Why do I have Vanguard Tax-Exempt funds?

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Colorado Guy
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Why do I have Vanguard Tax-Exempt funds?

Post by Colorado Guy » Sat Apr 18, 2020 12:06 pm

As a new retiree, I have been looking at some of my allocations to potentially simplify things. Would appreciate your expertise and perspective.

When I consolidated funds to Vanguard several years ago, I used the PAS services, as I definitely needed the help. The PAS adviser recommended diversifying into a number of funds, including VWIUX, VMLUX, and VWLUX (Intermediate, Limited, and long term tax exempt admiral shares. This is in my Brokerage Account (taxable). Today, combined I have invested less than 100k in these funds. FYI, I no longer use the PAS services.

I believe the intent was to grow these funds without tax implications and improve diversification, which seems logical. However, looking at the total gain/loss as of today, all three funds have essentially non-movement of long term gain (actually a slight loss this past year). So, while they are not hurting anything, they are not helping either. In retrospect, I think this has been a wasted investment. Or, am I missing something? If there is a value in leaving these funds where they are, will do that.

FYI, I do have VBTLX Total Bond Market in my Brokerage Account (50k). So, I could transfer there. Alternatively, am considering splitting the tax exempt funds between money market, VBTLX Total Bond Market and VTSAX, Total Stock Market.

Thx

GoldenFinch
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Re: Why do I have Vanguard Tax-Exempt funds?

Post by GoldenFinch » Sat Apr 18, 2020 12:17 pm

Are they not showing a gain because the dividends were reinvested? Aren’t the dividends most of the gain in the case of bonds?

livesoft
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Re: Why do I have Vanguard Tax-Exempt funds?

Post by livesoft » Sat Apr 18, 2020 12:22 pm

Generally, investors use tax-exempt bond funds when they have a non-low marginal income tax rate.

I will add that my MIL hated to pay any taxes, so she used tax-exempt bonds even though she was in a 0% tax bracket because she didn't really understand taxes that well.
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Colorado Guy
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Re: Why do I have Vanguard Tax-Exempt funds?

Post by Colorado Guy » Sat Apr 18, 2020 12:28 pm

GoldenFinch wrote:
Sat Apr 18, 2020 12:17 pm
Are they not showing a gain because the dividends were reinvested? Aren’t the dividends most of the gain in the case of bonds?
I believe that is correct. So, you're right, there has been some appreciation. I was looking at the Vanguard gain/loss table this AM which led to my questions.

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Colorado Guy
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Re: Why do I have Vanguard Tax-Exempt funds?

Post by Colorado Guy » Sat Apr 18, 2020 12:35 pm

livesoft wrote:
Sat Apr 18, 2020 12:22 pm
Generally, investors use tax-exempt bond funds when they have a non-low marginal income tax rate.
Am above the "low maginal income tax rates", and will be making a bit this year as well. That should change for 2021 (taxes in 2022).

Am digging into past threads on these funds as well. Have been inspired by recent threads to Keep Things Simple. :D Thx

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Re: Why do I have Vanguard Tax-Exempt funds?

Post by pascalwager » Sat Apr 18, 2020 3:49 pm

livesoft wrote:
Sat Apr 18, 2020 12:22 pm
Generally, investors use tax-exempt bond funds when they have a non-low marginal income tax rate.

I will add that my MIL hated to pay any taxes, so she used tax-exempt bonds even though she was in a 0% tax bracket because she didn't really understand taxes that well.
...but not, at least, in a variable annuity inside a Roth IRA.
Retired, pension, no SS | Bond funds: TIPS, TBM | Global stocks: total market, large value, small company, emerging market funds

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birdog
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Re: Why do I have Vanguard Tax-Exempt funds?

Post by birdog » Sat Apr 18, 2020 9:00 pm

I don’t think there’s anything wrong with holding onto the intermediate fund for some more fixed income diversification and to have a bond holding in a taxable account. I can’t see holding onto all three. Tax exempt is currently yielding higher than treasuries regardless of tax bracket. Higher perceived risk right now is how I understand it. I’m keeping the intermediate tax exempt fund that’s in my taxable account. I would make sure it’s a low percentage of your overall bond holdings, though.

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Re: Why do I have Vanguard Tax-Exempt funds?

Post by cleosdad » Sun Apr 19, 2020 10:10 am

Colorado Guy wrote:
Sat Apr 18, 2020 12:06 pm
As a new retiree, I have been looking at some of my allocations to potentially simplify things. Would appreciate your expertise and perspective.

When I consolidated funds to Vanguard several years ago, I used the PAS services, as I definitely needed the help. The PAS adviser recommended diversifying into a number of funds, including VWIUX, VMLUX, and VWLUX (Intermediate, Limited, and long term tax exempt admiral shares. This is in my Brokerage Account (taxable). Today, combined I have invested less than 100k in these funds. FYI, I no longer use the PAS services.

