feb 10, 2018 9:36 am

patrick wrote:
Fri Feb 09, 2018 11:40 pm
Iliketoridemybike wrote:
Fri Feb 09, 2018 9:16 pm
patrick wrote:
Fri Feb 09, 2018 9:08 pm
Iliketoridemybike wrote:
Fri Feb 09, 2018 7:56 pm
SNTIX blows VWITX out of the water for returns at every interval. Check it out. 2x the Sharpe ratio and a 30% higher yield.
SNTIX has outperformed in the last 10 years, but if you go back its inception (in 1988) it has slightly underpformed compared to VWITX. Due to its credit quality, a better comparison would be Vanguard High-Yield Tax Exempt (VWAHX) which has outperformed for the last 10 years also.
Credit quality is intermediate, not high yield.
According to Morningstar both VWAHX and SNTIX have BBB average credit.
BBB is considered investment grade intermediate. It is not junk.

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welderwannabe
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Re: Choosing muni bond funds

Post by welderwannabe » Sat Feb 10, 2018 9:51 am

CppCoder wrote:
Fri Feb 09, 2018 7:40 pm
There is some lousy advice so far on this thread from people who clearly have a beef with Fidelity. It's not terribly helpful. I have accounts at Fidelity, I like Fidelity, but I will admit that I'm not in love with their municipal bond funds. Vanguard does have better options here. That said, all hope is not lost at Fidelity. One has good, just not great options.

Assuming you are not looking for a state specific fund, I see four reasonable choices for intermediate-ish term muni bonds. You can either go the ETF route, where you can choose from iShares MUB or Vanguard VTEB. MUB is commission free but 0.25% ER, while VTEB will have a $4.95 commission but is a lower ER (0.09%). If you want to go the fund route, you'll likely want to choose from FTABX or FLTMX. Their expense ratios are 0.25% and 0.35% respectively. Both are fairly low expense, managed funds differing largely in duration and average maturity. I think both have similar credit quality, which is, overall, lower than the equivalent Vanguard funds.
+1 on MUB at Fidelity if you want to stay at Fidelity. I keep my taxable over at Vanguard and my tax deferred at Fidelity. Vanguard's tax exempt funds are the best. However, if you like Fidelity MUB will work just fine!

Good luck.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

CppCoder
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Re: Choosing muni bond funds

Post by CppCoder » Sat Feb 10, 2018 10:25 am

neveragain wrote:
Fri Feb 09, 2018 9:11 pm
Morningstar says it's risk is high at 5 years although returns are high, too.
Risk and return always go hand in hand. If you ever see a fund with higher than average returns and lower than average risk, just assume it's fraudulent. Note that risk, defined as volatility, does not equate to returns. A low risk fund may outperform a high risk fund over some time periods, particularly, those times when the risk shows up on the negative side.

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dratkinson
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Re: Choosing muni bond funds

Post by dratkinson » Sat Feb 10, 2018 10:37 am

neveragain wrote:
Fri Feb 09, 2018 9:08 pm
...
No, I haven't but I thought all municipal bond funds were completely tax free?
National muni funds are only fed tax exempt. And depending upon your tax brackets may not be recommended.

Single-state muni funds can be triple tax exempt, but come with more (single-state default) risk. And depending upon your home state, may not be recommended.

neveragain wrote:
Sat Feb 10, 2018 12:00 am
I wasn't aware that muni bond funds were that risky.
Yield and risk are always linked. More yield = more risk. Less risk = less yield.

Plus an IT national muni is considered to be slightly more risky than TBM. Why? TBM contain some treasuries and MBS, which are assumed to be backed up by the government.

neveragain wrote:
Fri Feb 09, 2018 10:02 pm
The expense ratio for SNTIX is 0.9%, is that a little high?
Recall from recommended books that a large recommended bond fund's ER should be <=50 basis point; TBM being an example. A smaller fund will have a higher ER. You'll have to determine if "higher" in a particular case is "too high".

Recall from forum topics that increasing muni duration (above IT) should produce an additional 15-20 basis points in (after-tax) yield for every additional year of duration.

Recall from recommended books that some munis contain an AMT exposure. The underlying (AMT-exposure) bonds are more risky (revenue bonds) than the safer general-obligation bonds. Whether you can tolerate the additional risk and AMT exposure depends upon your situation.



What to look-for/avoid in bond funds is described in a systematic format in the recommended bond books.

Whether a particular bond fund contains the recommended attributes is contained in its prospectus. Which you should be able to download and read. (You want to read the full prospectus, not the abbreviated summary prospectus. This is a necessary step in your due diligence.)

Whether you should use/avoid a particular muni fund depends upon it attributes and your situation---home state, tax brackets, need,.... Which I have not seen you describe... and would be inappropriate to guess.

Without your having the background bond information, and in answering your questions here one at a time, this information is coming out piecemealed and incomplete so does you a disservice.

A much better use of your time is to read the recommended bond books to get the background information. Then ask specific questions to refine your knowledge for your particular situation.

Why? Every step away from VWITX is a step off of the recommended central muni route. And VWITX often produces LESS after-tax income than TBM when used in the <= 22-25% fed tax brackets; so is not always appropriate.

So to best answer your questions, you need the background bond information contained in the recommended books, and the forum needs a complete description of your financial situation. We've got plenty of time and can wait for you to complete this step in your due diligence.



P.S. Several years back M* said this about its star ratings (paraphrased): "...can't be used to predict future performance."

Bottom line. If M* doesn't believe its star ratings, then neither should you.

Then what can you believe? The material in the recommended books.
d.r.a, not dr.a. | I'm a novice investor, you are forewarned.

neveragain
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Re: Choosing muni bond funds

Post by neveragain » Sat Feb 10, 2018 6:26 pm

dratkinson wrote:
Sat Feb 10, 2018 10:37 am

National muni funds are only fed tax exempt. And depending upon your tax brackets may not be recommended.

Single-state muni funds can be triple tax exempt, but come with more (single-state default) risk. And depending upon your home state, may not be recommended..
I live in Texas there is no state income tax. (That is why I can choose any state's 529 plan so I chose Utah). So there wouldn't be any advantage to choosing a Texas muni bond, as far as I know. As for my tax bracket, that tends to vary from year to year. We were in a lower tax bracket last year as my spouse was unemployed for a while.

As for risk, my risk tolerance is not high. I'd prefer something more conservative. I also won't accept any load fees. I wanted to put anywhere from 10K to 25K in muni bonds.

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dratkinson
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Re: Choosing muni bond funds

Post by dratkinson » Sat Feb 10, 2018 10:46 pm

neveragain wrote:
Sat Feb 10, 2018 6:26 pm
... Texas ... ( why I can choose any state's 529 plan so I chose Utah)... tax bracket... tends to vary from year to year... a lower tax bracket last year ... my risk tolerance is not high. I'd prefer something more conservative. ...
I checked and these are your first mentions of this information in this topic. The forum knows about Texas income tax, but we didn't know you were in Texas. Had we known, we would not have suggested a state-specific or single-state muni. We need your information to answer your questions.


