Bond Funds

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macandal
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Bond Funds

Post by macandal »

I've been trying to find information on bond funds. Specifically, FTFQX (Franklin California Tax-Free Income Fund), do I understand this correctly, a California resident selling all or some of that fund would not pay State or Federal taxes?
mediahound
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Re: Bond Funds

Post by mediahound »

macandal wrote: Wed Feb 24, 2021 6:49 pm I've been trying to find information on bond funds. Specifically, FTFQX (Franklin California Tax-Free Income Fund), do I understand this correctly, a California resident selling all or some of that fund would not pay State or Federal taxes?
State tax-free funds are still subject to Federal taxes I believe, just not state taxes.
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macandal
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Re: Bond Funds

Post by macandal »

So, this is what the prospectus says:
Taxes
The Fund’s distributions are primarily exempt from regular federal and state income
tax for individual residents of California. A portion of these distributions, however,
may be subject to the federal alternative minimum tax. The Fund may also make
distributions that are taxable to you as ordinary income or capital gains.
tibbitts
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Re: Bond Funds

Post by tibbitts »

macandal wrote: Wed Feb 24, 2021 6:49 pm I've been trying to find information on bond funds. Specifically, FTFQX (Franklin California Tax-Free Income Fund), do I understand this correctly, a California resident selling all or some of that fund would not pay State or Federal taxes?
I believe that a same-state muni fund would generally be tax free for income distributions. But not so for capital gains when you sell, assuming there are some, as far as I know.
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grabiner
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Re: Bond Funds

Post by grabiner »

tibbitts wrote: Wed Feb 24, 2021 7:25 pm
macandal wrote: Wed Feb 24, 2021 6:49 pm I've been trying to find information on bond funds. Specifically, FTFQX (Franklin California Tax-Free Income Fund), do I understand this correctly, a California resident selling all or some of that fund would not pay State or Federal taxes?
I believe that a same-state muni fund would generally be tax free for income distributions. But not so for capital gains when you sell, assuming there are some, as far as I know.
Likewise, you would pay tax on capital gains distributed by the fund, if it sells bonds for a capital gain.

But the problem with this fund is that you are paying a high price for the tax exemption. The fund has an expense ratio of 0.76%, which means that if its bonds return 2%, you are losing 38% of the return to expenses, plus the 3.75% front-end load. There are muni funds and ETFs with much lower expenses.

I believe Vanguard is the only provider which offers low-cost single-state funds; Vanguard's CA funds charge 0.09% expenses if you have $50K to invest, 0.17% for less than $50K.
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Munir
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Re: Bond Funds

Post by Munir »

mediahound wrote: Wed Feb 24, 2021 6:56 pm
macandal wrote: Wed Feb 24, 2021 6:49 pm I've been trying to find information on bond funds. Specifically, FTFQX (Franklin California Tax-Free Income Fund), do I understand this correctly, a California resident selling all or some of that fund would not pay State or Federal taxes?
State tax-free funds are still subject to Federal taxes I believe, just not state taxes.
I think they are free from federal taxes too. National municipal bond funds are free from federal taxes but not from state taxes. State municipal funds are free from both.
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macandal
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Re: Bond Funds

Post by macandal »

So the reason I'm asking about this fund is because my sister got a nice windfall (I think it was about $100K) and she invested it in this fund. I think she freaked out a little that the money was in the bank earning next to nothing. Through her credit union she got this fund and invested the money. I guess she could have done a lot worse, but if she had asked me, I would've told her to invest it in some Vanguard funds. My sister is within 10 years of retiring. This money will help in her retirement but it is not essential for her to do so (in other words, had she never received this money, she would still be able to retire), she will get a pension, SS, invests in her 457(b), and has an IRA. I believe she just got the fund last year, and according to her 1099, she earned around $2,451 in exempt interest dividends. Since she doesn't need the money right away and has some time to let it ride, should she sell this fund and invest in something like an index fund (VFIAX, VIMAX, VFSAX, VCSAX)? Thanks.
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grabiner
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Re: Bond Funds

Post by grabiner »

macandal wrote: Wed Mar 03, 2021 12:54 pm My sister is within 10 years of retiring. This money will help in her retirement but it is not essential for her to do so (in other words, had she never received this money, she would still be able to retire), she will get a pension, SS, invests in her 457(b), and has an IRA. I believe she just got the fund last year, and according to her 1099, she earned around $2,451 in exempt interest dividends. Since she doesn't need the money right away and has some time to let it ride, should she sell this fund and invest in something like an index fund (VFIAX, VIMAX, VFSAX, VCSAX)? Thanks.
Since she has this fund, a 457(b), and an IRA, she should decide on an appropriate allocation for all of her money. And since she is within a few years of retirement, this will include both stocks and bonds, although probably less in bonds than for most investors since she also has a pension.

Only after choosing her allocation should she choose her funds. Depending on her tax bracket and 457(b) options, she might be better off holding all her bonds as munis, or holding CA munis in taxable and non-CA bonds in the 457(b), or holding all her bonds in the 457(b) and IRA. (Given the high CA state tax, holding CA munis in taxable accounts is more attractive for CA investors than holding bonds in taxable accounts would be for investors in low-tax states or states with no low-cost muni fund.)
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anilj
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Re: Bond Funds

Post by anilj »

But the problem with this fund is that you are paying a high price for the tax exemption. The fund has an expense ratio of 0.76%, which means that if its bonds return 2%, you are losing 38% of the return to expenses, plus the 3.75% front-end load. There are muni funds and ETFs with much lower expenses.

I believe Vanguard is the only provider which offers low-cost single-state funds; Vanguard's CA funds charge 0.09% expenses if you have $50K to invest, 0.17% for less than $50K.
I am planning to start adding into FTFQX through Fidelity which offers it no-load/NTF. For someone in the high tax bracket of 35% or higher (in some years when RSU vests), I think this seems pretty good deal.

Beats the 0.5% savings accounts! Yield is 1.32% (tax equivalent is 2.81%).
dbr
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Re: Bond Funds

Post by dbr »

You still pay capital gains taxes on any gain (or offset for a loss) on the sale. She needs to know her cost basis in the fund. It is not likely this will amount to much but bonds that pay tax free interest are not tax free with respect to capital gains on sale.
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