I believe the intent was to grow these funds without tax implications and improve diversification, which seems logical. However, looking at the total gain/loss as of today, all three funds have essentially non-movement of long term gain (actually a slight loss this past year). So, while they are not hurting anything, they are not helping either. In retrospect, I think this has been a wasted investment. Or, am I missing something? If there is a value in leaving these funds where they are, will do that.

FYI, I do have VBTLX Total Bond Market in my Brokerage Account (50k). So, I could transfer there. Alternatively, am considering splitting the tax exempt funds between money market, VBTLX Total Bond Market and VTSAX, Total Stock Market.

Thx
Hi Colorado Guy. I asked myself the same thing. Without RMD'S this year i will be in 12% bracket and maybe 22% next year. I had tax exempt along with TSM and Int. Bond Index in taxable. I sold all tax exempt and put it in the Int, bobd fund per my AA. It wasn't the market that did it but more simplicity for me. Good luck from Littleton.

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Colorado Guy
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Re: Why do I have Vanguard Tax-Exempt funds?

Post by Colorado Guy » Sun Apr 19, 2020 6:45 pm

cleosdad wrote:
Sun Apr 19, 2020 10:10 am

Hi Colorado Guy. I asked myself the same thing. Without RMD'S this year i will be in 12% bracket and maybe 22% next year. I had tax exempt along with TSM and Int. Bond Index in taxable. I sold all tax exempt and put it in the Int, bobd fund per my AA. It wasn't the market that did it but more simplicity for me. Good luck from Littleton.
Cleosdad,

We are practically neighbors!

Understand the desire for simplicity, as I am also looking for the same. Life was a lot easier when I rarely looked at my accounts. I have only recently started looking at my overall portfolio and examining it closely, and if it was something I wanted to stay with or update. I guess I am still looking for a compelling reason to either sit still for 2020 or move funds for simplicity, and potentially better performance. I keep reminding myself I only have 100k in these accounts.

One of my questions is becoming, at what point in taxable income would tax exempt funds be a clear cut alternative? A tax exempt fund provides value if the dividends and pricing rise to the point the taxes would have been significant. Is that a reasonable scenario for the remainder of 2020? I haven't a clue. I am getting myself confused by looking at a number of threads discussing pros/cons of these funds, as there is no consistent answer (To be honest, was somewhat expecting that).

One option I am considering: For 2020, am getting a generous severance, so expect to be in a higher tax bracket than going forward. So, if I need to maintain something in a tax exempt fund in 2020, would like to narrow it down to one fund, not three. If I narrow down to one fund, am leaning towards VWIUX (intermediate). Then for 2021, and in a lower tax bracket, could get rid of it completely.

Option 2 is to redistribute it to Money Market (Emergency fund), Total Bonds, and Total Stocks.

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birdog
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Re: Why do I have Vanguard Tax-Exempt funds?

Post by birdog » Sun Apr 19, 2020 9:45 pm

Is your tax-advantaged space full of bonds with zero equities or other non-bond holdings?

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Colorado Guy
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Re: Why do I have Vanguard Tax-Exempt funds?

Post by Colorado Guy » Mon Apr 20, 2020 10:45 am

birdog wrote:
Sun Apr 19, 2020 9:45 pm
Is your tax-advantaged space full of bonds with zero equities or other non-bond holdings?
For my IRA, I have mostly bonds, plus VFIDX (Vanguard Intermediate-Term Investment-Grade Fund Admiral Shares) and VFSUX (Short-Term) mutual funds. Interestingly, both the VFIDX and the tax exempt bonds have the same Vanguard rating of "2", minimal risk, minimal reward. So, maybe I am making a mountain out of a molehill.

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birdog
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Re: Why do I have Vanguard Tax-Exempt funds?

Post by birdog » Mon Apr 20, 2020 4:40 pm

Colorado Guy wrote:
Mon Apr 20, 2020 10:45 am
birdog wrote:
Sun Apr 19, 2020 9:45 pm
Is your tax-advantaged space full of bonds with zero equities or other non-bond holdings?
For my IRA, I have mostly bonds, plus VFIDX (Vanguard Intermediate-Term Investment-Grade Fund Admiral Shares) and VFSUX (Short-Term) mutual funds. Interestingly, both the VFIDX and the tax exempt bonds have the same Vanguard rating of "2", minimal risk, minimal reward. So, maybe I am making a mountain out of a molehill.
If you still have space left in your tax-advantaged account that can be used to get you to your desired bond allocation, then I think you don't need any tax-free bonds in your taxable account unless you want them for further bond diversification and/or just to have some bonds available to draw from if you retire before being able to access tax-advantaged funds. If you keep any tax-free bonds in your taxable account I would recommend just keeping the intermediate fund and keeping it to a small percentage of your bond holdings. (I limit my munis to 33% of bonds.) It's nice to be able to simplify by reducing the total number of funds while still maintaining sufficient diversification.

