Muni bonds for taxable account?

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jajare58
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Muni bonds for taxable account?

Post by jajare58 »

I think am not in the high tax bracket but wanted to ask if it make sense to hold muni bonds in taxable account (since no federal tax) and total bond index fund in 401k account. Per BH principle, bonds belongs to tax-deferred account but I wanted to add some muni bonds in my taxable account at Fidelity.

State: TX, MFJ. marginal tax rate: 22%
Last edited by jajare58 on Sat Jan 02, 2021 7:27 pm, edited 1 time in total.
livesoft
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Re: Muni bonds for taxable account?

Post by livesoft »

It certainly makes sense to hold Total Bond Index in a 401(k). Maybe your 401(k)s can hold your entire allocation to bonds for your portfolio that consists of all your investable assets so that you do not need to put any bonds in your taxable account.
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Topic Author
jajare58
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Re: Muni bonds for taxable account?

Post by jajare58 »

livesoft wrote: Sat Jan 02, 2021 7:27 pm It certainly makes sense to hold Total Bond Index in a 401(k). Maybe your 401(k)s can hold your entire allocation to bonds for your portfolio that consists of all your investable assets so that you do not need to put any bonds in your taxable account.
Thank you. This is one of the option I am thinking. But if I wanted to diversity taxable account separately from all tax deferred and Roth account, I was thinking to add muni bonds. Would this make sense without adding too much complexity?
livesoft
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Re: Muni bonds for taxable account?

Post by livesoft »

It doesn't make sense to me, but it might make sense to someone else.
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willthrill81
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Re: Muni bonds for taxable account?

Post by willthrill81 »

Muni bonds don't make sense in the 22% bracket.
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DSInvestor
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Re: Muni bonds for taxable account?

Post by DSInvestor »

I view all my investment accounts (taxable, tax deferred, Roth) as parts of one portfolio. I do not hold bonds in my taxable account because my tax advantaged space is large enough to hold my entire bond allocation.
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Re: Muni bonds for taxable account?

Post by UpperNwGuy »

If you're in the 22% bracket, and you want bonds in your taxable account, you might as well hold the Total Bond Index Fund or the Intermediate-Term Bond Index Fund. Even after taxes, you would do better than if you had municipal bonds.

But why not keep all your bonds in your tax-advantaged accounts? That's the best solution. There's no need to diversify your taxable account separately from your overall portfolio across all accounts.
njinvestor2019
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Re: Muni bonds for taxable account?

Post by njinvestor2019 »

willthrill81 wrote: Sat Jan 02, 2021 8:07 pm Muni bonds don't make sense in the 22% bracket.
What if you are in NJ and your federal tax bracket is 22% and your NJ state tax bracket is 6.37%? I was looking at VNJTX this would give me both federal and state tax free for me. Is there a better option for me to hold in terms of bonds?
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AerialWombat
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Re: Muni bonds for taxable account?

Post by AerialWombat »

The majority of my taxable brokerage account is muni bonds. But my AA is 70% cash/bonds and I’m in a higher tax bracket. For your situation, I think it’s difficult to justify munis.
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Re: Muni bonds for taxable account?

Post by retiringwhen »

njinvestor2019 wrote: Sat Jan 02, 2021 8:24 pm
willthrill81 wrote: Sat Jan 02, 2021 8:07 pm Muni bonds don't make sense in the 22% bracket.
What if you are in NJ and your federal tax bracket is 22% and your NJ state tax bracket is 6.37%? I was looking at VNJTX this would give me both federal and state tax free for me. Is there a better option for me to hold in terms of bonds?
VNJTX will pay a lot higher interest rate, but it has a longer duration (6years) w/ 15.5 year average maturity when compared to VBTLX/VBILX. NJ is also considered one of the most (as in top 3) risky states for municipal bonds. Much of the bonds are barely above junk level.

So bottom line, you are taking a lot more risk, but there is compensation for it.

I disagree with others above and think a mix of intermediate and long-term muni bonds funds are a good proxy with a slight improvement in yield (and risk) vs. the total bond or intermediate-term bond index funds even at your tax rate.

Here are current SEC yields for the following funds as of 12/31/20 for a NJ taxpayer in the 22/6.37% tax bracket.

Code: Select all

Ticker	After Tax Yield	SEC Yield	Duration	Average Maturity
VBILX	0.79%		1.06%		6.4		7.5
VBTLX	0.82%		1.11%		6.7		8.6

VWIUX	0.83%		0.89%		4.6		8.9
VWLUX	1.27%		1.36%		6.0		16.7

VNJTX	1.59%		1.59%		6.0		15.5
VNJUX	1.67%		1.67%		6.0		15.5


I personally own a 50/50 mix of the VWIUX and VWLUX in taxable to allow me to keep a near stock/bond 50/50 mix in the IRA. It is sort a hedge on tax rates and returns vs. future growth. I would rather allow for a bit more deferred stock fund growth in the IRA vs a small potential tax drag in my taxable account.

Finally, I have dabbled in and out of the old NJ tax-free money market (now closed) and VNJUX over the years, but dropped VNJUX in favor of more VWIUX/VWLUX as part of tax-loss harvesting move back in March (it dropped a lot fast in March!). I don't really feel the need to take that risk anymore when the yield difference with the national muni funds is so little. I have enough risk just being a NJ resident and taxpayer, I don't need to add additional risk of being a lender too!

All the muni funds have significantly more volatility in distressed periods vs. the total bond funds, thus the higher risk / return calculus.

If you are willing to the take the small extra risk for Munis, the yield vs. total bond is close enough you can buy them.

Edit: these yields are calculated for NJ rates, for the OP, with no TX income tax, you can assume very similar spread, but each yield is a few basis points higher.
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jajare58
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Re: Muni bonds for taxable account?

Post by jajare58 »

Thank you all for the feedback. Will plan to allocate bonds funds to my tax deferred account since it is large chunk of my retirement asset allocation so it make sense to me.
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zaboomafoozarg
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Re: Muni bonds for taxable account?

Post by zaboomafoozarg »

I use VWIUX (Vanguard Intermediate-Term Tax-Exempt Fund Admiral Shares) in my taxable account. There's also VWITX which is similar to VWIUX but has a lower minimum amount.

Unlike most people, I prefer to use roughly the same AA in each of my separate accounts. I do this mostly because I had 100% bonds in my Roth IRA for a few years to offset my taxable account, and missed out on 50%+ gains in my Roth IRA.

Of course if it had been the early 2000s instead of the early 2010s I would've been happy to be 100% bonds in my Roth IRA. In any case though, I decided I preferred to use the same AA in all of them.
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Re: Muni bonds for taxable account?

Post by neb2020 »

Munis like VWITX have higher volatility than total bond fund, and every recession you'll be bombarded with "muni are collapsing" and "muni are bankrupt" rhetoric. Just saying...

Also, can consider i-Bonds and EE-bonds as bonds in taxable account. They have their own built-in tax deferred feature.
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Total Bond VS Intermediate Muni in TAXABLE

Post by hudson »

jajare58 wrote: Sat Jan 02, 2021 7:24 pm I think am not in the high tax bracket but wanted to ask if it make sense to hold muni bonds in taxable account (since no federal tax) and total bond index fund in 401k account. Per BH principle, bonds belongs to tax-deferred account but I wanted to add some muni bonds in my taxable account at Fidelity.

State: TX, MFJ. marginal tax rate: 22%
$100K investment in Total Bond VS Vang. Intermed. Muni in no-state-tax Texas

TAXABLE ACCOUNT...using distribution yield

Total Bond $100K X 2% = $2000....less 22% taxes pays out $1560
OR
VWIUX Vang. Inter. Muni X 2% = $2000....no tax...you keep the entire $2000.

Bottom line: do the math
UpperNwGuy
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Re: Total Bond VS Intermediate Muni in TAXABLE

Post by UpperNwGuy »

hudson wrote: Sun Jan 03, 2021 7:28 am
jajare58 wrote: Sat Jan 02, 2021 7:24 pm I think am not in the high tax bracket but wanted to ask if it make sense to hold muni bonds in taxable account (since no federal tax) and total bond index fund in 401k account. Per BH principle, bonds belongs to tax-deferred account but I wanted to add some muni bonds in my taxable account at Fidelity.

State: TX, MFJ. marginal tax rate: 22%
$100K investment in Total Bond VS Vang. Intermed. Muni in no-state-tax Texas

TAXABLE ACCOUNT...using distribution yield

Total Bond $100K X 2% = $2000....less 22% taxes pays out $1560
OR
VWIUX Vang. Inter. Muni X 2% = $2000....no tax...you keep the entire $2000.

