Help with buying municipal bonds please

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jonce17
Posts: 37
Joined: Sun Sep 10, 2017 3:57 pm

Help with buying municipal bonds please

Post by jonce17 » Thu Jun 14, 2018 12:06 am

I’ve got 100K in retirement at 90:10 stocks/bonds all tax-protected accounts.

Are muni bonds a good way to go for my first non-tax protected investment if I’d like to get to 80:20?

I’m 25 years from retirement, but feeling a little vulnerable being so stock heavy.

Where do I buy muni bonds and are they essentially tax-free? Any insight is appreciated, thanks

mcraepat9
Posts: 967
Joined: Thu Jul 16, 2015 11:46 am

Re: Help with buying municipal bonds please

Post by mcraepat9 » Thu Jun 14, 2018 12:51 am

jonce17 wrote:
Thu Jun 14, 2018 12:06 am
I’ve got 100K in retirement at 90:10 stocks/bonds all tax-protected accounts.

Are muni bonds a good way to go for my first non-tax protected investment if I’d like to get to 80:20?

I’m 25 years from retirement, but feeling a little vulnerable being so stock heavy.

Where do I buy muni bonds and are they essentially tax-free? Any insight is appreciated, thanks
What is your fed and state marginal tax rate? What state are you living in?

Another option is to simply increase bonds in your tax protected account and buy equities in your taxable account. Is there a reason you don’t want to do that?

Muni bond interest is fed income tax free. Muni bond interest CAN be state income tax free if the bonds are issued by authorities in your state. Typically the best path is to buy a muni bond mutual fund for diversification. Where is your first taxable account going to be opened? Most of the popular national muni bond funds (Vanguard Intermediate Term, Baird) can be purchased most anywhere.
Amateur investors are not cool-headed logicians.

not4me
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Joined: Thu May 25, 2017 3:08 pm

Re: Help with buying municipal bonds please

Post by not4me » Thu Jun 14, 2018 7:47 am

Since you've made a (seemingly prudent) decision to expand your bond allocation, the next step I'd recommend is to decide the characteristics you're going to get. Consider duration, credit quality, your risk tolerance, etc. It may be as simple as extending the types of bonds you already have. Then, i would look to what options you have.

It sounds as if you may have maxed your tax-deferred contribution & still have some money you'd like to invest? I'll assume that to be the case. Previous poster talked about changing your bond allocation in tax-deferred & that may be good. But, if your choices are slim in tax deferred (some 401ks for example have limited choices), you may be better off picking up another fund in a taxable account & municipals MAY be good.

Munis are generally federal tax-free (some do trigger AMT on occasion) & are taxed by a state if issued by a state other than your state of residence. Depending upon your tax situation, munis may not help you. This is especially true if you are in a lower bracket and/or live in a state with low/no income tax. When comparing funds, look at the tax equivalent return for your situation. I try to avoid letting tax avoidance lead me into a bad investment decision. Also, muni funds often have higher expenses, which is a key to selecting bond funds. If after considering tax equivalent yield & expense, the options seem to be about the same, I'd suggest going with the bigger fund to have better liquidity etc.

By the way, I would suggest you buy either a bond fund or an etf & not individual bonds for several reasons.

Since you've been 90/10, you may be comfortable looking into a balanced type fund such as Wellington or Wellesley at Vanguard. These have both stocks & bonds & long track records. They might make your transition easier(?) from a 'sleep at night' perspective.

Good luck!

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Duckie
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Re: Help with buying municipal bonds please

Post by Duckie » Thu Jun 14, 2018 4:21 pm

jonce17 wrote:I’ve got 100K in retirement at 90:10 stocks/bonds all tax-protected accounts.

Are muni bonds a good way to go for my first non-tax protected investment if I’d like to get to 80:20?
No. If you want more bonds add them to the tax-sheltered accounts. Put stocks in taxable accounts.
Where do I buy muni bonds
You can buy individual munis at most brokerages, but I don't recommend that. It's better to buy a muni fund instead. For example: (VWITX) Vanguard Intermediate-Term Tax-Exempt Fund Investor Shares (0.19%).
and are they essentially tax-free?
Muni bond funds are tax-exempt from federal income taxes, but not necessarily state income taxes. For that you'd need a muni bond fund for your particular state. In California for example: (VCAIX) Vanguard California Intermediate-Term Tax-Exempt Fund Investor Shares (0.19%). State munis are riskier because your eggs are in one state basket instead of spread across 50.

Sometime your tax-exempt income can trigger the dreaded AMT.

Read about Municipal bonds on the Wiki.

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grabiner
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Re: Help with buying municipal bonds please

Post by grabiner » Fri Jun 15, 2018 10:10 pm

Duckie wrote:
Thu Jun 14, 2018 4:21 pm
Sometime your tax-exempt income can trigger the dreaded AMT.

While some munis are subject to AMT, the only Vanguard muni funds which hold them are High-Yield Tax-Exempt and the money-market funds.

Also, the AMT is much less likely to affect investors under the new tax laws. One of the main causes of AMT was high deductions for state income taxes, but these are now capped at $10K under the regular tax.
Wiki David Grabiner

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