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BolderBoy
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Re: Why do I have Vanguard Tax-Exempt funds?

Post by BolderBoy » Mon Apr 20, 2020 7:10 pm

Colorado Guy wrote:
Sat Apr 18, 2020 12:06 pm
In retrospect, I think this has been a wasted investment. Or, am I missing something?
I think you are missing something - that the purpose of bond funds (even munis) is to mitigate portfolio volatility. That bond funds provide ongoing interest payments is a bonus.

I'm in the 12% bracket and have a sizable chunk in VG intermediate term tax-exempt. Rather than chasing every last possible after-tax dollar, I'm happy with this.

Simplify...
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect

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Colorado Guy
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Re: Why do I have Vanguard Tax-Exempt funds?

Post by Colorado Guy » Wed Apr 29, 2020 10:09 am

birdog wrote:
Sat Apr 18, 2020 9:00 pm
I don’t think there’s anything wrong with holding onto the intermediate fund for some more fixed income diversification and to have a bond holding in a taxable account. I can’t see holding onto all three. Tax exempt is currently yielding higher than treasuries regardless of tax bracket. Higher perceived risk right now is how I understand it. I’m keeping the intermediate tax exempt fund that’s in my taxable account. I would make sure it’s a low percentage of your overall bond holdings, though.
Appreciate the feedback and thoughts. It has been an interesting learning experience these last few weeks, for sure. I like the idea of tax exempt funds, but it is still confusing to me. I have made adjustments and reallocated funds to Total Bonds and Total Stocks, and currently only have VWIUX (Intermediate Term Tax Exempt) in my taxable account. With that said, I am considering moving the remaining funds to Money Market for safety until I get a clearer sense of direction. Am currently considering VLGSX (Long Term Treasury Index Admiral Shares). Also thought of VBLAX (Long Term Bond Index Admiral Shares), but am still unclear on the Purchase Fee that is charged.

I've also talked to a Vanguard Advisor (in theory, as a Flagship client, I have 1 session per year with an advisor). Their sales push is to both keep me in the fund(s), and also sign me back up into the PAS. I would prefer to continue to educate myself. I appreciate the wealth of practical experience and advise that is demonstrated on Bogleheads.

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Re: Why do I have Vanguard Tax-Exempt funds?

Post by hudson » Wed Apr 29, 2020 11:50 am

Colorado Guy wrote:
Wed Apr 29, 2020 10:09 am
birdog wrote:
Sat Apr 18, 2020 9:00 pm
I don’t think there’s anything wrong with holding onto the intermediate fund for some more fixed income diversification and to have a bond holding in a taxable account. I can’t see holding onto all three. Tax exempt is currently yielding higher than treasuries regardless of tax bracket. Higher perceived risk right now is how I understand it. I’m keeping the intermediate tax exempt fund that’s in my taxable account. I would make sure it’s a low percentage of your overall bond holdings, though.
Appreciate the feedback and thoughts. It has been an interesting learning experience these last few weeks, for sure. I like the idea of tax exempt funds, but it is still confusing to me. I have made adjustments and reallocated funds to Total Bonds and Total Stocks, and currently only have VWIUX (Intermediate Term Tax Exempt) in my taxable account. With that said, I am considering moving the remaining funds to Money Market for safety until I get a clearer sense of direction. Am currently considering VLGSX (Long Term Treasury Index Admiral Shares). Also thought of VBLAX (Long Term Bond Index Admiral Shares), but am still unclear on the Purchase Fee that is charged.

I've also talked to a Vanguard Advisor (in theory, as a Flagship client, I have 1 session per year with an advisor). Their sales push is to both keep me in the fund(s), and also sign me back up into the PAS. I would prefer to continue to educate myself. I appreciate the wealth of practical experience and advise that is demonstrated on Bogleheads.
I was offered one of those advisor sessions years ago. I didn't sign up for the formal session; I just asked the guy "off the record" what he would recommend. I didn't think that his advice was all that special compared to what you can get on Bogleheads. He didn't listen that hard to my thoughts, so his plan didn't fit very conservative me.

As far as what place to put your money....I would recommend that you do the math...especially on VWIUX or anything else. When I do the math, I use the distribution yield. Have you considered CDs? As far as funds go, I stick with Vanguard Risk Potential 1 or 2; no investment grade funds. Buying long bond funds is for the experienced and advanced investor.
Have you read Larry Swedroe's bond book or Bernstein's Ages of the Investor?

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Re: Why do I have Vanguard Tax-Exempt funds?

