muni bonds in 12% tax bracket

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jgt808
Posts: 20
Joined: Mon Jul 16, 2018 1:21 am

muni bonds in 12% tax bracket

Post by jgt808 » Wed Aug 08, 2018 9:31 pm

Hi all-
My husband (56) and I (49) inherited a State Farm municipal bond after his parents passing. State Farm Municipal Bond (SFBDX). We have $90,000 in it and are in the 12% tax bracket. His father was a life long State Farm employee and was very loyal to all their products. He may be reluctant to let go of any of his father's investment choices, either out of respect or tradition. But I can't see this as a smart investment as long as we will be in a low tax bracket (although it seems to be rated as a good bond fund.) We will stay in the 12% bracket, MAYBE a select few 22% years if we have too much in retirement which should be in 10 years.

I seem to have two choices:

1) Withdraw SFBDX and transfer them into an equivalent risk/return fund into a taxable Vanguard fund. We don't expect to use the money for 10+ years but we need this to fulfill our 35% bond allocation. Would you suggest investing in Vanguard's Total bond fund VBTLX in taxable or a CD, or ??

2) Put the 90k from the bond fund in Total Stock Market in taxable, and re-balance bond funds in my IRA. I'd transfer 90k of my 333k of Prudential 2035 target fund (457b) into a Blackrock bond fund. That way I won't be paying on dividends in taxable. Since it's a 457b and I'm no longer with that employer, I am free to withdraw this money before 59.5 years, but hoping not to. Prudential offers 2 bond choices 1) Blackrock Total Return (.19%) 2) Blackrock US Bond index (.04%)...plus their .11% annual fee to maintain the account.

Thanks, hope I'm not making this too complicated for myself. Just trying to tidy things up in the portfolio as my husband is not into our financials and relies on me to keep the books. I like the idea of putting into a taxable account, for some reason seems easier to withdrawl if we should need to rather than deal with the Prudential withdrawl and potential tax problems. Thanks for the help.

mega317
Posts: 2557
Joined: Tue Apr 19, 2016 10:55 am

Re: muni bonds in 12% tax bracket

Post by mega317 » Wed Aug 08, 2018 10:25 pm

I would go stocks in taxable as per your option #2 if you can get away with it. What would happen if the stock market crashed by half--would you rather that 90k be in taxable or not? If the answer is taxable or I don't care then you're good to go.

I'm not sure what your last sentence means--is there a liquidity issue with this muni fund?

Edit to add:
jgt808 wrote:
Wed Aug 08, 2018 9:31 pm
Withdraw SFBDX and transfer them into an equivalent risk/return fund into a taxable Vanguard fund.
Picking a nit here but you can get BETTER return for the same risk, or even less risk, with a vanilla taxable bond fund.

jgt808
Posts: 20
Joined: Mon Jul 16, 2018 1:21 am

Re: muni bonds in 12% tax bracket

Post by jgt808 » Wed Aug 08, 2018 10:44 pm

Thank you Mega.
"I would go stocks in taxable as per your option #2 if you can get away with it. What would happen if the stock market crashed by half--would you rather that 90k be in taxable or not? If the answer is taxable or I don't care then you're good to go."
---Is there a benefit to having bonds in taxable if the stock market crashed in half? Not sure how I should go with this, or how it makes a difference in my situation.

"I'm not sure what your last sentence means--is there a liquidity issue with this muni fund?"
---I meant to say the liquidity issue could be with the 457b, not withdrawing from the state farm muni fund. The 457b is supposed to be penalty free as I've left service there, but haven't done it yet.

"Picking a nit here but you can get BETTER return for the same risk, or even less risk, with a vanilla taxable bond fund."
--thanks, I was intending to get a better return for the same risk. So I'm assuming the Blackrock US bond Index fund (.04%) would be this?

Or I can split the difference, 1/2 in tax defferred bond fund in Blackrock, and half in Vanguard taxable total bonds fund. Thanks again, really helpful.

mega317
Posts: 2557
Joined: Tue Apr 19, 2016 10:55 am

Re: muni bonds in 12% tax bracket

Post by mega317 » Wed Aug 08, 2018 11:13 pm

jgt808 wrote:
Wed Aug 08, 2018 10:44 pm
---Is there a benefit to having bonds in taxable if the stock market crashed in half? Not sure how I should go with this, or how it makes a difference in my situation.
If you hold stocks in taxable and the market crashes, your taxable account will be smaller. This is a problem for people who are counting on their taxable accounts to buy something before they're dipping in to retirement accounts. The most common examples are with younger people who might want to buy a house in the near or intermediate future. If they need 50k for the down payment and their taxable account is 75k, holding all stocks is a problem. If their taxable account is 500k then it doesn't matter at all. I have a mix of stocks and bonds in taxable because I don't need ultimate stability, but I can't afford a total collapse because of some short-term plans.

jgt808
Posts: 20
Joined: Mon Jul 16, 2018 1:21 am

Re: muni bonds in 12% tax bracket

Post by jgt808 » Thu Aug 09, 2018 1:51 am

makes perfect sense, thank you!

