At what tax bracket should I care about BND vs Muni bonds in a taxable account?

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JimmyJammy
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At what tax bracket should I care about BND vs Muni bonds in a taxable account?

Post by JimmyJammy »

For bonds in my taxable account, I've generally steered towards municipal bonds (VNYTX for long - I'm in NY) and MUB for national intermediate, mainly because I wanted to reduce taxes.

But, given that bond yields are so low, I'm wondering if it's worth fretting over and if going into BND (VBTLX) is just as well.

My spouse and I are in the 24% tax bracket currently.
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retired@50
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Re: At what tax bracket should I care about BND vs Muni bonds in a taxable account?

Post by retired@50 »

JimmyJammy wrote: Mon Jun 15, 2020 3:38 pm For bonds in my taxable account, I've generally steered towards municipal bonds (VNYTX for long - I'm in NY) and MUB for national intermediate, mainly because I wanted to reduce taxes.

But, given that bond yields are so low, I'm wondering if it's worth fretting over and if going into BND (VBTLX) is just as well.

My spouse and I are in the 24% tax bracket currently.
I think you'll need to get acquainted with the taxable equivalent yield calculator to get a good answer. Don't forget to consider state / city taxes if applicable.

See link: https://www.calcxml.com/do/inc11

Regards,
This is one person's opinion. Nothing more.
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anon_investor
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Re: At what tax bracket should I care about BND vs Muni bonds in a taxable account?

Post by anon_investor »

You should know that the market is pricing muni bonds as much riskier than total bond (BND) since their yields are higher than total bond even before the tax advantages. So factoring the credit risk when making your decision (BND is almost 70% credit risk free US Government Bonds).
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JimmyJammy
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Re: At what tax bracket should I care about BND vs Muni bonds in a taxable account?

Post by JimmyJammy »

retired@50 wrote: Mon Jun 15, 2020 3:46 pm
JimmyJammy wrote: Mon Jun 15, 2020 3:38 pm For bonds in my taxable account, I've generally steered towards municipal bonds (VNYTX for long - I'm in NY) and MUB for national intermediate, mainly because I wanted to reduce taxes.

But, given that bond yields are so low, I'm wondering if it's worth fretting over and if going into BND (VBTLX) is just as well.

My spouse and I are in the 24% tax bracket currently.
I think you'll need to get acquainted with the taxable equivalent yield calculator to get a good answer. Don't forget to consider state / city taxes if applicable.

See link: https://www.calcxml.com/do/inc11

Regards,

Thank you!
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JimmyJammy
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Re: At what tax bracket should I care about BND vs Muni bonds in a taxable account?

Post by JimmyJammy »

anon_investor wrote: Mon Jun 15, 2020 3:54 pm You should know that the market is pricing muni bonds as much riskier than total bond (BND) since their yields are higher than total bond even before the tax advantages. So factoring the credit risk when making your decision (BND is almost 70% credit risk free US Government Bonds).
Good point!
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Noobvestor
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Re: At what tax bracket should I care about BND vs Muni bonds in a taxable account?

Post by Noobvestor »

I moved to Treasuries in taxable some time ago - (a) they're safer, (b) their low yields mean lower taxes, (c) they're state-tax exempt (I'm in a high-tax state). Might want to add those into your tax-equivalent calculation matrix and see if they make sense for you.
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L82GAME
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Re: At what tax bracket should I care about BND vs Muni bonds in a taxable account?

Post by L82GAME »

retired@50 wrote: Mon Jun 15, 2020 3:46 pm
JimmyJammy wrote: Mon Jun 15, 2020 3:38 pm For bonds in my taxable account, I've generally steered towards municipal bonds (VNYTX for long - I'm in NY) and MUB for national intermediate, mainly because I wanted to reduce taxes.

But, given that bond yields are so low, I'm wondering if it's worth fretting over and if going into BND (VBTLX) is just as well.

My spouse and I are in the 24% tax bracket currently.
I think you'll need to get acquainted with the taxable equivalent yield calculator to get a good answer. Don't forget to consider state / city taxes if applicable.

See link: https://www.calcxml.com/do/inc11

Regards,
+1, and echoing others’ comments RE: credit risk and price risk relative to specific needs and retirement timeline (i.e., do you have a specific EF and therefore taxable acct. is 100% retirement-dedicated, or is your EF in your taxable acct?).

Also, see here: https://www.bogleheads.org/wiki/Bonds:_advanced_topics

And here: https://www.bogleheads.org/wiki/Tax-eff ... _placement
“Simplicity is the ultimate sophistication.” - Lao Tzu
hudson
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Re: At what tax bracket should I care about BND vs Muni bonds in a taxable account?