Post by dratkinson » Wed Apr 29, 2020 3:30 pm

Disclosure.
--I needed bonds in retirement.
--Safe, low-yield treasury bond funds, in my rIRA, bored me to tears.
--So switched my rIRA to all equities for the greater excitement of shooting for the moon.
--Meaning my bonds had to go into taxable.
--I don't need to sell bonds in retirement, except to TLH. Did TLH Dec 2018.
--Since dividends are the major component of bond fund total return, I prefer more, rather than less.
--So I prefer VWLUX + a single-state muni fund.
--I enjoy recording the monthly dividends and am looking forward to the day when TE dividends cover my annual cost of living. Which adds to my pension + SS. It's good to LBYM.

Due diligence. After reading Swedroe's bond book, decided I didn't want to mess with owning individual bonds; let the fund managers worry about that (defaults, early redemptions,…). All I want to do is record/rebalance the monthly dividends.

Due diligence. I searched/read Swedroe’s forum/internet posts describing how his firm selects individual muni bonds for its clients. I used his advice to winnow single-state muni bond fund candidates.

Due diligence. I used Excel1040.com to produce sample tax returns and compute the after-tax income expected from multiple bond fund candidates: ST/IT/LT/HY, treasury/muni/TBM/corporate, before/after SS. I compared all results to that produced by TBM, the 3-fund portfolio standard. If the other candidates couldn't produce more after-tax income than TBM, then use TBM.

Due diligence. No change was indicated when I reran my Excel1040 exercises under the new tax code. I assume no change will be needed when current tax code sunsets.

While my muni fund NAVs were down at the end of Feb and Mar*, the dividends were as expected. Since I'm going for dividends, not NAV, things seem to be going according to plan. (* And since my 2018 TLH, the current NAV losses were not enough to TLH.)

When I started on this course, had less and was depending more upon munis to be the last/largest tier of my formal EFs, I overfilled my munis to ~120%* (=1/(1-0.15)) of the anticipated need, and stopped worrying. (* Assumes bonds can lose 5-15% during a crash.)



OP. If you own recommended muni funds, and don't need to sell them, then what do you care about their known instability in an unsettled market?

If you want price stability, buy insured CDs. (Believe 5yr CDs are paying <2% APY. Less after-tax.)

Or maybe your best option is to stay the course, but take advantage of this opportunity to TLH. TLHing will scratch your itch to be “doing something.” (Due diligence. Research how to correctly TLH, to avoid the need to later post “How do I fix my TLHing mistake?” “An ounce of prevention is worth a pound of cure.”)

Your choice.


After you complete your due diligence and decide what you want to do with your fixed income investments, then update your IPS, and refer to it in the future when the market upsets your emotions---to remind yourself what you are doing and why.


Hello from Centennial.
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Colorado Guy
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Re: Why do I have Vanguard Tax-Exempt funds?

Post by Colorado Guy » Thu Apr 30, 2020 8:45 am

Borrowing a quote,
nisiprius wrote:
Thu Apr 30, 2020 6:39 am
John C. Bogle said that the best piece of investment advice he had ever gotten was one from a seasoned investment professional just after he began working: "Nobody knows nothing."
I know a bit less than that.
dratkinson wrote:
Wed Apr 29, 2020 3:30 pm
OP. If you own recommended muni funds, and don't need to sell them, then what do you care about their known instability in an unsettled market?

If you want price stability, buy insured CDs. (Believe 5yr CDs are paying <2% APY. Less after-tax.)

Or maybe your best option is to stay the course, but take advantage of this opportunity to TLH. TLHing will scratch your itch to be “doing something.” (Due diligence. Research how to correctly TLH, to avoid the need to later post “How do I fix my TLHing mistake?” “An ounce of prevention is worth a pound of cure.”)

Your choice.
No need to sell, and not currently in favor of CDs. My concern with the muni funds is not necessarily the instability it is currently having, but recognizing the benefit of such. Maybe the dividends are not that exciting to me as I have most of my taxable bond funds in the Total Bond Market instead of the munis. If I moved 100k to the muni fund, that would make a substantial dividend difference for sure. Unclear to me if that would be the best decision either.

Ironically, during 2008-2009, I did nothing because it was not clear to me what to do. Surprise, it turned out to be an intelligent action. The recent crash has me looking closely at options for the first time since originally setting up the funds. Having more time as a recent retiree, am doing so and questioning some of the investments. As part of my due diligence, am currently re-examining the Boglehead's Guide to Three Fund portfolio (Taylor Larimore), and am attempting to get myself informed of decisions, as opposed to rashly making a change.

Have not read Larry Swedroe's bond book yet. That may be the next step.

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Re: Why do I have Vanguard Tax-Exempt funds?

Post by hudson » Thu Apr 30, 2020 9:22 am

Colorado Guy wrote:
Thu Apr 30, 2020 8:45 am
Bogle: "Nobody knows nothing."
Colorado Guy: "I know a bit less than that."
As part of my due diligence, am currently re-examining the Boglehead's Guide to Three Fund portfolio (Taylor Larimore), and am attempting to get myself informed of decisions, as opposed to rashly making a change.
I know less than you. :)
It looks like you are doing your homework....good stuff!
I'm constantly doing the same thing...listening and learning....and planning possible future moves...if needed.