Bottom line: do the math
Why are you using backward-looking distribution yields instead of forward-looking SEC yields?
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midareff
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Re: Muni bonds for taxable account?

Post by midareff »

jajare58 wrote: Sat Jan 02, 2021 7:24 pm I think am not in the high tax bracket but wanted to ask if it make sense to hold muni bonds in taxable account (since no federal tax) and total bond index fund in 401k account. Per BH principle, bonds belongs to tax-deferred account but I wanted to add some muni bonds in my taxable account at Fidelity.

State: TX, MFJ. marginal tax rate: 22%
Currently it seems that tax-exempt munis are providing the highest after tax, after CPI-U adjustment, REAL return of almost all bond categories in the investment grade risk group. Bonds in a tax deferred account provide minimal growth seem a waste a tax deferred space to me. AFAIC, I maintain a roughly equal AA across taxable and tax deferred accounts.
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anon_investor
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Re: Muni bonds for taxable account?

Post by anon_investor »

neb2020 wrote: Sun Jan 03, 2021 1:43 amAlso, can consider i-Bonds and EE-bonds as bonds in taxable account. They have their own built-in tax deferred feature.
+1. I am in a higher tax bracket than the OP and I Bonds made more sense than munis in taxable for me. Their tax deferred nature makes them tax efficient
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Re: Total Bond VS Intermediate Muni in TAXABLE

Post by hudson »

UpperNwGuy wrote: Sun Jan 03, 2021 7:34 am Why are you using backward-looking distribution yields instead of forward-looking SEC yields?
Fair question!
You are correct; distribution yields are in the past....except for tomorrow/Monday's 2.23% VWIUX payout.
https://investor.vanguard.com/mutual-fu ... ions/vwiux

Why do I use it? That's what VWIUX pays out, and what one pays taxes on.

When will VWIUX actually pay out it's SEC Yield of .89%? Will it be in 2021? or 2022?

Isn't SEC yield a long term predictor...an estimate of what an account holder is paid over the average duration of a fund?
Isn't distribution yield a shorter term predictor...tied to the actual payout of a fund?
What's real?

UpperNwGuy knows all of this. :)

Bottom Lines:
1. Study SEC and distribution yields
2. Rules of thumb don't always apply.
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jajare58
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Re: Muni bonds for taxable account?

Post by jajare58 »

midareff wrote: Sun Jan 03, 2021 8:07 am
jajare58 wrote: Sat Jan 02, 2021 7:24 pm I think am not in the high tax bracket but wanted to ask if it make sense to hold muni bonds in taxable account (since no federal tax) and total bond index fund in 401k account. Per BH principle, bonds belongs to tax-deferred account but I wanted to add some muni bonds in my taxable account at Fidelity.

State: TX, MFJ. marginal tax rate: 22%
Currently it seems that tax-exempt munis are providing the highest after tax, after CPI-U adjustment, REAL return of almost all bond categories in the investment grade risk group. Bonds in a tax deferred account provide minimal growth seem a waste a tax deferred space to me. AFAIC, I maintain a roughly equal AA across taxable and tax deferred accounts.
Interesting. Thank you for the information. Is it because of the current-low interest environment? So one does not have to be in high-tax bracket to use muni-bond ETFs?
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jajare58
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Re: Muni bonds for taxable account?

Post by jajare58 »

UpperNwGuy wrote: Sat Jan 02, 2021 8:24 pm If you're in the 22% bracket, and you want bonds in your taxable account, you might as well hold the Total Bond Index Fund or the Intermediate-Term Bond Index Fund. Even after taxes, you would do better than if you had municipal bonds.

But why not keep all your bonds in your tax-advantaged accounts? That's the best solution. There's no need to diversify your taxable account separately from your overall portfolio across all accounts.
Thank you for the information. That's the plan moving forward. I was weighing pros and cons of holding muni-bond in taxable due to their no federal tax status.
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Re: Muni bonds for taxable account?

Post by hudson »

UpperNwGuy wrote: Sat Jan 02, 2021 8:24 pm If you're in the 22% bracket, and you want bonds in your taxable account, you might as well hold the Total Bond Index Fund or the Intermediate-Term Bond Index Fund. Even after taxes, you would do better than if you had municipal bonds.

But why not keep all your bonds in your tax-advantaged accounts? That's the best solution. There's no need to diversify your taxable account separately from your overall portfolio across all accounts.
I humbly disagree with the top bolded statement. How can total bond beat an intermediate muni fund in a taxable account with the 22% bracket? I'd like to see the math. With total bond, you would pay 22% federal taxes plus state taxes.
With Vanguard's intermediate muni, you would pay no federal taxes and possibly no state taxes. You would end up with at least 22% more.

Keeping bonds in tax advantaged accounts....that's probably ok. Is it ALWAYS best? I'm not sure.
When I was in the accumulation phase, I always filled up tax advantaged...including Ibonds before putting anything in taxable.
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Re: Muni bonds for taxable account?

Post by Chris K Jones »

If it were me and there was enough room in my tax deferred accounts, I would put all my bond holdings in tax deferred.

But, to answer your question, in your tax bracket if I were to have any bond funds in taxable, I would not use Municipals. I would use either Total Bond or Intermediate Term Bond Index.

I do not have enough room in my tax deferred so I have bond funds in taxable. My initial plan was municipal funds as I am in a higher tax bracket than you. During the March selloff, I was surprised that my muni fund dropped more than Total Bond and Intermediate Term Bond Index (which I hold in Taxable). I have not added to my muni funds since than and now purchase Vanguard Intermediate Term Bond Index for my taxable account. It is pretty heavy in Treasuries.

Best Wishes.
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Re: Muni bonds for taxable account?

Post by spanky123 »

anon_investor wrote: Sun Jan 03, 2021 8:16 am
neb2020 wrote: Sun Jan 03, 2021 1:43 amAlso, can consider i-Bonds and EE-bonds as bonds in taxable account. They have their own built-in tax deferred feature.
+1. I am in a higher tax bracket than the OP and I Bonds made more sense than munis in taxable for me. Their tax deferred nature makes them tax efficient
BTW, annual purchase of I-binds is limited to $30K. :happy
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spanky123
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Re: Muni bonds for taxable account?

Post by spanky123 »

hudson wrote: Mon Jan 11, 2021 1:03 pm
UpperNwGuy wrote: Sat Jan 02, 2021 8:24 pm If you're in the 22% bracket, and you want bonds in your taxable account, you might as well hold the Total Bond Index Fund or the Intermediate-Term Bond Index Fund. Even after taxes, you would do better than if you had municipal bonds.

But why not keep all your bonds in your tax-advantaged accounts? That's the best solution. There's no need to diversify your taxable account separately from your overall portfolio across all accounts.
I humbly disagree with the top bolded statement. How can total bond beat an intermediate muni fund in a taxable account with the 22% bracket? I'd like to see the math. With total bond, you would pay 22% federal taxes plus state taxes.
With Vanguard's intermediate muni, you would pay no federal taxes and possibly no state taxes. You would end up with at least 22% more.

Keeping bonds in tax advantaged accounts....that's probably ok. Is it ALWAYS best? I'm not sure.
When I was in the accumulation phase, I always filled up tax advantaged...including Ibonds before putting anything in taxable.
Only a minor difference!
tax equivalent yield = tax free yield/(1- tax rate)

Intermediate Muni, VWITX = 0.79%
Total Bond, VBTLX = 1.11%
Intermediate, Index VBILX = 1.05%

Marginal Tax Rate = 22%

tax equivalent yield = 1.01%, which is slightly less than 1.05%
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Re: Muni bonds for taxable account?

Post by wriley4409 »

spanky123 wrote: Mon Jan 11, 2021 1:41 pm
hudson wrote: Mon Jan 11, 2021 1:03 pm
UpperNwGuy wrote: Sat Jan 02, 2021 8:24 pm If you're in the 22% bracket, and you want bonds in your taxable account, you might as well hold the Total Bond Index Fund or the Intermediate-Term Bond Index Fund. Even after taxes, you would do better than if you had municipal bonds.

But why not keep all your bonds in your tax-advantaged accounts? That's the best solution. There's no need to diversify your taxable account separately from your overall portfolio across all accounts.
I humbly disagree with the top bolded statement. How can total bond beat an intermediate muni fund in a taxable account with the 22% bracket? I'd like to see the math. With total bond, you would pay 22% federal taxes plus state taxes.
With Vanguard's intermediate muni, you would pay no federal taxes and possibly no state taxes. You would end up with at least 22% more.