To determine if a particular muni is appropriate to consider, as a first wag we can compute its taxable-equivalent yield (TEY: what a taxable bond/CD produces before-tax).

TEY = the muni's SEC yield / (1 - your fed tax bracket)

.. but we can't do the math with "lower tax bracket last year". We need to know exactly what your tax bracket was last year. But since the tax brackets changed this year, we need to know what tax bracket this year, your income last year, would have put you into.

Since your income varies, what is your tax bracket in the high-income years?

And if you are close to retirement, what do you anticipate your tax-bracket to be in retirement? (Yes, I know you mentioned a 529 plan, and that suggests you are younger, but I don't want to guess. It's easier if you tell us your age and how close you are to retirement.)


The simplest way for us to get your information is in the format requested in the sticky "Asking Portfolio Questions". Base your tax-bracket information on the new tax brackets. I see the new 1040 instructions are out at my public library, so you can use the tax rate table in the back---download PDF from IRS.

Please edit your OP (original post, original poster) to include all of the requested information... even if you supplied it in a later reply or in other topics. Why? It's most helpful to have all of your information in one place and in the format in which the forum is use to seeing it. Why? It gets all of us on the same page, makes it easier to find your information, and so makes it easier to answer your questions.



Do you remember this doctor joke?
Patient: Doc, it hurts when I do this.
Doc: Don't do that.

Without a complete description of all the symptoms (a complete description of your financial situation), a diagnosis is not possible.

And the principle of "First, do no harm." means we don't dare suggest anything that might be a disservice to you. So the only safe (do no harm) default answer must be "... munis are not appropriate for someone in 'a lower tax bracket'"---Don't do that.

If you want a better answer, then you must supply all of the information requested to help us get it for you.


It may be that munis are inappropriate for you. But we can use your information to demonstrate that logic for you. And knowing what to avoid and why, is just as important as knowing what to choose and why.


You will be surprised that your answer---either way---will require less than 100 words. I see that I'm 1200+ words into justifying why we need your information to answer your question. To give you the biggest bang for your buck, I'll save my last 100 words for when I see your information in your OP.
d.r.a, not dr.a. | I'm a novice investor, you are forewarned.

neveragain
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Re: Choosing muni bond funds

Post by neveragain » Sun Feb 11, 2018 12:18 am

OK I will get the info and edit my OP probably by tomorrow evening sometime.

neveragain
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Re: Choosing muni bond funds

Post by neveragain » Sun Feb 11, 2018 4:43 pm

I am bumping this because I edited my OP above to include more info.

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dratkinson
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Re: Choosing muni bond funds

Post by dratkinson » Mon Feb 12, 2018 6:11 pm

neveragain wrote:
Fri Feb 09, 2018 5:38 pm
I am interested in muni bond funds to invest outside of my IRA.

I am in the 10% tax bracket for 2017. (According to this calculator I found online, if that's not reliable I will need to talk to my CPA). We are in Texas, so no state income tax. In previous years, my spouse earned 80 to 100K, but last year was unemployed for a period of time. I earn about 6K from some contract work every year. We are in our early 50s with young children (not teenagers). Our home will be paid off in 3 years. We contribute to IRAs, the max, every year and have three 529 plans for three kids which I contribute to. I visited a CPA, he recommended muni bond funds but didn't recommend a specific one.

I am currently trying to invest some inheritance money and want lower-risk investments. I am also confused about why munis are not good for people in lower tax brackets. I understand why muni funds are recommended for people in higher tax brackets, but not sure why that would rule them out for people in lower tax brackets. Can I just calculate this way: TEY = the muni's SEC yield / (1 - your fed tax bracket)? and see if the Vanguard fund mentioned here would work for my situation?

Here is how I determined my tax bracket. https://www.taxact.com/tools/tax-bracket-calculator

The short answer. If you will not need the $10K-20K from your inheritance that you invest in a muni fund for 7-10 years, then I believe you could use VWLTX.



The long answer. You want to learn about munis, pull up a chair.

Congratulations on soon paying off your home.



Background information.

Data point: new tax law. The forum has talked about the new tax law.

See: https://www.bogleheads.org/wiki/Outline ... aw_changes

Bottom line. Any muni solution that works in the 10% tax bracket, old or new tax law, would also work in higher tax brackets.


Data point: above-the-line deductions and below-the-line income.

What is an above-the-line deduction? It’s everything deducted to compute adjusted gross income (AGI).

See: https://thefinancebuff.com/tax-deductio ... neous.html

Muni income is not deducted from AGI, instead it is considered to be “below-the-line” income---is not added to AGI, so is not taxed as ordinary income. Below link demonstrates “income stacking”, and how muni income is included below-the-line in the chart table area marked “Income Not Included in AGI”.

See: https://thefinancebuff.com/fiscal-cliff ... gains.html

While muni below-the-line income is excluded from ordinary taxable income, it is added to compute MAGIs (modified adjusted gross income) for different tax programs to determine the phase-out of benefits (earned income credit, health care subsidy, savers credit,…) and the phase-in of additional tax (SS taxation, AMT, Medicare tax,…).

Bottom line. As MAGIs are based on actual dollars, not taxable-equivalent dollars, and as munis have lower SEC yields than taxable alternatives---resulting in lower actual dollars---then munis should affect MAGIs less than the taxable alternative. So these is little MAGI justification to avoid munis*.

* Exception: It is best to avoid HY muni in the AMT income-exposure range. AMT exposure is computed on tax form 6251. I don’t believe a couple making $100K/yr is subject to AMT, but there are also other reasons to avoid HY bond funds. See below.



Your tax brackets for investment income. You were in the 10% tax bracket last year. I wag your maximum income (MFJ, $100K + $6K) would have put you in the old 25% fed tax bracket, and will again when the new tax law sunsets and the old tax code returns in 10 years.

So your tax brackets range from 10% to 25%. For simplicity, any muni answer should work in all your tax brackets.



TEY, tax bracket, and after-tax income. If you have a taxable investment earning 100% and are in the 10% tax bracket, then you get to keep 90% after-tax.

Example: 100% x (1 - .10) = 90%

The TEY math reverses the direction to compute the original taxable-equivalent yield, given the after-tax return and your tax bracket.

Example: 90% / (1 - .10) = 100%

SEC Yield. We always use a bond fund’s SEC yield because that is a forward-looking return---what we expect to earn going forward.

For taxable bonds, we subtract our tax bracket from the SEC yield to get our after-tax return.