I've found that I need to plan in advance and be ready for at least 2 moves.
1. Tax Loss Harvests: If intermediate muni VWIUX drops down to my buying price of $13.67 or lower, I'm selling and possibly buying another intermediate muni BMBIX...2 notches safer than VWIUX....less payout. If the price stays above $13.67 I'm staying. If I'm still holding VWIUX in 2021, I'll strongly consider making the change anyway if the capital gain is low enough. Muni funds are very attractive after taxes. If you hesitate, you miss it.

2. Buying CDs: I don't need to buy a CD now, but when I do, speed is critical to get a good rate. During CD buying season, it's all hands on deck. In recent years, I've gotten in on 2 or 3 good CD deals at the last minute. I almost missed both. I should have reacted faster. He who hesitates...

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dratkinson
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Re: Why do I have Vanguard Tax-Exempt funds?

Post by dratkinson » Thu Apr 30, 2020 1:12 pm

Colorado Guy wrote:
Thu Apr 30, 2020 8:45 am

No need to sell, and not currently in favor of CDs. My concern with the muni funds is not necessarily the instability it is currently having, but recognizing the benefit of such. Maybe the dividends are not that exciting to me as I have most of my taxable bond funds in the Total Bond Market instead of the munis. If I moved 100k to the muni fund, that would make a substantial dividend difference for sure. Unclear to me if that would be the best decision either.
Ahh. That's were playing Excl1040.com comes in handy. Why? While computing the TEY (taxable-equivalent yield) of munis does provide some insight into their goodness, it misses all of the MAGI (modified adjusted gross income) effects: program phase-outs (earned income credit, savers tax credit,...) and phase-ins (AMT, NIIT, SS taxation). Excel1040 picks up the MAGI effects. (Exceptions: it misses the effects of SS IRMAA, and ACA credit.)


Folks in retirement worry about tax bracket creep. Examples would be taxable bonds dividends (ordinary income), RMDs (ordinary income), and SS (up to 85% taxable as ordinary income) pushing us into a higher tax bracket.

Converting our tax-deferred accounts (traditional 401k/IRA,...) into a rIRA will turn off unneeded RMDs and help to minimize tax bracket creep.

The dividends from taxable bonds also increase our AGI, and maybe our tax bracket. Muni TE (tax-exempt) dividends do not add to our AGI, so do not increase our tax bracket.


When you play with Excel1040, assume all of your bonds are of one flavor---TBM only, VWIUX only, VWLUX only, single-state muni fund only, treasury only, corporate only---and see what it tells you about your AGI, tax bracket, and after-tax income.

If the use of munis can keep you in the 15% fed tax bracket in the first part of your retirement (before SS), then all of your QDI (qualified dividend income) and LTCG (long-term capital gains) from TSM (total stock market index fund) and TISM (total international stock market index fund) in your taxable account are taxed at 0%.

So while the muni dividends may appear to be lackluster, they do help elsewhere. And that's what playing with Excel1040 can show you.


SS taxation. Muni dividends do increase our MAGI for SS taxation. But! since SS taxation is based on actual dollars/yield, not muni taxable-equivalent dollars/yield. And since the actual muni yield should be less than TBM's, munis should affect SS taxation less that using TBM. Bottom line: Any muni answer that works well before taking SS, should continue to work well after taking SS.


When you play with Excel1040, add a sheet after Sch B as a scratch pad do all of your work---keep all of your work together for easy referral later.

In Colorado, we must add back in non-Colorado muni income. And that's where a single-state muni comes into play.

And since Colorado uses a flat tax system, it's easy to implement form 104 inline on your scratch pad. Makes it easy to compute your after-tax income from each bond fund candidate.

After-tax income = Excel1040 taxable income + muni dividends (not included in Excel1040 income) - fed tax - state tax - SS IRMMA


What are the benefits of using munis?
--Higher TEY. (I only consider muni funds with higher TEY than TBM.)
--Lower fed AGI.
--Helps to protect QDI and LTCG tax benefits.
All of these increase our after-tax income.

So if you're only considering lackluster muni dividends, you're missing part of the picture.


Yield inversion. In recent years, the forum has discussed treasury yield inversion---short rates paying more than longer rates. But! yield inversion seems to affect rates of <=5yrs. So my use of longer duration (>=5yrs) muni funds is so I worry less about yield inversion. (I accept the additional risk/reward that comes from using longer duration bonds. Will TLH when I get the chance.)


One and done. I like it when I can find an answer works before SS, after SS, in a yield inverted environment, during the last tax code, during the current tax code, and (hopefully) after the current tax code sunsets.