Keeping bonds in tax advantaged accounts....that's probably ok. Is it ALWAYS best? I'm not sure.
When I was in the accumulation phase, I always filled up tax advantaged...including Ibonds before putting anything in taxable.
Only a minor difference!
tax equivalent yield = tax free yield/(1- tax rate)

Intermediate Muni, VWITX = 0.79%
Total Bond, VBTLX = 1.11%
Intermediate, Index VBILX = 1.05%

Marginal Tax Rate = 22%

tax equivalent yield = 1.01%, which is slightly less than 1.05%


Don't overlook the current rate for I-Bonds at 1.68%
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Re: Muni bonds for taxable account?

Post by hudson »

spanky123 wrote: Mon Jan 11, 2021 1:41 pm
hudson wrote: Mon Jan 11, 2021 1:03 pm
UpperNwGuy wrote: Sat Jan 02, 2021 8:24 pm If you're in the 22% bracket, and you want bonds in your taxable account, you might as well hold the Total Bond Index Fund or the Intermediate-Term Bond Index Fund. Even after taxes, you would do better than if you had municipal bonds.

But why not keep all your bonds in your tax-advantaged accounts? That's the best solution. There's no need to diversify your taxable account separately from your overall portfolio across all accounts.
I humbly disagree with the top bolded statement. How can total bond beat an intermediate muni fund in a taxable account with the 22% bracket? I'd like to see the math. With total bond, you would pay 22% federal taxes plus state taxes.
With Vanguard's intermediate muni, you would pay no federal taxes and possibly no state taxes. You would end up with at least 22% more.

Keeping bonds in tax advantaged accounts....that's probably ok. Is it ALWAYS best? I'm not sure.
When I was in the accumulation phase, I always filled up tax advantaged...including Ibonds before putting anything in taxable.
Only a minor difference!
tax equivalent yield = tax free yield/(1- tax rate)

Intermediate Muni, VWITX = 0.79%
Total Bond, VBTLX = 1.11%
Intermediate, Index VBILX = 1.05%

Marginal Tax Rate = 22%

tax equivalent yield = 1.01%, which is slightly less than 1.05%
spank123,
You are using the SEC Yield. It will be paying that in the future. Right now the funds are paying out around 2%.
Percentages are hard for me to see or understand.
When I get time, I'll do the math with distribution yields and in dollars....say with a $100K investment.
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spanky123
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Re: Muni bonds for taxable account?

Post by spanky123 »

hudson wrote: Mon Jan 11, 2021 2:26 pm
spanky123 wrote: Mon Jan 11, 2021 1:41 pm
hudson wrote: Mon Jan 11, 2021 1:03 pm
UpperNwGuy wrote: Sat Jan 02, 2021 8:24 pm If you're in the 22% bracket, and you want bonds in your taxable account, you might as well hold the Total Bond Index Fund or the Intermediate-Term Bond Index Fund. Even after taxes, you would do better than if you had municipal bonds.

But why not keep all your bonds in your tax-advantaged accounts? That's the best solution. There's no need to diversify your taxable account separately from your overall portfolio across all accounts.
I humbly disagree with the top bolded statement. How can total bond beat an intermediate muni fund in a taxable account with the 22% bracket? I'd like to see the math. With total bond, you would pay 22% federal taxes plus state taxes.
With Vanguard's intermediate muni, you would pay no federal taxes and possibly no state taxes. You would end up with at least 22% more.

Keeping bonds in tax advantaged accounts....that's probably ok. Is it ALWAYS best? I'm not sure.
When I was in the accumulation phase, I always filled up tax advantaged...including Ibonds before putting anything in taxable.
Only a minor difference!
tax equivalent yield = tax free yield/(1- tax rate)

Intermediate Muni, VWITX = 0.79%
Total Bond, VBTLX = 1.11%
Intermediate, Index VBILX = 1.05%

Marginal Tax Rate = 22%

tax equivalent yield = 1.01%, which is slightly less than 1.05%
spank123,
You are using the SEC Yield. It will be paying that in the future. Right now the funds are paying out around 2%.
Percentages are hard for me to see or understand.
When I get time, I'll do the math with distribution yields and in dollars....say with a $100K investment.
Muni is better if Yield to maturity is used:
Intermed index = 1.1%
Muni Intermed = 1%
tax equivalent yield = 1.28%, which is better than 1.1%

BTW, Muni intermediate is less diversified than Intermediate Bond Index.
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Re: Muni bonds for taxable account?

Post by grabiner »

In a 22% bracket, I would prefer taxable bonds, which are likely to earn more after-tax than munis of comparable risk.

The important part of this statement is "comparable risk". For example, Admiral shares of Vanguard High-Yield Tax-Exempt yield 1.92%, which is more than most of Vanguard's bond funds, but that is because of the risk involved; this fund holds a bit of junk, a lot of bonds rated A and BBB, and a lot of callable bonds which will lose more than indicated by the fund's 6-year duration if rates rise. It is a fine fund if you are willing to take the risk, but in a 22% bracket, if you want to take that much risk, you would probably be better off with Vanguard Long-Term Investment-Grade with a 2.47% yield on its Admiral shares.
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Re: Muni bonds for taxable account?

Post by midareff »

jajare58 wrote: Mon Jan 11, 2021 11:50 am
midareff wrote: Sun Jan 03, 2021 8:07 am
jajare58 wrote: Sat Jan 02, 2021 7:24 pm I think am not in the high tax bracket but wanted to ask if it make sense to hold muni bonds in taxable account (since no federal tax) and total bond index fund in 401k account. Per BH principle, bonds belongs to tax-deferred account but I wanted to add some muni bonds in my taxable account at Fidelity.

State: TX, MFJ. marginal tax rate: 22%
Currently it seems that tax-exempt munis are providing the highest after tax, after CPI-U adjustment, REAL return of almost all bond categories in the investment grade risk group. Bonds in a tax deferred account provide minimal growth seem a waste a tax deferred space to me. AFAIC, I maintain a roughly equal AA across taxable and tax deferred accounts.
Interesting. Thank you for the information. Is it because of the current-low interest environment? So one does not have to be in high-tax bracket to use muni-bond ETFs?
When I evaluate a bond fund the primary factors are risk and reward, although the same could be said for any investment. Ally Bank is currently yielding .50% on high interest savings. The current 12 month rolling average CPI-U is 1.31%, and tax must be paid on the .50% Ally Bank yield. The Distribution Yield on Vanguard's Intermediate Term Muni (VWIUX) was 2.26%, the Long Term (VWLUX with 6.42 years duration) was 2.71%. No Federal IRS tax on either. Vanguard's Total Bond Admiral (VBTLX) had a distribution yield of 1.98% last month (taxable). Vanguard rates the risk of the Intermediate Term Muni Fund and the Total Bond Market Fund the same. I suppose at the end of the day it's all in the numbers and you have to decide what's right for you.
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Re: Muni bonds for taxable account?

Post by midareff »

grabiner wrote: Mon Jan 11, 2021 10:28 pm In a 22% bracket, I would prefer taxable bonds, which are likely to earn more after-tax than munis of comparable risk.

That is not currently correct.

The important part of this statement is "comparable risk". For example, Admiral shares of Vanguard High-Yield Tax-Exempt yield 1.92%, which is more than most of Vanguard's bond funds, but that is because of the risk involved; this fund holds a bit of junk, a lot of bonds rated A and BBB, and a lot of callable bonds which will lose more than indicated by the fund's 6-year duration if rates rise. It is a fine fund if you are willing to take the risk, but in a 22% bracket, if you want to take that much risk, you would probably be better off with Vanguard Long-Term Investment-Grade with a 2.47% yield on its Admiral shares.
Vanguard rates their Intermediate Term Muni fund (VWIUX) the same risk as their Total Bond Market Fund (VBTLX). The muni fund distributed 2.26% with no Federal tax to be paid and the Total Bond Market distributed 1.98% and that is taxable.
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Re: Muni bonds for taxable account?

Post by TinyElvis »

Good morning.

Please pardon my ignorance, but why does your tax bracket matter with regards to holding tax-free bonds in your taxable account?
"Give a cat a fish and it will eat for a day. Teach a cat to fish and it will just sit there waiting for you to give it a fish."
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Total Bond VBTLX or VWIUX Intermediate Muni After Taxes in Taxable

Post by hudson »

$100K investment...
VBTLX Total Bond is distributing 1.98%
VWIUX Intermediate Muni is distributing 2.23%

Let's say that both are paying out 2% to make the math easy.

