At what point do you use muni bonds in taxable portfolio?

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Captain kangaroo
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Joined: Mon Nov 27, 2017 12:45 am

At what point do you use muni bonds in taxable portfolio?

Post by Captain kangaroo » Tue Sep 18, 2018 2:40 am

I am currently 100% stocks in a mid 6 figure portfolio. I want to go to 10% bonds. I always thought it was conventional wisdom to keep bonds out of a taxable account and try to keep them within IRA's.

Would a total bond fund be too tax inefficient? Should I go with a national tax-free fund?

I am in the 22% tax bracket.

mhalley
Posts: 6324
Joined: Tue Nov 20, 2007 6:02 am

Re: At what point do you use muni bonds in taxable portfolio?

Post by mhalley » Tue Sep 18, 2018 2:56 am

You calculate the tax equivalent yield and see which gives you the most return.
So let’s look at the current sec yields on tbm vs int term tax exempt.
Tbm 3.06%
Int term 2.58%
Using this calculator
https://www.calcxml.com/do/inc11
We get
A 2.580% tax-free return is equivalent to a tax-equivalent yield of 3.308%. So looks like muni would come out ahead.
I hope I did that right, as it seems off for some reason, I thought the muni would not be ahead at that low a tax rate.
You can also go to the vanguard site, but it doesn’t have 22%, only 25.
https://personal.vanguard.com/us/funds/ ... ket=0#form

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Cyclesafe
Posts: 684
Joined: Wed Dec 31, 2014 1:03 pm

Re: At what point do you use muni bonds in taxable portfolio?

Post by Cyclesafe » Tue Sep 18, 2018 9:53 am

3.308% it is. TEY is muni%/(1-tr)

VWIUX in recent days has gone down sharply vs-a-vis VBTLX. Dunno why. Usually, as implied, breakeven tends to be more like 24%.

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