I found my fixed income answer(s) by playing with Excel1040.

My fixed income answer(s) work in conjunction with my Roth conversions to minimize my taxes in retirement.
d.r.a., not dr.a. | I'm a novice investor, you are forewarned.

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Re: Why do I have Vanguard Tax-Exempt funds?

Post by grabiner » Thu Apr 30, 2020 3:43 pm

dratkinson wrote:
Thu Apr 30, 2020 1:12 pm
Yield inversion. In recent years, the forum has discussed treasury yield inversion---short rates paying more than longer rates. But! yield inversion seems to affect rates of <=5yrs. So my use of longer duration (>=5yrs) muni funds is so I worry less about yield inversion. (I accept the additional risk/reward that comes from using longer duration bonds. Will TLH when I get the chance.)
The reason that muni yields do not invert when other yields do is the callability of muni bonds. If a long-term muni fund holds a 25-year bond which can be called in 5 years, and rates rise significantly, the bond will not be called and the rate increase will affect the full 25-year term. Thus long-term munis have significantly more interest-rate risk than is indicated by their duration. In contrast, most short-term munis are not affected much by callability, so they lose only as much as other short-term bonds when rates rise.
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Colorado Guy
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Re: Why do I have Vanguard Tax-Exempt funds?

Post by Colorado Guy » Fri May 01, 2020 11:01 am

dratkinson,

Lots of material for me to digest!
dratkinson wrote:
Thu Apr 30, 2020 1:12 pm
What are the benefits of using munis?
--Higher TEY. (I only consider muni funds with higher TEY than TBM.)
--Lower fed AGI.
--Helps to protect QDI and LTCG tax benefits.
All of these increase our after-tax income.
So if you're only considering lackluster muni dividends, you're missing part of the picture.
I do have a couple of follow up questions regarding your post.
dratkinson wrote:
Thu Apr 30, 2020 1:12 pm
Folks in retirement worry about tax bracket creep. Examples would be taxable bonds dividends (ordinary income), RMDs (ordinary income), and SS (up to 85% taxable as ordinary income) pushing us into a higher tax bracket.
So I should be thinking of both tax bracket creep as well as taxes on SS.
My 2020 situation is that I will be firmly in the 32% tax bracket. For both 2021 and 2022, I will be drawing SS at a minimum, and expect to be in the 22% range. Afterwards the RMDs will kick in and that will change things, and I can see where avoiding a bracket creep in 2023 would be beneficial. For 2020 to 2022 then, for the purposes of avoiding tax bracket creep, the tax exempt bonds provide minimal value. Or, should I be considering using tax exempt in my taxable account instead of TBM even now, as inflation and interest levels are low? Some of the recent threads have been mentioning muni defaults and such, but I have not been paying too much attention.
dratkinson wrote:
Thu Apr 30, 2020 1:12 pm
In Colorado, we must add back in non-Colorado muni income. And that's where a single-state muni comes into play.
Can you elaborate on this? On the Vanguard mutual funds list, I do not see any Colorado specific tax exempt funds. Or, are you suggesting that a solid course of action is to purchase a non-Vanguard tax exempt bond fund with my taxable account?

I may modify the above questions as I think this through.

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Re: Why do I have Vanguard Tax-Exempt funds?

Post by David Jay » Fri May 01, 2020 11:11 am

pascalwager wrote:
Sat Apr 18, 2020 3:49 pm
livesoft wrote:
Sat Apr 18, 2020 12:22 pm
Generally, investors use tax-exempt bond funds when they have a non-low marginal income tax rate.

I will add that my MIL hated to pay any taxes, so she used tax-exempt bonds even though she was in a 0% tax bracket because she didn't really understand taxes that well.
...but not, at least, in a variable annuity inside a Roth IRA.
:twisted:
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heartwood
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Re: Why do I have Vanguard Tax-Exempt funds?

Post by heartwood » Fri May 01, 2020 12:22 pm

A month ago I sold my NJ LT TE VNJUX as a tax loss harvest. viewtopic.php?p=5131837

I put the proceeds into the NJ TE MM VNJXX. At first i was an instant loser; VNJUX jumped the next day and the VNJXX yield started dropping.

I'm now more than 30 days after that sale and out of the wash sale concerns. VNJUX has returned to where I TLH'd so I could re-enter where I left. But perhaps the outlook for blue-state (any-state?) municipals has changed. I'll mention NJ Gov Murphy asking Trump yesterday for 10s of billions to get through the current crisis. And McConnell saying a week or so ago that he would not support "bailing-out" blue states, they should be allowed to go bankrupt. I won't go into state layoffs, reduced tax payments and other things that might impact muni bond prices.

I'm not advocating any political position but wonder if VNJUX is too risky at this time financially. It's low point in 2008 was 10.40 v. yesterday's close of 11.72. YTD return is minus 4.79%; most recent 3 month cumulative return is minus 6.62%. The current 30 day SEC yield is 2.90%.

