Choosing a bond fund based on personal income, salary.

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SpartanBull
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Choosing a bond fund based on personal income, salary.

Post by SpartanBull »

Hello,
This question relates to choosing a bond fund for your taxable account. I've read a couple of times where people have said if you have a higher income/higher tax bracket, then you want a tax exempt bond fun, municipal bond fund, etc. However if your personal income/tax bracket is not at a certain level, then its wiser to stock with total bond, corporate bond funds, something else?
I'm just looking for a general idea, line in the sand on this. FWIW I live in Michigan. What I'm looking to find out is (again just a rough estimate), is there a rule of thumb like "If you make 100k or more, stick with muni". Maybe it cant be broken down that simply, but just trying to get a general idea. thanks.
strafe
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Re: Choosing a bond fund based on personal income, salary.

Post by strafe »

in general, no matter what your income, you should try to put all your bond funds in tax deferred vehicles -- for example, in your 401k, 403b, or IRA.

if you need to hold additional bonds in a taxable account, then the choice between a tax-exempt and taxable bonds boils down to the equivalent rate. For most, you need to be in the 28% marginal federal income tax bracket or higher for tax-exempt bonds to make sense.
dbr
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Re: Choosing a bond fund based on personal income, salary.

Post by dbr »

It isn't about wiser; it is about the after tax yield. As in the reply above, you have to be in a high tax bracket to get the math to work out. It makes a big difference what your state tax rates are and buying a state specific muni fund. The Michigan income tax rate is middling and there is a Fidelity Michigan muni fund. It is not necessarily a good idea to put a huge fraction of assets in a state specific muni fund.

Look up tax equivalent yield or something like that.
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mickeyd
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Re: Choosing a bond fund based on personal income, salary.

Post by mickeyd »

I'm just looking for a general idea,
You live in MI (which I believe has a state income tax). I live it TX which has none. No general rule would ever work for either of us. Read as much as you can on the subject, break out pencil and paper (or calculator), do some stubby-pencil work and see what applies to your situation.

Tax rates may change in the future.
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grabiner
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Re: Choosing a bond fund based on personal income, salary.

Post by grabiner »

dbr wrote:It isn't about wiser; it is about the after tax yield. As in the reply above, you have to be in a high tax bracket to get the math to work out. It makes a big difference what your state tax rates are and buying a state specific muni fund. The Michigan income tax rate is middling and there is a Fidelity Michigan muni fund. It is not necessarily a good idea to put a huge fraction of assets in a state specific muni fund.
At 0.49% expenses, the Fidelity Michigan fund is not worthwhile. You would pay more in extra expenses on that fund than you would save in taxes, compared to a national Vanguard fund with bonds of comparable risk and 0.20% (0.12% Admiral) expenses.
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dbr
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Re: Choosing a bond fund based on personal income, salary.

Post by dbr »

grabiner wrote:
dbr wrote:It isn't about wiser; it is about the after tax yield. As in the reply above, you have to be in a high tax bracket to get the math to work out. It makes a big difference what your state tax rates are and buying a state specific muni fund. The Michigan income tax rate is middling and there is a Fidelity Michigan muni fund. It is not necessarily a good idea to put a huge fraction of assets in a state specific muni fund.
At 0.49% expenses, the Fidelity Michigan fund is not worthwhile. You would pay more in extra expenses on that fund than you would save in taxes, compared to a national Vanguard fund with bonds of comparable risk and 0.20% (0.12% Admiral) expenses.
You're right. The point I was making by mentioning it is that there is a fund at all suggests a state tax structure exists that might interest someone in looking at munis. I think only Florida muni funds are available without a tax rationalization, or some peculiar thing like that.
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