Total Bond: $100K X 2%...payout = $2000....less 22% federal tax or $440 ...you are left with $1560
Intermediate Muni: $100K X 2%....payout = $2000...no deduction for federal tax...you are left with $2000

I used distribution yield because that's what you pay taxes on. I'm sure that you watch the distribution yields and realize that they appear to be declining towards the SEC Yield. How long will that take? I don't know. I check it every month.

What's safer Total Bond or Intermediate Muni. I speculate that the munis are safer. Munis are screened before being allowed to be issued. Munis are harder to default. I could be wrong.

Bottom line: VWIUX...intermediate muni pays out more in a taxable account than does VBTLX...total bond. Why? No federal taxes are owed on VWIUX dividends.
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Re: Muni bonds for taxable account?

Post by ksualum »

There are different views on this subject:

https://www.whitecoatinvestor.com/asset ... n-taxable/

I do keep some munis in my taxable (most are in my 401k). I think sometimes it is good to have some stocks in your 401k.
If your 401k is all bonds, I worry that may not be the best use of tax free shielding, but I am just one opinion.

Tax efficient placement would have you put all bonds in taxable: https://www.bogleheads.org/wiki/Tax-eff ... _placement

I think you have to decide what you think is best.
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Re: Muni bonds for taxable account?

Post by Hookem_1 »

TinyElvis wrote: Tue Jan 12, 2021 8:41 am Good morning.

Please pardon my ignorance, but why does your tax bracket matter with regards to holding tax-free bonds in your taxable account?
Your tax bracket is used to calculate the tax equivalent yield that you can then use to compare to the yield of bonds that are not tax free. The idea being that there are times when you are better off holding taxable bonds in a taxable account depending on the spread in yield and your tax rate.
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Re: Muni bonds for taxable account?

Post by grabiner »

midareff wrote: Tue Jan 12, 2021 5:45 am
grabiner wrote: Mon Jan 11, 2021 10:28 pm In a 22% bracket, I would prefer taxable bonds, which are likely to earn more after-tax than munis of comparable risk.

That is not currently correct.

The important part of this statement is "comparable risk". For example, Admiral shares of Vanguard High-Yield Tax-Exempt yield 1.92%, which is more than most of Vanguard's bond funds, but that is because of the risk involved; this fund holds a bit of junk, a lot of bonds rated A and BBB, and a lot of callable bonds which will lose more than indicated by the fund's 6-year duration if rates rise. It is a fine fund if you are willing to take the risk, but in a 22% bracket, if you want to take that much risk, you would probably be better off with Vanguard Long-Term Investment-Grade with a 2.47% yield on its Admiral shares.
Vanguard rates their Intermediate Term Muni fund (VWIUX) the same risk as their Total Bond Market Fund (VBTLX). The muni fund distributed 2.26% with no Federal tax to be paid and the Total Bond Market distributed 1.98% and that is taxable.
These distributions are the wrong numbers for comparison. The SEC yields are 0.87% for Intermediate-Term Tax-Exempt and 1.11% for Total Bond Market; these would be equal in a 22% tax bracket. See SEC Yield on the wiki for the reason for using SEC yield rather than distribution yield to compare funds; there is an example of two bonds of identical SEC yield, but one is at a premium and thus has a higher distribution yield but guaranteed capital losses.

Equally important is that Vanguard's fund ratings are general guides; they are not precise within a category, and do not reflect current risk. Vanguard gives the same risk rating to Vanguard CA Long-Term Tax-Exempt, Vanguard Long-Term Tax-Exempt, and Vanguard NJ Long-Term Tax-Exempt. Bond traders disagree, as they price CA munis higher than national munis of the same duration, and NJ munis lower. In fact, Vanguard CA Long-Term Tax-Exempt has a lower after-tax yield than Vanguard Long-Term Tax-Exempt, but the fund is still recommended for CA investors, as it gives almost the same yield and presumably has less risk. Conversely, the higher yield on Vanguard NJ Long-Term Tax-Exempt is not a free lunch; it is an indication of the state of the state of NJ, and is a caution to NJ investors not to hold too much in that fund.

So I slightly prefer Total Bond Market over Intermediate-Term Tax-Exempt in the 22% tax bracket; they have equal yields, but I believe that the muni fund is currently slightly riskier. (In the past, the break-even tax rate was closer to 25%, implying comparable risk.)
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Re: Muni bonds for taxable account?

Post by midareff »

grabiner wrote: Tue Jan 12, 2021 7:23 pm
midareff wrote: Tue Jan 12, 2021 5:45 am
grabiner wrote: Mon Jan 11, 2021 10:28 pm In a 22% bracket, I would prefer taxable bonds, which are likely to earn more after-tax than munis of comparable risk.

That is not currently correct.

The important part of this statement is "comparable risk". For example, Admiral shares of Vanguard High-Yield Tax-Exempt yield 1.92%, which is more than most of Vanguard's bond funds, but that is because of the risk involved; this fund holds a bit of junk, a lot of bonds rated A and BBB, and a lot of callable bonds which will lose more than indicated by the fund's 6-year duration if rates rise. It is a fine fund if you are willing to take the risk, but in a 22% bracket, if you want to take that much risk, you would probably be better off with Vanguard Long-Term Investment-Grade with a 2.47% yield on its Admiral shares.
Vanguard rates their Intermediate Term Muni fund (VWIUX) the same risk as their Total Bond Market Fund (VBTLX). The muni fund distributed 2.26% with no Federal tax to be paid and the Total Bond Market distributed 1.98% and that is taxable.
These distributions are the wrong numbers for comparison. The SEC yields are 0.87% for Intermediate-Term Tax-Exempt and 1.11% for Total Bond Market; these would be equal in a 22% tax bracket. See SEC Yield on the wiki for the reason for using SEC yield rather than distribution yield to compare funds; there is an example of two bonds of identical SEC yield, but one is at a premium and thus has a higher distribution yield but guaranteed capital losses.

Equally important is that Vanguard's fund ratings are general guides; they are not precise within a category, and do not reflect current risk. Vanguard gives the same risk rating to Vanguard CA Long-Term Tax-Exempt, Vanguard Long-Term Tax-Exempt, and Vanguard NJ Long-Term Tax-Exempt. Bond traders disagree, as they price CA munis higher than national munis of the same duration, and NJ munis lower. In fact, Vanguard CA Long-Term Tax-Exempt has a lower after-tax yield than Vanguard Long-Term Tax-Exempt, but the fund is still recommended for CA investors, as it gives almost the same yield and presumably has less risk. Conversely, the higher yield on Vanguard NJ Long-Term Tax-Exempt is not a free lunch; it is an indication of the state of the state of NJ, and is a caution to NJ investors not to hold too much in that fund.

So I slightly prefer Total Bond Market over Intermediate-Term Tax-Exempt in the 22% tax bracket; they have equal yields, but I believe that the muni fund is currently slightly riskier. (In the past, the break-even tax rate was closer to 25%, implying comparable risk.)
What I get paid every month is what I get paid. You want to keep comparing numbers that are not what is paid out, and that may be fine for you. Personally, I count what they pay me, not some number that may never actually occur. I calculate percentages based on previous months closing $$. If I am paid an annualized 2.26% tax-exempt dividend on December 31, and you are paid 1.98% and it is taxable, and you think you got a better deal with a fund Vanguard rates as the same risk that's OK with me. Stay safe amigo, I enjoy these chats we seem to always have about munis.
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Re: Muni bonds for taxable account?

Post by MikeG62 »

midareff wrote: Wed Jan 13, 2021 8:38 am
grabiner wrote: Tue Jan 12, 2021 7:23 pm
midareff wrote: Tue Jan 12, 2021 5:45 am
grabiner wrote: Mon Jan 11, 2021 10:28 pm In a 22% bracket, I would prefer taxable bonds, which are likely to earn more after-tax than munis of comparable risk.

That is not currently correct.