Post by hudson »

JimmyJammy wrote: Mon Jun 15, 2020 3:38 pm For bonds in my taxable account, I've generally steered towards municipal bonds (VNYTX for long - I'm in NY) and MUB for national intermediate, mainly because I wanted to reduce taxes.

But, given that bond yields are so low, I'm wondering if it's worth fretting over and if going into BND (VBTLX) is just as well.

My spouse and I are in the 24% tax bracket currently.
Short answer: Munis are probably a good choice in your situation...24% bracket
Long answer: Do the after tax math for VNYTX and BND. How does that come out?

I calculate with distribution yield. Consider learning the ins and outs of distribution yield, but as you know, that's what you get paid every month.
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JimmyJammy
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Re: At what tax bracket should I care about BND vs Muni bonds in a taxable account?

Post by JimmyJammy »

According to the calculator, the MUB yield of 2.35% is equivalent to a 3.31% taxable rate (for my tax bracket as a NY resident).

The VNYTX yield of 2.86% is equivalent to a taxable 4.028% rate.

It does seem like a risky space - these munis - in light of the Covid crisis fall-out. We even have at least one Senator encouraging some cities to declare bankruptcy!
hudson
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Re: At what tax bracket should I care about BND vs Muni bonds in a taxable account?

Post by hudson »

JimmyJammy,

I'm not making a recommendation....just some thoughts.

Your NY muni is over 90% AAA/AA/A...not bad.
It is a long bond fund...average duration 6.5 years...not that long...
It's rated a Vanguard Risk Potential 3. I like ratings that are 1 or 2.
The distribution yield has been running 2.8% or better since Dec. 2018
There's an admiral version with even lower expenses.
If I lived in NY, I would probably own this fund for maybe half of my muni holdings.

When I think about buying munis, I look at the holdings.
I would still rate munis right behind CDs, Treasuries, and US government bonds....as far as safety.
If a corporate bond defaults forget it. If a muni bond defaults, the bond holder has a much better chance of getting a payback.

BMBIX is an intermediate national muni that is one of the safest muni funds out there....maybe worth a look. It's all AAA/AA. The expense ratio makes me hold my nose...but I would buy it.

A related discussion on munis: viewtopic.php?p=5317013#p5317013
Last edited by hudson on Tue Jun 16, 2020 10:21 am, edited 1 time in total.
Topic Author
JimmyJammy
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Re: At what tax bracket should I care about BND vs Muni bonds in a taxable account?

Post by JimmyJammy »

L82GAME wrote: Tue Jun 16, 2020 3:46 am
retired@50 wrote: Mon Jun 15, 2020 3:46 pm
JimmyJammy wrote: Mon Jun 15, 2020 3:38 pm For bonds in my taxable account, I've generally steered towards municipal bonds (VNYTX for long - I'm in NY) and MUB for national intermediate, mainly because I wanted to reduce taxes.

But, given that bond yields are so low, I'm wondering if it's worth fretting over and if going into BND (VBTLX) is just as well.

My spouse and I are in the 24% tax bracket currently.
I think you'll need to get acquainted with the taxable equivalent yield calculator to get a good answer. Don't forget to consider state / city taxes if applicable.

See link: https://www.calcxml.com/do/inc11

Regards,
+1, and echoing others’ comments RE: credit risk and price risk relative to specific needs and retirement timeline (i.e., do you have a specific EF and therefore taxable acct. is 100% retirement-dedicated, or is your EF in your taxable acct?).

Also, see here: https://www.bogleheads.org/wiki/Bonds:_advanced_topics

And here: https://www.bogleheads.org/wiki/Tax-eff ... _placement
Where would you recommend putting your EF money? VGIT? VTIP? Right now, I have most of it in Vanguard's muni money market and short term treasuries (SHY).
hudson
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Re: At what tax bracket should I care about BND vs Muni bonds in a taxable account?

Post by hudson »

JimmyJammy wrote: Tue Jun 16, 2020 10:10 am Where would you recommend putting your EF money? VGIT? VTIP? Right now, I have most of it in Vanguard's muni money market and short term treasuries (SHY).
I use high yield savings accounts: https://www.depositaccounts.com/ratetab ... 1592320955

I use Amex Bank because they can transfer funds to my credit union faster than other banks....same business day, if I make the request before 10:30 AM.
L82GAME
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Re: At what tax bracket should I care about BND vs Muni bonds in a taxable account?

Post by L82GAME »

JimmyJammy wrote: Tue Jun 16, 2020 10:10 am
L82GAME wrote: Tue Jun 16, 2020 3:46 am
retired@50 wrote: Mon Jun 15, 2020 3:46 pm
JimmyJammy wrote: Mon Jun 15, 2020 3:38 pm For bonds in my taxable account, I've generally steered towards municipal bonds (VNYTX for long - I'm in NY) and MUB for national intermediate, mainly because I wanted to reduce taxes.