For muni bonds, we use the whole SEC yield to get our after-tax return because no tax is removed. (Exception for MAGI program effects, which should be less than for taxable alternative.)

The muni TEY calculation is used to answer the question, “At what taxable-equivalent yield am I indifferent to the taxable vs. muni decision?”. Meaning I don’t care which I own because both produce the same after-tax income.

By knowing a muni’s TEY, we can compare it to multiple taxable fixed income investments: bond fund SEC yield and CD APY.

So knowing a muni’s SEC yield, and our tax fed bracket (fed+state brackets for single-state munis), we get…

Muni’s TEY = muni's SEC yield / (1 - your fed tax bracket)

Given VBMFX (TBM) is the preferred 3-fund portfolio’s bond fund, then any muni selected should produce equivalent or better after-tax income than TBM. Otherwise, why bother?

Your $10K-20K investment will get you Admiral shares (VBTLX, lower ER, correspondingly higher SEC yield) of TBM. You’ll need $50K to buy Admiral shares of Vanguard’s muni funds. The Vanguard muni ETF has no purchase minimum and the same ER as Admiral shares.

You can buy fractional shares of a fund, so can reinvest distributions. You can NOT buy fractional shares of an ETF, so can NOT reinvest distributions, they must be sent to a sweep account or to your bank checking/savings.



In your 10% fed tax bracket.

From: http://quotes.morningstar.com/fund/f?Symbol=VBTLX
Edit URL to view other funds.

SEC yields, credit quality, interest rate sensitivity.
VBTLX: 2.79%, high, moderate.
VWITX: 2.12%, medium, moderate. 2.12/(1-.10)= 2.36%
VWLTX: 2.56%, medium, moderate. 2.56/(1-.10)=2.84%
VWAHX: 2.98%, medium, extensive. 2.98/(1-.10)=3.31%
MUB: (iShares IT national) 2.07%, high, moderate. 2.07/(1-.10)=2.30%
VTEB (VWITX’s ETF share class): 2.22%, medium, moderate. 2.22/(1-.10)=2.47%

Bond risk spectrum for same credit quality/duration: (least risk) treasury -- munis -- corporate (most risk)

Munis by definition, are believed to be slightly more risky than TBM, because TBM is considered safer as 2/3 of it is backed by the US government: 1/3 treasuries, 1/3 MBS, 1/3 corporate bonds. (However, MBS are deprecated, so I believe a comparable muni---VWITX---is better, thought not safer, than 2/3 of TBM.)

VWLTX’s TEY in the 10% tax bracket is (slightly better) equivalent to TBM’s SEC yield. It is not low-risk, but it is only slightly more risky than the recommended VWITX.

Inflation and taxes. To get the market risk premium, we must accept the market risk. If you want lower-risk, you could use an insured CD. But! inflation is currently 2%, so any CD APY less than that loses to inflation. Then you get to pay fed tax on the interest. So there is such a thing as being too safe. It’s best to have investments that are: reasonably safe, keep up with inflation, and minimize taxes. I believe VWLTX does all three.

VWAHX is included as an example, but is not recommended because it comes with much more risk. If money is tight, better to avoid it. Only folks who don’t need to worry about losing money should consider a HY fund.



In your 25% fed tax bracket.

VBTLX: 2.79%, high, moderate.
VWITX: 2.12%, medium, moderate. 2.12/(1-.25)= 2.83%
VWLTX: 2.56%, medium, moderate. 2.56/(1-.25)=3.41%
VWAHX: 2.98%, medium, extensive. 2.98/(1-.25)=3.97%
MUB: (iShares IT national) 2.07%, high, moderate. 2.07/(1-.25)=2.76%
VTEB (VWITX’s ETF share class): 2.22%, medium, moderate. 2.22/(1-.25)=2.96%

Notice how the TEY improves as the tax bracket increases. It’s the way the math works---the higher the tax bracket, the higher the TEY. This is why munis are typically recommended only for folks in highest tax brackets.


Plan for the worst, hope for the best. There are safer shorter-term munis---VWSTX and VMLTX* that can be used by folks in the highest tax brackets---but their lower SEC yields coupled with your lower tax brackets make them a nonstarter. In this case, TBM would produce more after-tax income for you. (* But you may compute their TEYs as a student exercise.)

Using VWLTX, you would have one answer that works (equivalent or better after-tax income than TBM) in all tax brackets.


How much after-tax income? Given VWLTX’s SEC yield of 2.56% and a $20K investment, you would expect to earn ~$500/yr (=$20K x .0256), or ~$40/mo (=$20K x .0256 / 12).

However a bond fund’s SEC yield changes based on the yield of the underlying individual bonds. With interest rates rising, you would expect the fund’s SEC yield to rise as older lower-yield individual bonds are replaced by newer higher-yield individual bonds.



1/2: Credit quality and default risk. You are correct to worry about losing money to bond defaults and want lower-risk investment. However, the risk of a bond fund is less than individual bonds of the same credit quality. And if the average credit quality of the fund is at least “investment grade”, then the fund’s default risk is low. VWLTX is rated “investment grade”.

Student exercise. Search M* for the “average credit quality” of each muni fund. Search next link for the definition of “investment grade”, and the bond default rate experienced for each “credit quality” tier.

See: https://en.wikipedia.org/wiki/Bond_cred ... ault_rates

If you can withstand the default risk exposure for a fund’s average credit quality, then you are half-way there.


2/2: Duration and interest rate risk. You must plan to hold VWLTX for 7-10 years; can’t sell before then. Why? Holding a bond fund for longer than its “duration” before selling is a way to keep from losing money due to interest rate risk. Why? Any price drop due to an interest rate increase should recover as the fund swaps out individual old bonds for new bonds. The duration tells you: (1) how sensitive the fund is to an interest rate change (up or down), and (2) how long it should take (years) for the fund to recover after an interest rate increase.

Student exercise. Check M* for VWLTX’s duration. Plan to hold it for longer than its duration.



Extra risk of HY muni. A HY muni fund comes with an additional “equity-like” risk component, and the alternative minimum tax. (If interested, the Wiki has a topic on HY bond funds. Some advocate owning 10% of total bonds in HY.)

Equity-like risk. A HY bond fund (VWAHX) will drop more in value during a stock market crisis. So if you need to sell when stocks are crashing, you will lose more money on that sale.

Disclosure. I follow the forum’s advice to use safer bonds and take my risk on the equity side. I don’t use any HY bond funds. I do skew the meaning of “safer bonds” to include VWLTX.

AMT. I don’t believe a couple making <$100K/yr in “taxable income” is subject to this. But should double-check this as a CYA---run your numbers through tax form 6251.


Bottom line. Most would advise sticking with higher quality funds to worry less. Many advise NOT going beyond VWITX when a munis is appropriate, so VWLTX is seen as a half-step too far.