MikeG62
Posts: 1222
Joined: Tue Nov 15, 2016 3:20 pm
Location: New Jersey

Re: muni bonds in 12% tax bracket

Post by MikeG62 » Thu Aug 09, 2018 8:22 am

mega317 wrote:
Wed Aug 08, 2018 11:13 pm
jgt808 wrote:
Wed Aug 08, 2018 10:44 pm
---Is there a benefit to having bonds in taxable if the stock market crashed in half? Not sure how I should go with this, or how it makes a difference in my situation.
If you hold stocks in taxable and the market crashes, your taxable account will be smaller. This is a problem for people who are counting on their taxable accounts to buy something before they're dipping in to retirement accounts. The most common examples are with younger people who might want to buy a house in the near or intermediate future. If they need 50k for the down payment and their taxable account is 75k, holding all stocks is a problem. If their taxable account is 500k then it doesn't matter at all. I have a mix of stocks and bonds in taxable because I don't need ultimate stability, but I can't afford a total collapse because of some short-term plans.
...this would include people who intend to retire many years before taking RMD's from their tax advantaged accounts or drawing SS and will finance their cash flow during this period from their taxable account.
Real Knowledge Comes Only From Experience

PFInterest
Posts: 2684
Joined: Sun Jan 08, 2017 12:25 pm

Re: muni bonds in 12% tax bracket

Post by PFInterest » Thu Aug 09, 2018 8:26 am

jgt808 wrote:
Wed Aug 08, 2018 9:31 pm
Hi all-
My husband (56) and I (49) inherited a State Farm municipal bond after his parents passing. State Farm Municipal Bond (SFBDX). We have $90,000 in it and are in the 12% tax bracket. His father was a life long State Farm employee and was very loyal to all their products. He may be reluctant to let go of any of his father's investment choices, either out of respect or tradition. But I can't see this as a smart investment as long as we will be in a low tax bracket (although it seems to be rated as a good bond fund.) We will stay in the 12% bracket, MAYBE a select few 22% years if we have too much in retirement which should be in 10 years.

I seem to have two choices:

1) Withdraw SFBDX and transfer them into an equivalent risk/return fund into a taxable Vanguard fund. We don't expect to use the money for 10+ years but we need this to fulfill our 35% bond allocation. Would you suggest investing in Vanguard's Total bond fund VBTLX in taxable or a CD, or ??

2) Put the 90k from the bond fund in Total Stock Market in taxable, and re-balance bond funds in my IRA. I'd transfer 90k of my 333k of Prudential 2035 target fund (457b) into a Blackrock bond fund. That way I won't be paying on dividends in taxable. Since it's a 457b and I'm no longer with that employer, I am free to withdraw this money before 59.5 years, but hoping not to. Prudential offers 2 bond choices 1) Blackrock Total Return (.19%) 2) Blackrock US Bond index (.04%)...plus their .11% annual fee to maintain the account.

Thanks, hope I'm not making this too complicated for myself. Just trying to tidy things up in the portfolio as my husband is not into our financials and relies on me to keep the books. I like the idea of putting into a taxable account, for some reason seems easier to withdrawl if we should need to rather than deal with the Prudential withdrawl and potential tax problems. Thanks for the help.
- you have no need for munis.
- behavioral issues might outweigh rational ones
- the cost basis reset to 0 on the day of their passing so should be minimal gains/losses to sell.
- yes buy stocks and rebalance in tax protected accounts while vbtlx is fine for your needs even though taxable income its still not the most efficient.

jgt808
Posts: 20
Joined: Mon Jul 16, 2018 1:21 am

Re: muni bonds in 12% tax bracket

Post by jgt808 » Thu Aug 09, 2018 8:36 pm

...this would include people who intend to retire many years before taking RMD's from their tax advantaged accounts or drawing SS and will finance their cash flow during this period from their taxable account.
[/quote]

Yes, we plan to retire early, around 60 or 62. I assume in this scenario, it would be best to keep them in tax advantaged as we'd be able to access our IRA accounts at 59.5? I hope to be spending down our IRA before 70, and don't expect 'too big' of RMDs to be a problem in our situation. thank you

jgt808
Posts: 20
Joined: Mon Jul 16, 2018 1:21 am

Re: muni bonds in 12% tax bracket

Post by jgt808 » Thu Aug 09, 2018 8:55 pm

- you have no need for munis.
Yes, thanks. I didn't think we had any use for muni's, but it was passed on so we are trying to respect some of his financial choices (keeping 2 whole life policies that he purchased, etc) while shedding some that make no sense in our financial plan.

- behavioral issues might outweigh rational ones
true! :oops:

- the cost basis reset to 0 on the day of their passing so should be minimal gains/losses to sell.
We actually rec'd this fund in 2010 ($40k) and put more (50k) in 1/2018 (nav was higher 1/18 than now). If I were to cash it out, would I actually owe anyting in gains since we are in 12%? The 2010 shares would be long term, and the 2018 shares would be a loss. Am I understanding this correct? Boy I've got a lot to learn!

- yes buy stocks and rebalance in tax protected accounts while vbtlx is fine for your needs even though taxable income its still not the most efficient.
I will rebalance the majority of my bonds in tax protected accounts, that certainly makes sense.

thanks!

PFInterest
Posts: 2684
Joined: Sun Jan 08, 2017 12:25 pm

Re: muni bonds in 12% tax bracket

Post by PFInterest » Thu Aug 09, 2018 9:06 pm

jgt808 wrote:
Thu Aug 09, 2018 8:55 pm
- you have no need for munis.
Yes, thanks. I didn't think we had any use for muni's, but it was passed on so we are trying to respect some of his financial choices (keeping 2 whole life policies that he purchased, etc) while shedding some that make no sense in our financial plan.

- behavioral issues might outweigh rational ones
true! :oops:

- the cost basis reset to 0 on the day of their passing so should be minimal gains/losses to sell.
We actually rec'd this fund in 2010 ($40k) and put more (50k) in 1/2018 (nav was higher 1/18 than now). If I were to cash it out, would I actually owe anyting in gains since we are in 12%? The 2010 shares would be long term, and the 2018 shares would be a loss. Am I understanding this correct? Boy I've got a lot to learn!

- yes buy stocks and rebalance in tax protected accounts while vbtlx is fine for your needs even though taxable income its still not the most efficient.
I will rebalance the majority of my bonds in tax protected accounts, that certainly makes sense.

thanks!
Sounds like bigger problems.

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