But, given that bond yields are so low, I'm wondering if it's worth fretting over and if going into BND (VBTLX) is just as well.

My spouse and I are in the 24% tax bracket currently.
I think you'll need to get acquainted with the taxable equivalent yield calculator to get a good answer. Don't forget to consider state / city taxes if applicable.

See link: https://www.calcxml.com/do/inc11

Regards,
+1, and echoing others’ comments RE: credit risk and price risk relative to specific needs and retirement timeline (i.e., do you have a specific EF and therefore taxable acct. is 100% retirement-dedicated, or is your EF in your taxable acct?).

Also, see here: https://www.bogleheads.org/wiki/Bonds:_advanced_topics

And here: https://www.bogleheads.org/wiki/Tax-eff ... _placement
Where would you recommend putting your EF money? VGIT? VTIP? Right now, I have most of it in Vanguard's muni money market and short term treasuries (SHY).
Hi JimmyJammy,

The duration of that fund of 1.86 years presents price risk to your invested principle should you need the cash in an emergency within the timeframe of roughly two years. An HYSA is therefore a less risky holding for the value of principle invested for the purpose of an EF. However, this general advice is relative to how many months equivalent to living expenses you have in an EF, and relative to specifically planned near-term needs for which you’d use your EF. A portfolio review might be worth considering following these guidelines: viewtopic.php?f=1&t=6212
“Simplicity is the ultimate sophistication.” - Lao Tzu
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Re: At what tax bracket should I care about BND vs Muni bonds in a taxable account?

Post by grabiner »

My rule of thumb is that munis break even with taxable bonds of comparable risk in a 25% tax bracket.

Thus, in the 24% bracket in New York, NY muni funds are more attractive than taxable bonds, but national munis are probably less attractive. But you may not want all your bonds in NY munis; a reasonable split would be half Vanguard NY Long-Term Tax-Exempt, and half Treasuries. Since long-term munis have some inflation risk, the Treasury half could be in a TIPS fund. (Max out your I-Bond allocation before buying any TIPS; I-Bonds have the extra advantage of tax deferral, and at current rates, you aren't giving up much in yield.)
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CFM300
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Re: At what tax bracket should I care about BND vs Muni bonds in a taxable account?

Post by CFM300 »

JimmyJammy wrote: Mon Jun 15, 2020 3:38 pm For bonds in my taxable account, I've generally steered towards municipal bonds (VNYTX for long - I'm in NY) and MUB for national intermediate, mainly because I wanted to reduce taxes.
Keep in mind that muni funds often decline along with stocks. Look at what happened to MUB in March. That may or may not be a problem, depending on the role of your munis in taxable. But if you want to rebalance into stocks, or are expecting the money to be "safe" in a crisis, having at least some treasuries would be a good idea.

That has been the advice of Bill Bernstein.

"...take a look at what happened to the Vanguard muni bond funds did the first 10 months of 2008. You can easily do this with with Yahoo finance. Then look at what treasurys did during the same period. When I buy at the stock fire sale, I don't want to take a bond haircut to do so."

viewtopic.php?t=175804#p2659058
Topic Author
JimmyJammy
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Re: At what tax bracket should I care about BND vs Muni bonds in a taxable account?

Post by JimmyJammy »

CFM300 wrote: Thu Jun 18, 2020 11:49 am
JimmyJammy wrote: Mon Jun 15, 2020 3:38 pm For bonds in my taxable account, I've generally steered towards municipal bonds (VNYTX for long - I'm in NY) and MUB for national intermediate, mainly because I wanted to reduce taxes.
Keep in mind that muni funds often decline along with stocks. Look at what happened to MUB in March. That may or may not be a problem, depending on the role of your munis in taxable. But if you want to rebalance into stocks, or are expecting the money to be "safe" in a crisis, having at least some treasuries would be a good idea.

That has been the advice of Bill Bernstein.

"...take a look at what happened to the Vanguard muni bond funds did the first 10 months of 2008. You can easily do this with with Yahoo finance. Then look at what treasurys did during the same period. When I buy at the stock fire sale, I don't want to take a bond haircut to do so."

viewtopic.php?t=175804#p2659058
It's funny you mention MUB. I'm embarrassed to say that was my only panic sell during the March downturn. Of course, soon after I sold the Fed jumped in to bail them out. So, yeah, I don't think I would have sold if I had been psychologically prepared in advance for its possible extreme volatility. Live and learn.
Time for treasuries!
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