But if you want a muni fund solution, it looks like VWLTX is the only muni solution that will work for you in all of your tax brackets.


Disclosure. I went through this drill in the (old) 15% tax bracket and came to these decisions:

--VWLTX’s TEY is equivalent/better than TBM SEC yield so worked as a long-term bond holding. Any answer that works in a lower tax bracket will also work in a higher tax brackets. I can tolerate its 52-week price spread of <$1.

--VWITX’s TEY is better than current CD rates. I have some allocated as a replacement for CDs as the last tier of my formal EFs. This way I don’t need to worry about the CD early withdrawal penalty, and I can choose the shares to sell to minimize capital gains (or loss) when sold. Its 52-week price spread is ~50-cents.



A second look: Excel1040.com. Besides using above TEY analysis and reading the recommended books, Wiki, and forum; I also used Excel1040.com to duplicate a previous tax return, then ran multiple different bond fund tax return scenarios. (I previously posted how I did this. Can search forum for method.)

This second look catches all of the MAGI effects of program phase-outs and phase-ins that the TEY calculation misses. It confirmed that---if I can withstand the price fluctuations and not sell in the short-term---VWLTX should work for me: in the 15% fed tax bracket, in higher tax brackets, before taking SS, and after taking SS. So one solution, I like the simplicity of “one and done”.



I may be forgetting something. Or I may have fumble-fingered something. Please read the recommended bond books and double-check everything. It’s your due diligence responsibility to do so before acting on this.

I can tell you what I did and why, but that may not be the best answer for you. Doing the required reading will jog your memory about the things I've forgotten, and the things you didn’t think were important enough to mention.



Inheritance. You mention an inheritance. It might be best to forget you have it and save it all for your retirement.

See: https://www.bogleheads.org/wiki/Managing_a_windfall
d.r.a, not dr.a. | I'm a novice investor, you are forewarned.

neveragain
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Re: Choosing muni bond funds

Post by neveragain » Mon Feb 12, 2018 8:29 pm

Thanks for your response.

It does seem that munis work better for people in higher tax brackets and I should move on from considering them. But I'm still going to keep all this information handy and will look into VWLTX. I may decide to invest some money in a Fidelity 500 index fund first, which would be taxable. I need more time to reflect on munis.

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weltschmerz
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Re: Choosing muni bond funds

Post by weltschmerz » Mon Feb 12, 2018 9:19 pm

Whakamole wrote:
Fri Feb 09, 2018 11:45 pm
BMBIX (Baird Intermediate) has a very good risk profile (73% AAA, 26% AA).
I am also intrigued by BMBIX, but I can't wrap my head around the risks of munis. There is the risk that the rating agencies have messed up (again), then there's the risk that the laws will change and there will be a rush to the exits to sell these things. I am in a tax bracket where munis make sense, but at the end of the day, I throw up my hands and just go with US treasuries. They're free from state taxation, and I know the US gov't can print more money if they need to pay the interest. Or else I just go with an FDIC-insured CD.

Perhaps dratkinson could weigh in.... but please just keep it to a simple paragraph like you're explaining it to a noob....why should anyone accept the risks of munis over US treasuries (or a bank CD)?

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Re: Choosing muni bond funds

Post by Whakamole » Mon Feb 12, 2018 10:26 pm

weltschmerz wrote:
Mon Feb 12, 2018 9:19 pm
Whakamole wrote:
Fri Feb 09, 2018 11:45 pm
BMBIX (Baird Intermediate) has a very good risk profile (73% AAA, 26% AA).
I am also intrigued by BMBIX, but I can't wrap my head around the risks of munis. There is the risk that the rating agencies have messed up (again), then there's the risk that the laws will change and there will be a rush to the exits to sell these things. I am in a tax bracket where munis make sense, but at the end of the day, I throw up my hands and just go with US treasuries. They're free from state taxation, and I know the US gov't can print more money if they need to pay the interest. Or else I just go with an FDIC-insured CD.

Perhaps dratkinson could weigh in.... but please just keep it to a simple paragraph like you're explaining it to a noob....why should anyone accept the risks of munis over US treasuries (or a bank CD)?
I think if the risk of munis in the aggregate is an issue, then BMBIX is still better because instead of something that is mostly AAA, you're getting something that is mostly AA or A, and other funds will drop down to semi-investment-grade status or worse.

I've heard about foreign investors buying municipal bonds because they pay more than Treasuries and are less risky than corporates. And if Federal laws change, which I doubt, yields will adjust accordingly.

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Re: Choosing muni bond funds

Post by dratkinson » Tue Feb 13, 2018 4:48 am

neveragain wrote:
Mon Feb 12, 2018 8:29 pm
... I may decide to invest some money in a Fidelity 500 index fund first, which would be taxable. I need more time to reflect on munis.
The short answer.
--Get a forum review to help you create an investing game plan, and a backup plan if needed.
--Don’t worry about it, stay the course until the tax laws require a change.



The long answer.

Investing game plan.

To be able to change from thinking about buying bonds, to thinking about buying equities, implies you have not determined your asset allocation (AA) nor created an investing game plan.

This http://quotes.morningstar.com/chart/fund/chart?t=FUSEX says the TTM (trailing twelve month) yield is 1.6%. I believe S&P500 and TSM typically return 2-2.5%. FUSEX's current lower yield is probably due to its current high price: (stable dividends) / (current high price) = (lower TTM yield).

If like Vanguard's S&P500 index fund, then ~100% of FUSEX's dividends are QDI (qualified dividends income) so taxed at 0-15%. Since you are in the bottom of the 25% tax bracket* in high years, then most of those QDI dividends should be taxed at 0%. So your taxes should be less then you think. (* New 22%?, don't know how investment income tax brackets work with earned income tax brackets under new tax law, but think they are kept separate. The existence of QDI, its tax treatment, and the funds that have a majority of it, is in the recommended books and Wiki.)

What I notice is your willingness to swap from considering VWLTX's 2.5% tax-advantaged dividends at a time when it's price is relatively low (below its mean price), to considering FUSEX's 1.6% tax-advantaged dividends at a time when it's price is relatively high (above its mean price). RTM (regression to the mean) happens. In 2-4-8-years (depending upon who you read) you should not be surprised to see this situation reverses.

The thing about bandwagons (everyone buying S&P500 or TSM) is this, once you see one, it’s too late to get on it. Most do not recommend a “buy high” investing strategy. RTM can become a “bear” for those who buy high.


There is a recent forum topic in which is discussed "Who is buying equities now with the recent price drop?" Answer: No one. The current equity prices are still so high that we're all still buying bonds to keep our AAs in balance.


Suggested book. If you have not already done so, reading The Bogleheads’ Guide to Investing would be a good place to start to come up to speed on the forum’s investing philosophy. Get it from your local library.

