Whats this "Tax-Exempt Fund"?

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TheQuestionGuy
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Joined: Thu Jun 30, 2016 6:36 pm

Whats this "Tax-Exempt Fund"?

Post by TheQuestionGuy » Tue Oct 24, 2017 9:38 pm

Just getting started with Bonds and have a couple of threads going.
As I am reading I am seeing references to Tax-Exempt Funds.
An example being Vanguard Limited-Term Tax-Exempt Fund

It appears the money made is tax exempt. Is that correct?

If I come across one of these, and a pre-tax account, any money made is tax exempt?
How does that get tracked?

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

Re: Whats this "Tax-Exempt Fund"?

Post by PFInterest » Tue Oct 24, 2017 9:42 pm

you usually cant put munis in retirement accounts.
and why would you, you would still pay the tax on the way out.

Lou354
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Re: Whats this "Tax-Exempt Fund"?

Post by Lou354 » Tue Oct 24, 2017 9:52 pm

If held in a taxable account, money made by a tax-exempt bond or fund is exempt from federal taxes but not state taxes. They pay less interest because of that, but it may be worthwhile if your marginal tax rate is high enough. Tax exempt funds are not suitable in a tax-deferred account because you have to pay taxes on all withdrawals from such accounts, including money made from a tax-exempt fund.

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BolderBoy
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Re: Whats this "Tax-Exempt Fund"?

Post by BolderBoy » Wed Oct 25, 2017 10:01 am

TheQuestionGuy wrote:
Tue Oct 24, 2017 9:38 pm
If I come across one of these, and a pre-tax account, any money made is tax exempt?
How does that get tracked?
Your year-end documents will show the amount of tax-exempt income earned per account type. On Vanguard's website you can log into your account, go to the bottom of the page and click on "Tax Center" - the info is presented there for you anytime you wish to view it (quarterly, for example). Also, the 1099 you'll receive from the investment company will have the info itemized out so you can enter it onto your 1040 in the right box.
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect

DSInvestor
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Re: Whats this "Tax-Exempt Fund"?

Post by DSInvestor » Wed Oct 25, 2017 11:40 am

TheQuestionGuy wrote:
Tue Oct 24, 2017 9:38 pm
It appears the money made is tax exempt. Is that correct?
Note that the bond interest from these tax exempt funds are exempt from taxation but the capital gains (if the you sell for a higher price) is taxable. The bond interest will be reported to you and IRS via 1099-DIV or 1099-INT. The capital gain (or loss) will be reported to you via 1099-B.

Do not hold tax exempt bonds or tax exempt bond funds in tax advantaged accounts like 401k, IRA.
Wiki

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dratkinson
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Re: Whats this "Tax-Exempt Fund"?

Post by dratkinson » Wed Oct 25, 2017 4:27 pm

Search Wiki for recommended "books" (search term). Read the recommended bond books.

I read the ones by Swedroe, and Thau. Why read more than one bond book? Where experts agree, that is the central route. Where experts disagree, those are optional routes.


While waiting for your books, search Wiki for "municipal bonds" and read that topic to jumpstart your learning.
d.r.a, not dr.a. | I'm a novice investor, you are forewarned.

not4me
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Re: Whats this "Tax-Exempt Fund"?

Post by not4me » Wed Oct 25, 2017 4:35 pm

Just to add a couple of clarifications...state tax shouldn't be owed if the bond is from the state you are paying taxes to. That is, A California municipal if you are living/filing in California. Also, SOME muni bonds will trigger AMT impacts

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