Do I re-enter VNJUX, go with a national muni fund, leave the monies in the VNJXX, or what?

As the OP asks, Why do I have Vanguard Tax-Exempt funds?

hudson
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Re: Why do I have Vanguard Tax-Exempt funds?

Post by hudson » Fri May 01, 2020 12:48 pm

heartwood,
I won't make any recommendations...just some thoughts.
The NJ money market fund is Vanguard Risk Potential 1...which is good.
The other fund is a Long NJ Muni that is Vanguard Risk Potential 3. I personally don't buy anything except risk potential 1 and 2 funds.
The long NJ fund is 34% BBB...I like funds that are very strong AAA/AA/A.
Vanguard's National Muni VWIUX is under 10% BBB or below....the rest is AAA/AA/A
Baird's National Intermediate Muni BMBIX is all AAA/AA.
You already know that risk pays more; safety pays less.

Why do I hold munis? The risk is lower than everything but CDs and US government bonds; the after tax payout is good.

On munis, Bill Bernstein says.... viewtopic.php?p=5160087#p5160087

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steve50
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Re: Why do I have Vanguard Tax-Exempt funds?

Post by steve50 » Fri May 01, 2020 1:11 pm

I own the same 3 funds as OP in my taxable account. I am asking my self the same question as OP. The CD currently would be paying 1% after federal/state taxes for me, so it's either the CD or these funds for a taxable account. Don't see much any other option.

hudson
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Re: Why do I have Vanguard Tax-Exempt funds?

Post by hudson » Fri May 01, 2020 2:00 pm

steve50,
I ask the same questions. I'm heavy in CDs; munis are a lessor part of my overall.
I would have to pay heavy capital gains if I harvested VWIUX for Baird's safer intermediate fund.
My plan is to just hold VWIUX unless it drops below my buy price of $13.87....then I'll Tax Loss Harvest into BMBIX.
CDs are good but the payout isn't.

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dratkinson
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Re: Why do I have Vanguard Tax-Exempt funds?

Post by dratkinson » Fri May 01, 2020 4:13 pm

BH Why do I have Vanguard Tax-Exempt funds
Colorado Guy wrote:
Fri May 01, 2020 11:01 am
dratkinson,

Lots of material for me to digest!
dratkinson wrote:
Thu Apr 30, 2020 1:12 pm
What are the benefits of using munis?
--Higher TEY. (I only consider muni funds with higher TEY than TBM.)
--Lower fed AGI.
--Helps to protect QDI and LTCG tax benefits.
All of these increase our after-tax income.
So if you're only considering lackluster muni dividends, you're missing part of the picture.
I do have a couple of follow up questions regarding your post.
dratkinson wrote:
Thu Apr 30, 2020 1:12 pm
Folks in retirement worry about tax bracket creep. Examples would be taxable bonds dividends (ordinary income), RMDs (ordinary income), and SS (up to 85% taxable as ordinary income) pushing us into a higher tax bracket.
So I should be thinking of both tax bracket creep as well as taxes on SS.
My 2020 situation is that I will be firmly in the 32% tax bracket. For both 2021 and 2022, I will be drawing SS at a minimum, and expect to be in the 22% range. Afterwards the RMDs will kick in and that will change things, and I can see where avoiding a bracket creep in 2023 would be beneficial. For 2020 to 2022 then, for the purposes of avoiding tax bracket creep, the tax exempt bonds provide minimal value. Or, should I be considering using tax exempt in my taxable account instead of TBM even now, as inflation and interest levels are low? Some of the recent threads have been mentioning muni defaults and such, but I have not been paying too much attention.

Agree. Too many questions. Resulting from too many what-ifs. Affected by too many MAGIs.

This is where playing with Excel1040 comes into play. To save myself some time, here are previous examples where I’ve described how I’ve used Excel1040, and the simplifying assumptions I’ve made to reach an answer.

viewtopic.php?p=4919082#p4919082
viewtopic.php?p=4401980#p4401980
viewtopic.php?p=3513427#p3513427
viewtopic.php?p=4568558#p4568558
viewtopic.php?p=4873265#p4873265
viewtopic.php?p=4919082#p4919082

dratkinson wrote:
Thu Apr 30, 2020 1:12 pm
In Colorado, we must add back in non-Colorado muni income. And that's where a single-state muni comes into play.
Can you elaborate on this? On the Vanguard mutual funds list, I do not see any Colorado specific tax exempt funds. Or, are you suggesting that a solid course of action is to purchase a non-Vanguard tax exempt bond fund with my taxable account?

I purchased a non-Vanguard Colorado muni bond fund (and posted my due diligence steps for feedback). If you go this route, you’ll need to do much more due diligence than is required to buy a Vanguard fund, because there are some scary funds out there. Afterwards, we can compare notes.