If after reading the book you have questions about the BH investing philosophy, then ask questions until you do understand. (I’m not be best person to answer philosophy questions, I’m more of the “needs simple action steps” type.)

You can ask your clarifying questions in the same topic in which you post your financial situation for a forum review. That way you will get the benefit of more senior investors.



Forum review.

If you have not done so, please post your financial situation so the forum can help you come up with an AA and investing game plan. Then write your investing game plan down in an IPS (investment policy statement, it’s in the Wiki).

I'm not saying you shouldn't buy equities. I'm not saying you should buy bonds. I'm saying you should be following your investing game plan, your IPS.

And if you don't have an investing game plan, then the forum can help you create one. Just sit on your inheritance until you complete this step. An IPS makes life much easier because you always know where to invest your next dollar, and why. The “why” is the most important part.

To hit a target, you must first identify it, and each shot must be carefully aimed at it. The same is true with retirement investing.


Disclosure. The forum reviewed* my investments in late 2007 (the market was high then, too), right before the market drop.

* I’d asked a simple question, “What do you guys do when your investments are throwing off so much money it’s pushing you into a higher tax bracket?” They asked, “What are you doing?” I told them, and they said, “That’s tax-inefficient and too risky for your age.” Then they suggested several ways I could improve. I picked the ones what worked for me.

The game plan they helped me create made 2008-2009 sooo much easier to live through.

Over the years I’ve tweaked my IPS as I’ve learned more and my life has change and new goals have come into focus. But I always follow it.



Muni tax law change.

This is certainly possible. It would require:
--Getting the majority of elected officials to give up the tax-free dividends they personally enjoy.
--Getting the majority of municipalities (state, county, city) to give up the ability to borrow money at a lower rate, and then be seen to raise taxes to pay for the higher borrowing costs.
--Getting taxpayers/voters to give up tax-free dividends, plus pay higher taxes to pay from higher borrowing costs.

Sure. That could happen.


Backup plan. And if the tax law changes, then I'll TLH and rethink this. (My IPS reminds me that before discovering munis I was thinking about VBIIX (IT index bond fund), similar to TBM, but without MBS.)

But until it does, it’s a waste of time to worry about something that has not happened.


Disclosure. Since before 2007 when I bought my first muni, there have been many that have predicted problems for munis. The problems have yet to materialize. But if they ever do, then I have a backup plan as part of my IPS. So until then I’m continuing to record >10-years of monthly tax-exempt dividends. :)
d.r.a, not dr.a. | I'm a novice investor, you are forewarned.

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Re: Choosing muni bond funds

Post by rkhusky » Tue Feb 13, 2018 8:13 am

The historical default rate for AAA muni bonds is essentially zero, for AA muni bonds it is also extremely small, on the order of 0.05%, and for A muni bonds, also very small, perhaps 0.1%. See https://en.wikipedia.org/wiki/Bond_credit_rating, although more recent data would be nice. And, for higher rated bonds, even if there is a default, most of the money is eventually recovered.

But, as described in detail above, you need to compare after-tax returns and associated risk to determine if a muni, investment-grade (corporate), or treasury bond fund is best for you in a taxable account. I would not use a muni fund in the 10% or 12% tax bracket and probably not in the 22% bracket either, unless there was a need to minimize AGI or MAGI.

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Re: Choosing muni bond funds

Post by neveragain » Tue Feb 13, 2018 11:47 am

dratkinson wrote:
Tue Feb 13, 2018 4:48 am

This http://quotes.morningstar.com/chart/fund/chart?t=FUSEX says the TTM (trailing twelve month) yield is 1.6%. I believe S&P500 and TSM typically return 2-2.5%. FUSEX's current lower yield is probably due to its current high price: (stable dividends) / (current high price) = (lower TTM yield).
How important is Trailing Twelve Month Yield (TTM)? And is this based on past performance of the fund?

I did read the Bogle book about a year ago, and from what I remember, he pushed index funds as the way to go. So I put index funds into my IRA.

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Re: Choosing muni bond funds

Post by dratkinson » Tue Feb 13, 2018 3:36 pm

neveragain wrote:
Tue Feb 13, 2018 11:47 am
dratkinson wrote:
Tue Feb 13, 2018 4:48 am

This http://quotes.morningstar.com/chart/fund/chart?t=FUSEX says the TTM (trailing twelve month) yield is 1.6%. I believe S&P500 and TSM typically return 2-2.5%. FUSEX's current lower yield is probably due to its current high price: (stable dividends) / (current high price) = (lower TTM yield).
How important is Trailing Twelve Month Yield (TTM)? And is this based on past performance of the fund?

I did read the Bogle book about a year ago, and from what I remember, he pushed index funds as the way to go. So I put index funds into my IRA.
Yes, "trailing twelve months" is the dividends paid in the last year, divided by the fund's current price/NAV. Since the NAV is currently high, it makes the TTM yield appear lower, when it is typically in the 2-2.5% range.

1. I was only noting that you were rejecting a higher-yield lower-price investment (LT TE bonds) for a lower-yield higher-priced investment (S&P500).

2. I was noting that RTM (market crash) could affect the price of equities that have been high for the past two years. Some authors believe that RTM can happen is a little as two years.

3. I was noting that the market stumble last week (A stumble before resuming the climb? A stumble before a crash? No one knows.) was talked about, but forum members are still buying bonds because equities are still too high for their IPS to allow them to be bought.

4. The TTM yield is based on the current market price. Our personal TTM yield is based on the price we pay for an investment. If we buy high, then our personal TTM yield will always be low. This is why the forum advised having an investing game plan and AA. The two work together to automatically tell us what to buy and what to avoid.

Don't want you acting in haste and repenting in leisure.

If you don't have an investing game plan/IPS, then the forum can help you create one. But they need to review all of your investments to do so.


Index funds are good. Some index funds are better than others. Some actively managed funds are good. E.G.: Vanguard has only one municipal bond INDEX fund, all the others are actively managed. And VWITX, the most often recommended as a replacement for TBM, is an actively managed fund.

In tax-advantaged accounts we can double-up and use a target date retirement fund (all-in-one fund: combine equities/bonds US/international in a single self-managing fund). It's one less thing to worry about.

Meaning the only thing we need to manage is our taxable investments, which should be discrete funds (not all-in-one funds, which are tax-inefficient).

One of the most important guiding BH principles is the importance of our AA, our ratio of stocks to bonds.
--Using mutual funds (index, active, all-in-one) we get our low-cost fair share of the market return.
--But our AA determines the safety of our total investments. More bonds as we age=more safety as we age.

So if we have an AA, then the current market condition means we will be doing only 1 of 3 things with new money to keep our investments balanced: 1) buying equities (equities are low, means our personal TTM yield will always be higher) or 2) buying bonds (equities are high) or 3) buying both (the market is flat). But we will never go from considering only buying bonds to considering only buying equities, because those are different market conditions.