The important part of this statement is "comparable risk". For example, Admiral shares of Vanguard High-Yield Tax-Exempt yield 1.92%, which is more than most of Vanguard's bond funds, but that is because of the risk involved; this fund holds a bit of junk, a lot of bonds rated A and BBB, and a lot of callable bonds which will lose more than indicated by the fund's 6-year duration if rates rise. It is a fine fund if you are willing to take the risk, but in a 22% bracket, if you want to take that much risk, you would probably be better off with Vanguard Long-Term Investment-Grade with a 2.47% yield on its Admiral shares.
Vanguard rates their Intermediate Term Muni fund (VWIUX) the same risk as their Total Bond Market Fund (VBTLX). The muni fund distributed 2.26% with no Federal tax to be paid and the Total Bond Market distributed 1.98% and that is taxable.
These distributions are the wrong numbers for comparison. The SEC yields are 0.87% for Intermediate-Term Tax-Exempt and 1.11% for Total Bond Market; these would be equal in a 22% tax bracket. See SEC Yield on the wiki for the reason for using SEC yield rather than distribution yield to compare funds; there is an example of two bonds of identical SEC yield, but one is at a premium and thus has a higher distribution yield but guaranteed capital losses.

Equally important is that Vanguard's fund ratings are general guides; they are not precise within a category, and do not reflect current risk. Vanguard gives the same risk rating to Vanguard CA Long-Term Tax-Exempt, Vanguard Long-Term Tax-Exempt, and Vanguard NJ Long-Term Tax-Exempt. Bond traders disagree, as they price CA munis higher than national munis of the same duration, and NJ munis lower. In fact, Vanguard CA Long-Term Tax-Exempt has a lower after-tax yield than Vanguard Long-Term Tax-Exempt, but the fund is still recommended for CA investors, as it gives almost the same yield and presumably has less risk. Conversely, the higher yield on Vanguard NJ Long-Term Tax-Exempt is not a free lunch; it is an indication of the state of the state of NJ, and is a caution to NJ investors not to hold too much in that fund.

So I slightly prefer Total Bond Market over Intermediate-Term Tax-Exempt in the 22% tax bracket; they have equal yields, but I believe that the muni fund is currently slightly riskier. (In the past, the break-even tax rate was closer to 25%, implying comparable risk.)
What I get paid every month is what I get paid. You want to keep comparing numbers that are not what is paid out, and that may be fine for you. Personally, I count what they pay me, not some number that may never actually occur. I calculate percentages based on previous months closing $$. If I am paid an annualized 2.26% tax-exempt dividend on December 31, and you are paid 1.98% and it is taxable, and you think you got a better deal with a fund Vanguard rates as the same risk that's OK with me. Stay safe amigo, I enjoy these chats we seem to always have about munis.
As has been discussed numerous times before, you are only looking at 1/2 of the return. You need to also consider the change in the NAV. Every time your muni fund pays a dividend at "above market rates" it's NAV drops by the amount of the above market element (aka the return of capital component). Because there are lots of things happening under the water line (changes in market interest rates from month to month, bonds being called or maturing, new bonds being purchased) you can't tie the above market dividend payment to a commensurate drop in the NAV. However, that does not mean it's not happening.

Do you really think the market would offer this "free lunch" (i.e., above market interest rate) and that not immediately be arbitraged away by professionals who are managing a lot more money, have access to better information and are a lot smarter than we are? :oops:
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Re: Muni bonds for taxable account?

Post by midareff »

MikeG62 wrote: Wed Jan 13, 2021 9:58 am
midareff wrote: Wed Jan 13, 2021 8:38 am
grabiner wrote: Tue Jan 12, 2021 7:23 pm
midareff wrote: Tue Jan 12, 2021 5:45 am
grabiner wrote: Mon Jan 11, 2021 10:28 pm In a 22% bracket, I would prefer taxable bonds, which are likely to earn more after-tax than munis of comparable risk.

That is not currently correct.

The important part of this statement is "comparable risk". For example, Admiral shares of Vanguard High-Yield Tax-Exempt yield 1.92%, which is more than most of Vanguard's bond funds, but that is because of the risk involved; this fund holds a bit of junk, a lot of bonds rated A and BBB, and a lot of callable bonds which will lose more than indicated by the fund's 6-year duration if rates rise. It is a fine fund if you are willing to take the risk, but in a 22% bracket, if you want to take that much risk, you would probably be better off with Vanguard Long-Term Investment-Grade with a 2.47% yield on its Admiral shares.
Vanguard rates their Intermediate Term Muni fund (VWIUX) the same risk as their Total Bond Market Fund (VBTLX). The muni fund distributed 2.26% with no Federal tax to be paid and the Total Bond Market distributed 1.98% and that is taxable.
These distributions are the wrong numbers for comparison. The SEC yields are 0.87% for Intermediate-Term Tax-Exempt and 1.11% for Total Bond Market; these would be equal in a 22% tax bracket. See SEC Yield on the wiki for the reason for using SEC yield rather than distribution yield to compare funds; there is an example of two bonds of identical SEC yield, but one is at a premium and thus has a higher distribution yield but guaranteed capital losses.

Equally important is that Vanguard's fund ratings are general guides; they are not precise within a category, and do not reflect current risk. Vanguard gives the same risk rating to Vanguard CA Long-Term Tax-Exempt, Vanguard Long-Term Tax-Exempt, and Vanguard NJ Long-Term Tax-Exempt. Bond traders disagree, as they price CA munis higher than national munis of the same duration, and NJ munis lower. In fact, Vanguard CA Long-Term Tax-Exempt has a lower after-tax yield than Vanguard Long-Term Tax-Exempt, but the fund is still recommended for CA investors, as it gives almost the same yield and presumably has less risk. Conversely, the higher yield on Vanguard NJ Long-Term Tax-Exempt is not a free lunch; it is an indication of the state of the state of NJ, and is a caution to NJ investors not to hold too much in that fund.

So I slightly prefer Total Bond Market over Intermediate-Term Tax-Exempt in the 22% tax bracket; they have equal yields, but I believe that the muni fund is currently slightly riskier. (In the past, the break-even tax rate was closer to 25%, implying comparable risk.)
What I get paid every month is what I get paid. You want to keep comparing numbers that are not what is paid out, and that may be fine for you. Personally, I count what they pay me, not some number that may never actually occur. I calculate percentages based on previous months closing $$. If I am paid an annualized 2.26% tax-exempt dividend on December 31, and you are paid 1.98% and it is taxable, and you think you got a better deal with a fund Vanguard rates as the same risk that's OK with me. Stay safe amigo, I enjoy these chats we seem to always have about munis.
As has been discussed numerous times before, you are only looking at 1/2 of the return. You need to also consider the change in the NAV. Every time your muni fund pays a dividend at "above market rates" it's NAV drops by the amount of the above market element (aka the return of capital component). Because there are lots of things happening under the water line (changes in market interest rates from month to month, bonds being called or maturing, new bonds being purchased) you can't tie the above market dividend payment to a commensurate drop in the NAV. However, that does not mean it's not happening.

Do you really think the market would offer this "free lunch" (i.e., above market interest rate) and that not immediately be arbitraged away by professionals who are managing a lot more money, have access to better information and are a lot smarter than we are? :oops:
You are saying that the NAV drops every time a dividend is paid out.. is that what you are saying? Therefore I have less money after the dividend is paid to my bank (not reinvested), is that what you are saying? Because let's say for example; just for example.. I bought $195K of VWLUX near the middle of the year and it paid me $4,154.27 in tax-exempt dividends and I have $201,982.28 left I'm not sure how I reconcile that with your statements. As Desi used to say: Splain me Lucy.
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Re: Muni bonds for taxable account?

Post by MikeG62 »

midareff wrote: Wed Jan 13, 2021 10:43 am
MikeG62 wrote: Wed Jan 13, 2021 9:58 am
midareff wrote: Wed Jan 13, 2021 8:38 am
grabiner wrote: Tue Jan 12, 2021 7:23 pm
midareff wrote: Tue Jan 12, 2021 5:45 am

Vanguard rates their Intermediate Term Muni fund (VWIUX) the same risk as their Total Bond Market Fund (VBTLX). The muni fund distributed 2.26% with no Federal tax to be paid and the Total Bond Market distributed 1.98% and that is taxable.
These distributions are the wrong numbers for comparison. The SEC yields are 0.87% for Intermediate-Term Tax-Exempt and 1.11% for Total Bond Market; these would be equal in a 22% tax bracket. See SEC Yield on the wiki for the reason for using SEC yield rather than distribution yield to compare funds; there is an example of two bonds of identical SEC yield, but one is at a premium and thus has a higher distribution yield but guaranteed capital losses.

Equally important is that Vanguard's fund ratings are general guides; they are not precise within a category, and do not reflect current risk. Vanguard gives the same risk rating to Vanguard CA Long-Term Tax-Exempt, Vanguard Long-Term Tax-Exempt, and Vanguard NJ Long-Term Tax-Exempt. Bond traders disagree, as they price CA munis higher than national munis of the same duration, and NJ munis lower. In fact, Vanguard CA Long-Term Tax-Exempt has a lower after-tax yield than Vanguard Long-Term Tax-Exempt, but the fund is still recommended for CA investors, as it gives almost the same yield and presumably has less risk. Conversely, the higher yield on Vanguard NJ Long-Term Tax-Exempt is not a free lunch; it is an indication of the state of the state of NJ, and is a caution to NJ investors not to hold too much in that fund.