I may modify the above questions as I think this through.

Bottom line. The only way to know your best solution(s) for (1) your initial retirement before SS phase, (2) your after SS but before RMDs phase, and (3) your after RMDs phase… is to produce some sample tax returns, for each fixed income candidate, for each.

You can produce sample tax returns using your current tax software. But Excel1040 is much faster---<5min/fixed income scenario.

After going through this exercise, your questions will be answered because you will KNOW your best fixed income solutions for (1)-(3). And if you’re lucky, you may find a one-and-done solution.

You’re the only one, who knows all the details of your situation, so you must be the one to do the work.

Producing sample tax returns to test fixed income candidates is not really hard to do. And it’s kinda fun once you get going.

The hardest part will be ensuring the fixed income dividends are treated correctly---fed taxable/tax-exempt, state taxable/tax-exempt---and keeping your scenario results straight.


Disclosure. Since I’d done Roth conversions to turn off unneeded RMDs, and was already in retirement and before taking SS, I only had two fixed income phases to analysis---retirement before/after SS.

And with ~10 fixed income candidates / phase to consider, I produced ~20 sample tax returns in total---just the after-tax income / fixed income candidate was all I cared to know.


In your case, I can see you producing ~30 sample tax returns (= 3 phases x ~10 fixed income candidates/phase).

Break the problem down into smaller bites---like eating an elephant, you do it one bite at a time.
--Add one scratch pad worksheet after Excel1040 Sch B, for each phase---initial retirement phase, after SS phase, after RMDs phase.
--Start on your “initial retirement phase” worksheet. Follow my above examples and simplifying assumptions to determine the after-tax income produced by each of your fixed income candidates.
--It’s then a simple matter to copy your “initial retirement phase” worksheet to produce your “after SS” phase worksheet and rerun your analysis for each fixed income candidate.
--Lather, rinse, repeat for your “after RMD” phase. Easy peasy.

If you find one or two fixed income solutions that work well for each of your phases, then you’ve found a one-and-done solution to all your problems.

You just have to be able to withstand the risk/reward of your possible answers.


Disclosure. In my case, I don’t need to sell bonds to live on in retirement, so I opted for the more-dividends route produced by using higher risk/reward bonds. And planned to TLH any risk that appeared. Excel1040 worked well for identifying possible solution(s)*.

* Excel1040 suggested a HY muni would earn <1% more after-tax than my single-state muni fund---which earns more after-tax than VWLUX---but I worry about re-exposure to AMT after tax code sunset. So I don’t use a HY muni due to: too little extra reward, too much extra risk.


However, if you will need to sell bonds to pay for living expenses in retirement and need more principal protection… then that’s a different problem… and Excel1040 may help little.


Roth conversions. On the other hand, Excel1040 can help you plan annual Roth conversions to turn off unneeded RMDs.

The typical advice is to convert enough each year so you are in the top of your current tax bracket, but not so much that you advance tax brackets. If you can get all conversions done before RMDs start… great.

But if you can’t get all conversions done before RMDs start, then you can consider advancing tax bracket to convert more each year. It all depends upon how badly you want to avoid the RMD consequences.

Can search forum for other Roth conversion ideas.
--Recall some plan end-of-year conversions, so they better understand their annual taxes before converting.
--Conversions count as income and affect Medicare IRMAA fees 2yrs later.
--Recall some skew tax-deferred accounts toward bonds to minimize growth/taxes on conversions. They skew their taxable and tax-free accounts toward equities to maintain their AA. (Don’t know if switching your planned-conversion tax-deferred accounts to bonds would be a good idea now, as you’d lock in your recent equity losses and miss their rebound.)

For the annual planning you need to do until RMDs start, Microsoft Excel can be your friend---to run Excel1040; and for guesstimating the effects of income, expenses, conversions, SS, Medicare+IRMAA, RMDs, taxes,….



Edit. Forgot you were in your initial retirement phase, and second thoughts.
Last edited by dratkinson on Sat May 02, 2020 2:14 pm, edited 2 times in total.
d.r.a., not dr.a. | I'm a novice investor, you are forewarned.

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willthrill81
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Re: Why do I have Vanguard Tax-Exempt funds?

Post by willthrill81 » Fri May 01, 2020 4:17 pm

Colorado Guy wrote:
Sat Apr 18, 2020 12:28 pm
GoldenFinch wrote:
Sat Apr 18, 2020 12:17 pm
Are they not showing a gain because the dividends were reinvested? Aren’t the dividends most of the gain in the case of bonds?
I believe that is correct. So, you're right, there has been some appreciation. I was looking at the Vanguard gain/loss table this AM which led to my questions.
I find Vanguard's gain/loss table to be worthless. If you're concerned about such things, tracking them via Excel is much easier. You can do this after the fact as well.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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