This is why I asked if you'd had the forum help you establish your AA and investing game plan.


The review really doesn't hurt. They don't bite. They didn't bite me. It was a little humbling to learn I'd made several mistakes. But I got over that when I was able to easily weather 2008-2009.


rkhusky wrote:
Tue Feb 13, 2018 8:13 am
... I would not use a muni fund in the 10% or 12% tax bracket and probably not in the 22% bracket either, unless there was a need to minimize AGI or MAGI.
I noticed that too. After my 2007 forum review and getting rid of the tax-inefficient investments that were pushing me into the 25% tax bracket, the use of munis helped me remain in the 15% tax bracket for 3-4 more years, meaning I got those TE dividends, PLUS all QDI was taxed at 0% :)

I forgot about that. Above when I was computing the TEY benefits, I forgot to add in the 0% QDI benefit that comes from staying out of the 25% tax bracket.

Bottom line. My recalled 2007 thinking to justify using munis (to lower AGI) in the 15% bracket, I get:
--Their tax-exempt dividends, plus
--0% QDI
--0% LTCG
--Cheaper Roth conversion

Of course my state takes 5% of everything.
d.r.a, not dr.a. | I'm a novice investor, you are forewarned.

neveragain
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Re: Choosing muni bond funds

Post by neveragain » Tue Feb 13, 2018 6:11 pm

dratkinson wrote:
Tue Feb 13, 2018 3:36 pm

Meaning the only thing we need to manage is our taxable investments, which should be discrete funds (not all-in-one funds, which are tax-inefficient).
Thanks.

I was considering a Fidelity fund that is Four-In-One. I'm wondering if that would be "tax inefficient". It's basically just four different index funds rolled into one. It is called FFNOX. The TTM yield was slightly higher than FUSEX, but the ER was higher also, about 0.1%

And I still might take out VWLTX with Vanguard and might be willing to pay the $75 fee to buy it through Fidelity.

I've already made a lot of screw ups with investing, last year I transferred everything to Edward Jones and was sorry, as I didn't realize the loading fees were going to be that bad. Then I transferred it all back out.

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Re: Choosing muni bond funds

Post by radiowave » Tue Feb 13, 2018 7:37 pm

neveragain wrote:
Tue Feb 13, 2018 6:11 pm
dratkinson wrote:
Tue Feb 13, 2018 3:36 pm

Meaning the only thing we need to manage is our taxable investments, which should be discrete funds (not all-in-one funds, which are tax-inefficient).
Thanks.

I was considering a Fidelity fund that is Four-In-One. I'm wondering if that would be "tax inefficient". It's basically just four different index funds rolled into one. It is called FFNOX. The TTM yield was slightly higher than FUSEX, but the ER was higher also, about 0.1%

And I still might take out VWLTX with Vanguard and might be willing to pay the $75 fee to buy it through Fidelity.

I've already made a lot of screw ups with investing, last year I transferred everything to Edward Jones and was sorry, as I didn't realize the loading fees were going to be that bad. Then I transferred it all back out.
OP, this is an excellent thread with really good input above. But getting to basics, we need more information on what you have in tax-deferred (and Roth IRA if applicable) and in taxable. You need to look at your entire portfolio. You may be able to increase your bonds in tax deferred to your desired asset allocation and then use your taxable for total stock market (US) and total international stock and not use munis in taxable. Again, as noted above, you may get better feedback by posting your entire portfolio.
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Re: Choosing muni bond funds

Post by dratkinson » Tue Feb 13, 2018 9:08 pm

neveragain wrote:
Tue Feb 13, 2018 6:11 pm
dratkinson wrote:
Tue Feb 13, 2018 3:36 pm

Meaning the only thing we need to manage is our taxable investments, which should be discrete funds (not all-in-one funds, which are tax-inefficient).
Thanks.

I was considering a Fidelity fund that is Four-In-One. I'm wondering if that would be "tax inefficient". It's basically just four different index funds rolled into one. It is called FFNOX. The TTM yield was slightly higher than FUSEX, but the ER was higher also, about 0.1%

And I still might take out VWLTX with Vanguard and might be willing to pay the $75 fee to buy it through Fidelity.

I've already made a lot of screw ups with investing, last year I transferred everything to Edward Jones and was sorry, as I didn't realize the loading fees were going to be that bad. Then I transferred it all back out.
The best we can hope for is to earn our fair share of the market return... at the lowest possible cost (minimize fees and taxes). Fees are forever.

When you have two equivalent investments, choose the cheapest option. If you want a Vanguard fund and Fidelity charges you to buy it, then buy it from Vanguard. It’s okay to have accounts at both Fidelity and Vanguard and use the cheapest options from each.

"Past performance is no predictor of future return." The SEC requires this verbiage to be included in every prospectus because it is true. So the past performance of FFNOX is meaningless. Only it’s composition---what it invests in---has meaning. Remember, by the time you see a bandwagon, it’s too late to get on it. So ignore past performance, buy good investments, and stick with them.



I've made multiple investing mistakes too. And thought I knew what I was doing when I copied a lazy portfolio for myself. How hard could it be? Wrong. I had to watch as my investments pushed me into a higher tax bracket before I recognized a problem existed. It required the forum to review my investments to explain what I was doing wrong.

Since nothing I'd done before had worked out well, and the parts of the BH investing advice I was following was working (if a little too well), I decided it couldn't hurt to try things more their way. So I did.

In 2008-2009, the market lost 40%. After restructuring my investments to be more in line with the forum's views, mine lost 20% during 2008-2009. And I couldn't have been happier. Why? Because the BH's advice was the first I've received that worked exactly the way they said it would work.

From 2008 to the present, the forum’s advice has cut my tax bite in half. The total dividends are still the same and have crept up a little since then (I'm now in the bottom of the 25% bracket, or whatever it is now), but less is going to taxes.

See my first statement. "The best we can hope for is to earn our fair share of the market return... at the lowest possible cost (minimize fees and taxes). Fees are forever."

The forum’s advice made my investments more tax-efficient. It can do the same for you.



You really should take advantage of the forum's offer to review your total investments.

You will find differing opinions from different members on any particular facet of your investments. Take bonds:
--Some will suggest TBM in taxable in a lower tax bracket.
--Some will suggest treasury bonds in taxable because they are exempt from state income tax. (This is a meaningless benefit for you. For me, I pay state income tax so had to think more about this option.)
--Some will suggest savings bonds because their interest is tax-deferred until redeemed, and then state tax exempt. (Ditto the absence of that advantage for you.)

So with every option, you have to think through each.

I gave the forum's advice a fair chance and followed the safest advice for ~5 years. During that time I continued to read the recommended books, read the forum topics (the theory topics are beyond me, I need simple action steps), and watched my investments.