So I slightly prefer Total Bond Market over Intermediate-Term Tax-Exempt in the 22% tax bracket; they have equal yields, but I believe that the muni fund is currently slightly riskier. (In the past, the break-even tax rate was closer to 25%, implying comparable risk.)
What I get paid every month is what I get paid. You want to keep comparing numbers that are not what is paid out, and that may be fine for you. Personally, I count what they pay me, not some number that may never actually occur. I calculate percentages based on previous months closing $$. If I am paid an annualized 2.26% tax-exempt dividend on December 31, and you are paid 1.98% and it is taxable, and you think you got a better deal with a fund Vanguard rates as the same risk that's OK with me. Stay safe amigo, I enjoy these chats we seem to always have about munis.
As has been discussed numerous times before, you are only looking at 1/2 of the return. You need to also consider the change in the NAV. Every time your muni fund pays a dividend at "above market rates" it's NAV drops by the amount of the above market element (aka the return of capital component). Because there are lots of things happening under the water line (changes in market interest rates from month to month, bonds being called or maturing, new bonds being purchased) you can't tie the above market dividend payment to a commensurate drop in the NAV. However, that does not mean it's not happening.

Do you really think the market would offer this "free lunch" (i.e., above market interest rate) and that not immediately be arbitraged away by professionals who are managing a lot more money, have access to better information and are a lot smarter than we are? :oops:
You are saying that the NAV drops every time a dividend is paid out.. is that what you are saying? Therefore I have less money after the dividend is paid to my bank (not reinvested), is that what you are saying? Because let's say for example; just for example.. I bought $195K of VWLUX near the middle of the year and it paid me $4,154.27 in tax-exempt dividends and I have $201,982.28 left I'm not sure how I reconcile that with your statements. As Desi used to say: Splain me Lucy.
When the fund pays a dividend at an "above market" yield, some of that dividend is return of principal (or the bond premium amortizing eventually to zero). As the bond premium amortizes down, the FMV of the bond declines as does NAV of the fund.

The increase in NAV you are referencing is due to a decline in muni "market" interest rates since the middle of last year. As rates drop, the price of bonds increases. That's a mathematical fact. It's how bonds work. Had rates remained exactly the same (assume there had been no bonds called or maturing and no bonds purchased as well), you would have seen a decline in the NAV of the fund to the extent of the amortization of the bond premium.

I provided a clear example of how this works in this thread from the spring of last year.

viewtopic.php?f=10&t=315462&p=5263977&h ... n#p5263977

I'll leave the folks reading this thread with what I said above. Does anyone really think the market would offer this "free lunch" (i.e., above market interest rate) and that not immediately be arbitraged away by professionals who are managing a lot more money, have access to better information and are a lot smarter than we are?
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Re: Muni bonds for taxable account?

Post by midareff »

MikeG62 wrote: Wed Jan 13, 2021 11:18 am
midareff wrote: Wed Jan 13, 2021 10:43 am
MikeG62 wrote: Wed Jan 13, 2021 9:58 am
midareff wrote: Wed Jan 13, 2021 8:38 am
grabiner wrote: Tue Jan 12, 2021 7:23 pm

These distributions are the wrong numbers for comparison. The SEC yields are 0.87% for Intermediate-Term Tax-Exempt and 1.11% for Total Bond Market; these would be equal in a 22% tax bracket. See SEC Yield on the wiki for the reason for using SEC yield rather than distribution yield to compare funds; there is an example of two bonds of identical SEC yield, but one is at a premium and thus has a higher distribution yield but guaranteed capital losses.

Equally important is that Vanguard's fund ratings are general guides; they are not precise within a category, and do not reflect current risk. Vanguard gives the same risk rating to Vanguard CA Long-Term Tax-Exempt, Vanguard Long-Term Tax-Exempt, and Vanguard NJ Long-Term Tax-Exempt. Bond traders disagree, as they price CA munis higher than national munis of the same duration, and NJ munis lower. In fact, Vanguard CA Long-Term Tax-Exempt has a lower after-tax yield than Vanguard Long-Term Tax-Exempt, but the fund is still recommended for CA investors, as it gives almost the same yield and presumably has less risk. Conversely, the higher yield on Vanguard NJ Long-Term Tax-Exempt is not a free lunch; it is an indication of the state of the state of NJ, and is a caution to NJ investors not to hold too much in that fund.

So I slightly prefer Total Bond Market over Intermediate-Term Tax-Exempt in the 22% tax bracket; they have equal yields, but I believe that the muni fund is currently slightly riskier. (In the past, the break-even tax rate was closer to 25%, implying comparable risk.)
What I get paid every month is what I get paid. You want to keep comparing numbers that are not what is paid out, and that may be fine for you. Personally, I count what they pay me, not some number that may never actually occur. I calculate percentages based on previous months closing $$. If I am paid an annualized 2.26% tax-exempt dividend on December 31, and you are paid 1.98% and it is taxable, and you think you got a better deal with a fund Vanguard rates as the same risk that's OK with me. Stay safe amigo, I enjoy these chats we seem to always have about munis.
As has been discussed numerous times before, you are only looking at 1/2 of the return. You need to also consider the change in the NAV. Every time your muni fund pays a dividend at "above market rates" it's NAV drops by the amount of the above market element (aka the return of capital component). Because there are lots of things happening under the water line (changes in market interest rates from month to month, bonds being called or maturing, new bonds being purchased) you can't tie the above market dividend payment to a commensurate drop in the NAV. However, that does not mean it's not happening.

Do you really think the market would offer this "free lunch" (i.e., above market interest rate) and that not immediately be arbitraged away by professionals who are managing a lot more money, have access to better information and are a lot smarter than we are? :oops:
You are saying that the NAV drops every time a dividend is paid out.. is that what you are saying? Therefore I have less money after the dividend is paid to my bank (not reinvested), is that what you are saying? Because let's say for example; just for example.. I bought $195K of VWLUX near the middle of the year and it paid me $4,154.27 in tax-exempt dividends and I have $201,982.28 left I'm not sure how I reconcile that with your statements. As Desi used to say: Splain me Lucy.
When the fund pays a dividend at an "above market" yield, some of that dividend is return of principal (or the bond premium amortizing eventually to zero). As the bond premium amortizes down, the FMV of the bond declines as does NAV of the fund.

The increase in NAV you are referencing is due to a decline in muni "market" interest rates since the middle of last year. As rates drop, the price of bonds increases. That's a mathematical fact. It's how bonds work. Had rates remained exactly the same (assume there had been no bonds called or maturing and no bonds purchased as well), you would have seen a decline in the NAV of the fund to the extent of the amortization of the bond premium.

I provided a clear example of how this works in this thread from the spring of last year.

viewtopic.php?f=10&t=315462&p=5263977&h ... n#p5263977

I'll leave the folks reading this thread with what I said above. Does anyone really think the market would offer this "free lunch" (i.e., above market interest rate) and that not immediately be arbitraged away by professionals who are managing a lot more money, have access to better information and are a lot smarter than we are?
Aren't you talking about amortization that occurs in all bond funds, not just munis?
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Re: Muni bonds for taxable account?

Post by hudson »

MikeG62 wrote: Wed Jan 13, 2021 11:18 am
midareff wrote: Wed Jan 13, 2021 10:43 am
MikeG62 wrote: Wed Jan 13, 2021 9:58 am
midareff wrote: Wed Jan 13, 2021 8:38 am
grabiner wrote: Tue Jan 12, 2021 7:23 pm

These distributions are the wrong numbers for comparison. The SEC yields are 0.87% for Intermediate-Term Tax-Exempt and 1.11% for Total Bond Market; these would be equal in a 22% tax bracket. See SEC Yield on the wiki for the reason for using SEC yield rather than distribution yield to compare funds; there is an example of two bonds of identical SEC yield, but one is at a premium and thus has a higher distribution yield but guaranteed capital losses.