During those 5 years I learned more about my ability to accept more risk to get a higher return. Today my investments can not be called mainstream because all my bonds are in taxable and my small Roth is all play money equities. But my investments fit my temperament better and my AA is 50/50, which is good enough.

You will find the same to be true for yourself. Most of the suggestions will be very safe because the forum doesn't want you to be hurt by your investments. Some of the suggestions will be a little less safe to give you the option to earn a little more return.

You'll need to decide which options fit you (plural) best, and come up with an investing game plan.

After the review and thinking about options for a while, I've seen many post their draft game plan for a final review. Here the forum is looking at all of the pieces you've selected to see if they hang together in a logical order.

If no glaring problems are found, then your draft game plan becomes your final game plan. You write it down and that's your IPS (investment policy statement)---your desired AA, your international allocation, the accounts you will use (401k, IRAs, taxable,…), where those accounts will be located (employer, Fidelity, Vanguard,…), the funds to be used in each account, when you will rebalance (monthly with new money, annually if a market segment is out of balance by >5%,…),.... All the nuts and bolts needed to make your investing game plan work.

The SWAN test. You'll know if your investing game plan is working because you'll be able Sleep Well At Night.

In my case, I learned that having only safe bonds in my Roth was boring me to tears. Why? The reason I paid taxes to convert to a Roth was to get tax-free growth. And you don't get much growth from safe bonds. I'm much happier after moving all my bonds to taxable (hence my preference for munis), and populating my Roth with equities.

Bottom line. The forum's review will: (1) improve your investments in terms of cost and tax efficiency, and (2) give you a second opinion that your investments are on track to get you to retirement.

But you still may need to tweak your game plan/IPS a little, after living with it for a while, learning more about yourself, and from your additional reading.
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Re: Choosing muni bond funds

Post by grabiner » Tue Feb 13, 2018 10:06 pm

neveragain wrote:
Fri Feb 09, 2018 5:38 pm
I am in the 10% tax bracket for 2017.


I am currently trying to invest some inheritance money and want lower-risk investments. I am also confused about why munis are not good for people in lower tax brackets. I understand why muni funds are recommended for people in higher tax brackets, but not sure why that would rule them out for people in lower tax brackets. Can I just calculate this way: TEY = the muni's SEC yield / (1 - your fed tax bracket)? and see if the Vanguard fund mentioned here would work for my situation?
You can calculate this way (or, equivalently, after-tax yield = fund yield*(1-tax bracket)).

But higher yields are not necessarily better; investors demand higher yields on bonds to compensate for risk. Most investors who buy muni bonds are in higher tax brackets. If a taxable bond yields 3%, investors in a 24% tax bracket will buy muni bonds of the same risk if the yield is at least 2.28%. That is likely to be about the break-even point. Therefore, if you buy the taxable bond yielding 3%, you will get 2.7% after tax (or 2.64% if you happen to be in the 12% tax bracket), and that is a better deal than the munis yielding 2.28%.

In a low bracket, you should decide on your appropriate risk level, and then buy taxable bonds to get the best returns for that risk level. A common low-risk recommendation is a total bond market index; if you are at Fidelity, the Fidelity US Bond Index is a low-cost investment opportunity.

But as other posters have noted, you need to look at your portfolio as a whole. Once you have decided how much you want to hold in bonds, it's probably better for you to fill your IRAs with bonds, and hold stock in your taxable account. The reason is that, in your tax bracket, you pay almost no tax on stock investments anyway (qualified dividends and long-term gains are not taxed in your bracket, and you pay no state tax), so they don't need to be in an IRA.
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Re: Choosing muni bond funds

Post by neveragain » Wed Feb 14, 2018 12:09 am

radiowave wrote:
Tue Feb 13, 2018 7:37 pm
\OP, this is an excellent thread with really good input above. But getting to basics, we need more information on what you have in tax-deferred (and Roth IRA if applicable) and in taxable. You need to look at your entire portfolio. You may be able to increase your bonds in tax deferred to your desired asset allocation and then use your taxable for total stock market (US) and total international stock and not use munis in taxable. Again, as noted above, you may get better feedback by posting your entire portfolio.
Would total stock market & total international be tax efficient in the taxable accounts? They would likely incur some kinds of tax, I think. Being in a low tax bracket, it might not hurt me too much, though? I am still interested in a four-in-one index fund for my taxable.

Here is what I have in two Fidelity IRAs:

Roth: FSICX (multi sector bond fund), FUSVX (500 index) PRTXX, SCHZ (Bond fund), VEU (Vanguard International Equity).

Traditional IRA: FSICX, FUSVX, PRTXX and VEU.

Outside of my IRA, I have a CD Ladder with Fidelity.
Last edited by neveragain on Wed Feb 14, 2018 12:23 am, edited 1 time in total.

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Re: Choosing muni bond funds

Post by neveragain » Wed Feb 14, 2018 12:12 am

grabiner wrote:
Tue Feb 13, 2018 10:06 pm

But as other posters have noted, you need to look at your portfolio as a whole. Once you have decided how much you want to hold in bonds, it's probably better for you to fill your IRAs with bonds, and hold stock in your taxable account. The reason is that, in your tax bracket, you pay almost no tax on stock investments anyway (qualified dividends and long-term gains are not taxed in your bracket, and you pay no state tax), so they don't need to be in an IRA.
OK that makes sense.

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Re: Choosing muni bond funds

Post by neveragain » Wed Feb 14, 2018 12:21 am

dratkinson wrote:
Tue Feb 13, 2018 3:36 pm

I noticed that too. After my 2007 forum review and getting rid of the tax-inefficient investments that were pushing me into the 25% tax bracket, the use of munis helped me remain in the 15% tax bracket for 3-4 more years, meaning I got those TE dividends, PLUS all QDI was taxed at 0% :)

I forgot about that. Above when I was computing the TEY benefits, I forgot to add in the 0% QDI benefit that comes from staying out of the 25% tax bracket.

Bottom line. My recalled 2007 thinking to justify using munis (to lower AGI) in the 15% bracket, I get:
--Their tax-exempt dividends, plus
--0% QDI
--0% LTCG
--Cheaper Roth conversion

Of course my state takes 5% of everything.
Thanks.

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Re: Choosing muni bond funds

Post by dratkinson » Wed Feb 14, 2018 7:35 pm

Retirement investing: background information.

See seminal article by William Sharpe: https://web.stanford.edu/~wfsharpe/art/ ... active.htm

See Wiki topic: https://www.bogleheads.org/wiki/Three-fund_portfolio
See forum discussion: viewtopic.php?f=10&t=88005

See Wiki topic: https://www.bogleheads.org/wiki/Princip ... _placement



3-fund portfolio. The 3-fund portfolio is recommended for all account types (self-employed, employer, personal, tax-free, tax-deferred, and taxable). It can be replicated in each account, or spread across all guided by your investment options’ availability/costs. However you get to an age-appropriate 3-fund portfolio is fine: individual funds/ETFs, or an all-in-one fund.



Preferred retirement investing order, generic.
--Employer’s retirement plan to get the company match (it’s free money, but most restrictive choices)
--IRA (more and better choices)
--Spousal IRA (if spouse not working, qualifies based on your earned income)
--Employer’s retirement plan to annual contribution limit (maximize annual tax-advantaged space because more is better than less)
--Taxable investments (if you have more to invest after filling annual tax-advantaged space, no annual contribution limit). Round out your AA using the most tax-efficient options.

See Wiki topic: https://www.bogleheads.org/wiki/Priorit ... nvestments

Begin creating a 3-fund portfolio by investing in your employer’s retirement plan (probably the worst options) by choosing the best options (lowest-cost, broadest-index). Then invest in your IRA (unlimited good options) by buying whatever you need to fill out the missing pieces of your 3-fund portfolio not available from your employer’s plan. Finally, if you have more to invest after filling all of your annual tax-advantaged space, then begin taxable investing (choose only the most tax-efficient options).


neveragain wrote:
Wed Feb 14, 2018 12:09 am
...
Would total stock market & total international be tax efficient in the taxable accounts? They would likely incur some kinds of tax, I think. Being in a low tax bracket, it might not hurt me too much, though? I am still interested in a four-in-one index fund for my taxable.

Here is what I have in two Fidelity IRAs:

Roth: FSICX (multi sector bond fund), FUSVX (500 index) PRTXX, SCHZ (Bond fund), VEU (Vanguard International Equity).

Traditional IRA: FSICX, FUSVX, PRTXX and VEU.

Outside of my IRA, I have a CD Ladder with Fidelity.

Total stock market returns ~100% QDI income.

Total international stock market returns ~70% QDI income + ~10% FTC (foreign tax credit). FTC is received for TISM in a taxable account, lost if TISM in a tax-advantaged account.

Under the old tax rules, if you were in the <=15% fed tax bracket, you paid 0% tax on QDI (+LTCG). You paid 15% fed tax on QDI (+LTCG) if you were in a higher tax bracket. So yes, TSM and TISM are tax efficient and can be used in taxable account.

You were in the 10% tax bracket last year, but that seems to have been a one-time event. You should probably plan for being in the new 22% fed tax bracket going forward. Why? "Plan for the worst, hope for the best."

In a taxable account and 22% tax bracket, dividends from taxable bonds will be taxed more than dividends from TSM and TISM. A four-in-one (all-in-one) fund contains taxable bonds.

A single four-in-one fund would be appropriate for your rIRA (Roth IRA) and tIRA (traditional IRA). TSM+TISM would be appropriate for your taxable account.



Given above, a first cut at restructuring your investments would look like:

Roth IRA: Four-in-one fund. (Chosen retirement date ~15 years from now (65 - early 50s)).

Traditional IRA: Four-in-one fund. (Ditto.)

Taxable: TSM (80% of taxable equities) + TISM (20% of taxable equities) + CD ladder at Fidelity (50% of taxable investments).

Asset allocation: 50/50 (conservative AA rule: age in bonds).

International allocation: 20% (Believe Mr Bogle accepts 20%, Vanguard recommends 30%, or use Fidelity’s recommended weight%).


Why?

Tax-advantaged accounts. The four-in-one fund is the recommended 3-fund portfolio + international bonds (similar to the way Vanguard does it with their all-in-one funds) and self-managing. The only management required for your TA accounts is to maximize your annual contribution limits.

Taxable account. The management of your taxable account is a little more hands-on, but that's easy to do. With TSM+TISM+CDs effectively being a 3-fund portfolio, you just add your new money to the asset that is under weight based on current market conditions. Simple. And by buying what is currently under-weight, you are always "buying low". So you are never tempted to chase the current market bandwagon and "buy high".

N.B. To avoid “buying high”, you must have developed, and be following a written investing game plan (IPS), defining what you will invest in, so you know what to buy-low based on current market conditions, so you will not be tempted to stray by a current high-priced market bandwagon.



Disclosure. That's the way I did it: start with the safe recommendations and live with them for a few years. See how you like it.


Option. I believe an argument can be made for an IT (or LT) national muni to replace part of your CD ladder---TEYs were equivalent or better. But you can live with above for a few years and see if you pass the SWAN test. If so, then no IPS tweaking needed.

But if after a few years you feel the urge to reach for a little more after-tax income and can withstand a little more risk (experienced as a bond crash if you need to sell at the wrong time), then can revisit this option at that time.


Ending my worry about using munis as an emergency fund tier. Assuming a worst case 15% bond crash, then I overfill my muni emergency fund tier to 118% (=1/(1-.15)) of anticipated need and stopped worrying.

Plan for the worst, hope for the best.

Did I mention that I like simple action steps? :)
d.r.a, not dr.a. | I'm a novice investor, you are forewarned.

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Re: Choosing muni bond funds

Post by Money Market » Thu Feb 15, 2018 4:55 am

VTEB is an index fund whereas VWITX is actively managed as far as I can see from the description and returns on VG's site

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Re: Choosing muni bond funds

Post by neveragain » Thu Feb 15, 2018 1:22 pm

dratkinson wrote:
Wed Feb 14, 2018 7:35 pm

Given above, a first cut at restructuring your investments would look like:

Roth IRA: Four-in-one fund. (Chosen retirement date ~15 years from now (65 - early 50s)).

Traditional IRA: Four-in-one fund. (Ditto.)

Taxable: TSM (80% of taxable equities) + TISM (20% of taxable equities) + CD ladder at Fidelity (50% of taxable investments).

Asset allocation: 50/50 (conservative AA rule: age in bonds).

International allocation: 20% (Believe Mr Bogle accepts 20%, Vanguard recommends 30%, or use Fidelity’s recommended weight%).
Thanks for this info. I pasted it into a Word Document so I can have it to refer to.

Given this, I will likely put the FFNOX (Four in One Fund), into my Roth and Traditional IRAs when I make my next contribution.

The VEU (All World Except for US) that I have already is an international fund; it's perhaps not exactly 20%, but close to that. I have it in both IRAs. I will check on what percentage it's at.

I will start looking for a Total US Stock Market Fund and Total International Stock Market Fund for my taxable accounts.

Although I would like the Vanguard muni that's been recommended here, I'd rather keep everything at Fidelity & don't want to pay the $75.00 fee to buy a Vanguard product in Fidelity. I am going to look at some Fidelity muni bond funds if I can find something decent.
Last edited by neveragain on Thu Feb 15, 2018 5:19 pm, edited 2 times in total.

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