Equally important is that Vanguard's fund ratings are general guides; they are not precise within a category, and do not reflect current risk. Vanguard gives the same risk rating to Vanguard CA Long-Term Tax-Exempt, Vanguard Long-Term Tax-Exempt, and Vanguard NJ Long-Term Tax-Exempt. Bond traders disagree, as they price CA munis higher than national munis of the same duration, and NJ munis lower. In fact, Vanguard CA Long-Term Tax-Exempt has a lower after-tax yield than Vanguard Long-Term Tax-Exempt, but the fund is still recommended for CA investors, as it gives almost the same yield and presumably has less risk. Conversely, the higher yield on Vanguard NJ Long-Term Tax-Exempt is not a free lunch; it is an indication of the state of the state of NJ, and is a caution to NJ investors not to hold too much in that fund.

So I slightly prefer Total Bond Market over Intermediate-Term Tax-Exempt in the 22% tax bracket; they have equal yields, but I believe that the muni fund is currently slightly riskier. (In the past, the break-even tax rate was closer to 25%, implying comparable risk.)
What I get paid every month is what I get paid. You want to keep comparing numbers that are not what is paid out, and that may be fine for you. Personally, I count what they pay me, not some number that may never actually occur. I calculate percentages based on previous months closing $$. If I am paid an annualized 2.26% tax-exempt dividend on December 31, and you are paid 1.98% and it is taxable, and you think you got a better deal with a fund Vanguard rates as the same risk that's OK with me. Stay safe amigo, I enjoy these chats we seem to always have about munis.
As has been discussed numerous times before, you are only looking at 1/2 of the return. You need to also consider the change in the NAV. Every time your muni fund pays a dividend at "above market rates" it's NAV drops by the amount of the above market element (aka the return of capital component). Because there are lots of things happening under the water line (changes in market interest rates from month to month, bonds being called or maturing, new bonds being purchased) you can't tie the above market dividend payment to a commensurate drop in the NAV. However, that does not mean it's not happening.

Do you really think the market would offer this "free lunch" (i.e., above market interest rate) and that not immediately be arbitraged away by professionals who are managing a lot more money, have access to better information and are a lot smarter than we are? :oops:
You are saying that the NAV drops every time a dividend is paid out.. is that what you are saying? Therefore I have less money after the dividend is paid to my bank (not reinvested), is that what you are saying? Because let's say for example; just for example.. I bought $195K of VWLUX near the middle of the year and it paid me $4,154.27 in tax-exempt dividends and I have $201,982.28 left I'm not sure how I reconcile that with your statements. As Desi used to say: Splain me Lucy.
When the fund pays a dividend at an "above market" yield, some of that dividend is return of principal (or the bond premium amortizing eventually to zero). As the bond premium amortizes down, the FMV of the bond declines as does NAV of the fund.

The increase in NAV you are referencing is due to a decline in muni "market" interest rates since the middle of last year. As rates drop, the price of bonds increases. That's a mathematical fact. It's how bonds work. Had rates remained exactly the same (assume there had been no bonds called or maturing and no bonds purchased as well), you would have seen a decline in the NAV of the fund to the extent of the amortization of the bond premium.

I provided a clear example of how this works in this thread from the spring of last year.

viewtopic.php?f=10&t=315462&p=5263977&h ... n#p5263977

I'll leave the folks reading this thread with what I said above. Does anyone really think the market would offer this "free lunch" (i.e., above market interest rate) and that not immediately be arbitraged away by professionals who are managing a lot more money, have access to better information and are a lot smarter than we are?
I'm referring to Vanguard's intermediate muni VWIUX...
I agree with MikeG62 and Grabiner that there is a "return of principal" and that the NAV does drop "under the hood".
It's hard to see the results of this because VWIUX is daily accrual...so it comes out daily and isn't apparent.
I believe that this "return of principal" is just one of the many factors that influence changes in the NAV.
I believe that recent owners of VWIUX have not seen or experienced this drop in NAV because the NAV has been mostly steady or rising over the last several years. This return of principal is not an effort of fund managers to manipulate dividends. It is a required by the government agency that makes mutual fund rules.

I see the same thing that Midareff is talking about. The NAV remains much higher than when I bought it. The dividend was 2.23% on January 4. Therefore, so far the "return of principal" that happens "under the hood" has not cost me anything.

Bottom Line:
I agree with the "under the hood" stuff. That happens. I appreciate the explanation and details by MikeG62 and Grabiner!

That under the hood stuff has not cost me anything that I can see. I'm way ahead on the NAV and I'm making over 2% a month federal tax free.

How long will this last? I have no idea where the NAV will go. I speculate that the distribution yield will slowly move towards the SEC Yield...maybe over the average duration of the fund.
MikeG62
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Re: Muni bonds for taxable account?

Post by MikeG62 »

hudson wrote: Wed Jan 13, 2021 4:36 pm
MikeG62 wrote: Wed Jan 13, 2021 11:18 am
midareff wrote: Wed Jan 13, 2021 10:43 am
MikeG62 wrote: Wed Jan 13, 2021 9:58 am
midareff wrote: Wed Jan 13, 2021 8:38 am

What I get paid every month is what I get paid. You want to keep comparing numbers that are not what is paid out, and that may be fine for you. Personally, I count what they pay me, not some number that may never actually occur. I calculate percentages based on previous months closing $$. If I am paid an annualized 2.26% tax-exempt dividend on December 31, and you are paid 1.98% and it is taxable, and you think you got a better deal with a fund Vanguard rates as the same risk that's OK with me. Stay safe amigo, I enjoy these chats we seem to always have about munis.
As has been discussed numerous times before, you are only looking at 1/2 of the return. You need to also consider the change in the NAV. Every time your muni fund pays a dividend at "above market rates" it's NAV drops by the amount of the above market element (aka the return of capital component). Because there are lots of things happening under the water line (changes in market interest rates from month to month, bonds being called or maturing, new bonds being purchased) you can't tie the above market dividend payment to a commensurate drop in the NAV. However, that does not mean it's not happening.

Do you really think the market would offer this "free lunch" (i.e., above market interest rate) and that not immediately be arbitraged away by professionals who are managing a lot more money, have access to better information and are a lot smarter than we are? :oops:
You are saying that the NAV drops every time a dividend is paid out.. is that what you are saying? Therefore I have less money after the dividend is paid to my bank (not reinvested), is that what you are saying? Because let's say for example; just for example.. I bought $195K of VWLUX near the middle of the year and it paid me $4,154.27 in tax-exempt dividends and I have $201,982.28 left I'm not sure how I reconcile that with your statements. As Desi used to say: Splain me Lucy.
When the fund pays a dividend at an "above market" yield, some of that dividend is return of principal (or the bond premium amortizing eventually to zero). As the bond premium amortizes down, the FMV of the bond declines as does NAV of the fund.

The increase in NAV you are referencing is due to a decline in muni "market" interest rates since the middle of last year. As rates drop, the price of bonds increases. That's a mathematical fact. It's how bonds work. Had rates remained exactly the same (assume there had been no bonds called or maturing and no bonds purchased as well), you would have seen a decline in the NAV of the fund to the extent of the amortization of the bond premium.

I provided a clear example of how this works in this thread from the spring of last year.

viewtopic.php?f=10&t=315462&p=5263977&h ... n#p5263977

I'll leave the folks reading this thread with what I said above. Does anyone really think the market would offer this "free lunch" (i.e., above market interest rate) and that not immediately be arbitraged away by professionals who are managing a lot more money, have access to better information and are a lot smarter than we are?
I'm referring to Vanguard's intermediate muni VWIUX...
I agree with MikeG62 and Grabiner that there is a "return of principal" and that the NAV does drop "under the hood".
It's hard to see the results of this because VWIUX is daily accrual...so it comes out daily and isn't apparent.
I believe that this "return of principal" is just one of the many factors that influence changes in the NAV.
I believe that recent owners of VWIUX have not seen or experienced this drop in NAV because the NAV has been mostly steady or rising over the last several years. This return of principal is not an effort of fund managers to manipulate dividends. It is a required by the government agency that makes mutual fund rules.

I see the same thing that Midareff is talking about. The NAV remains much higher than when I bought it. The dividend was 2.23% on January 4. Therefore, so far the "return of principal" that happens "under the hood" has not cost me anything.

Bottom Line:
I agree with the "under the hood" stuff. That happens. I appreciate the explanation and details by MikeG62 and Grabiner!

That under the hood stuff has not cost me anything that I can see. I'm way ahead on the NAV and I'm making over 2% a month federal tax free.

How long will this last? I have no idea where the NAV will go. I speculate that the distribution yield will slowly move towards the SEC Yield...maybe over the average duration of the fund.
The decreasing rate environment we've been in the last few years has created a situation where the rise in the underlying bond prices has more than offset the impact of the return of principal component of the monthly dividend payment. Had the opposite occurred (i.e., had we been in a rising rate environment) we'd be having a different discussion as both the impact of the rise in market rates and the impact of the return of principal component would drive a decrease in the NAV of the fund.

Putting a sharper pencil to this. I own a collection of several dozen individual muni bonds (each bond acquired one by one in the secondary market over a period of many years). Approximately 85% of them were purchased at a premium to PAR, 10% at PAR and 5% at a discount. In 2019, the return of principal component of my total dividends was 25% and in 2018 is was 28%. Line 8 of the 1099-INT I received from the broker included all dividends and the return of principal component was included in line 13. The net of the two numbers is what was picked up by Turbotax (from the 1099-INT I imported into TT) and included as tax exempt dividends in my Federal tax return on line 2a. This return of principal is not income - it is giving me back (amortizing) a portion of the premium I paid when I bought the bond. I've never looked at my muni bond portfolio and considered the monthly or annual coupon payments as the income i I earned during the period, because I know it is not. The same is true when the bonds are owned inside a bond fund.
Real Knowledge Comes Only From Experience
hudson
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Re: Muni bonds for taxable account?

Post by hudson »

MikeG62 wrote: Thu Jan 14, 2021 9:39 am
The decreasing rate environment we've been in the last few years has created a situation where the rise in the underlying bond prices has more than offset the impact of the return of principal component of the monthly dividend payment. Had the opposite occurred (i.e., had we been in a rising rate environment) we'd be having a different discussion as both the impact of the rise in market rates and the impact of the return of principal component would drive a decrease in the NAV of the fund.

I agree with your statement above. Thanks! Your contributions have helped me better understand how muni funds work!

Bottom Line: The stuff that happens "under the hood" has been overshadowed by falling interest rates. So for about the last 10 years, VWIUX holders have not lost any NAV; the payouts or distribution yield have been good. VWIUX holders have been happy. That's how Midareff can make the following statement:
I bought $195K of VWLUX (long muni) near the middle of the year and it paid me $4,154.27 in tax-exempt dividends and I have $201,982.28 left.


I could make a comparable statement; my investment in VWIUX (intermediate muni) has grown; the payout has been good.


Again, what will the future hold? I don't know; that's why I watch VWIUX's NAV and distribution yield/payout. If the NAV drops below my purchase price, I'll tax loss harvest. If the payout drops too far, I'll look at changing horses.

BACK TO THE OP: Jajare58 may still want to consider a muni fund in taxable at 22% marginal, if jajare58 determines that the fund placement is correct. Any muni fund buyer would do well to understand what happens "under the hood" in a muni fund. I read what Grabiner said about risks with munis and taxable bond funds. I plan to do some more research, but for now, I still believe that high quality muni funds are a good investment.
secondopinion
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Re: Muni bonds for taxable account?

Post by secondopinion »

jajare58 wrote: Sat Jan 02, 2021 7:24 pm I think am not in the high tax bracket but wanted to ask if it make sense to hold muni bonds in taxable account (since no federal tax) and total bond index fund in 401k account. Per BH principle, bonds belongs to tax-deferred account but I wanted to add some muni bonds in my taxable account at Fidelity.

State: TX, MFJ. marginal tax rate: 22%
Risk/return is the key for munis to make sense; they are safer than corporate bonds but riskier than treasuries (if you take the duration risk as constant). Before making a comparison, make sure that the muni fund do not take more risk in other ways, like duration risk or leaning towards poor credit bonds, than the taxable funds.
  • If you beat corporate bonds with after-tax returns, then focus on munis.
  • If the after-tax return is close to corporate bonds and quite a bit better than treasuries, then they are worth considering but hold some taxable bond funds regardless.
  • If after-tax returns are not even close to corporate bonds (or possibly worse than treasuries), then skip munis entirely and stay with taxable bond funds.
It is better to be half-wrong than have a 50% chance of being all-wrong. With the former, you will learn and have money to try again. Otherwise, you will never learn and will have nothing eventually.
Topic Author
jajare58
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Re: Muni bonds for taxable account?

Post by jajare58 »

grabiner wrote: Mon Jan 11, 2021 10:28 pm In a 22% bracket, I would prefer taxable bonds, which are likely to earn more after-tax than munis of comparable risk.

The important part of this statement is "comparable risk". For example, Admiral shares of Vanguard High-Yield Tax-Exempt yield 1.92%, which is more than most of Vanguard's bond funds, but that is because of the risk involved; this fund holds a bit of junk, a lot of bonds rated A and BBB, and a lot of callable bonds which will lose more than indicated by the fund's 6-year duration if rates rise. It is a fine fund if you are willing to take the risk, but in a 22% bracket, if you want to take that much risk, you would probably be better off with Vanguard Long-Term Investment-Grade with a 2.47% yield on its Admiral shares.
Thank you for the information.
Topic Author
jajare58
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Re: Muni bonds for taxable account?

Post by jajare58 »

secondopinion wrote: Thu Jan 14, 2021 1:18 pm
jajare58 wrote: Sat Jan 02, 2021 7:24 pm I think am not in the high tax bracket but wanted to ask if it make sense to hold muni bonds in taxable account (since no federal tax) and total bond index fund in 401k account. Per BH principle, bonds belongs to tax-deferred account but I wanted to add some muni bonds in my taxable account at Fidelity.

State: TX, MFJ. marginal tax rate: 22%
Risk/return is the key for munis to make sense; they are safer than corporate bonds but riskier than treasuries (if you take the duration risk as constant). Before making a comparison, make sure that the muni fund do not take more risk in other ways, like duration risk or leaning towards poor credit bonds, than the taxable funds.
  • If you beat corporate bonds with after-tax returns, then focus on munis.
  • If the after-tax return is close to corporate bonds and quite a bit better than treasuries, then they are worth considering but hold some taxable bond funds regardless.
  • If after-tax returns are not even close to corporate bonds (or possibly worse than treasuries), then skip munis entirely and stay with taxable bond funds.
Very interesting. Based on all the feedback regarding pros and cons of holding muni bonds in the taxable account, I understand that it depends on the risk tolerance, current interest rate environment and performance to determine the appropriateness of holding muni bonds in taxable account. I certainly wants to holds few k of muni bonds in taxable for the tax-free benefits but majority of my bond portfolio will be in my 401k. Muni bonds does look appealing based on the recent performance compared to other bonds. Thank you all BHs for your advice and sharing your perspective on muni bonds in taxable account.
Topic Author
jajare58
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Re: Muni bonds for taxable account?

Post by jajare58 »

hudson wrote: Thu Jan 14, 2021 10:00 am
MikeG62 wrote: Thu Jan 14, 2021 9:39 am
The decreasing rate environment we've been in the last few years has created a situation where the rise in the underlying bond prices has more than offset the impact of the return of principal component of the monthly dividend payment. Had the opposite occurred (i.e., had we been in a rising rate environment) we'd be having a different discussion as both the impact of the rise in market rates and the impact of the return of principal component would drive a decrease in the NAV of the fund.

I agree with your statement above. Thanks! Your contributions have helped me better understand how muni funds work!

Bottom Line: The stuff that happens "under the hood" has been overshadowed by falling interest rates. So for about the last 10 years, VWIUX holders have not lost any NAV; the payouts or distribution yield have been good. VWIUX holders have been happy. That's how Midareff can make the following statement:
I bought $195K of VWLUX (long muni) near the middle of the year and it paid me $4,154.27 in tax-exempt dividends and I have $201,982.28 left.



I could make a comparable statement; my investment in VWIUX (intermediate muni) has grown; the payout has been good.


Again, what will the future hold? I don't know; that's why I watch VWIUX's NAV and distribution yield/payout. If the NAV drops below my purchase price, I'll tax loss harvest. If the payout drops too far, I'll look at changing horses.

BACK TO THE OP: Jajare58 may still want to consider a muni fund in taxable at 22% marginal, if jajare58 determines that the fund placement is correct. Any muni fund buyer would do well to understand what happens "under the hood" in a muni fund. I read what Grabiner said about risks with munis and taxable bond funds. I plan to do some more research, but for now, I still believe that high quality muni funds are a good investment.
Based on all the information shared, I think I will hold small % of muni bond allocation in taxable account to compare against the taxable bond funds.
RJ5
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Re: Muni bonds for taxable account?

Post by RJ5 »

I hold Vanguard PA muni bond fund in my taxable brokerage account. The shares were inherited. I've just let it be, and all kickoffs are re-invested into the fund. I pretend that it doesn't exist, nor do I even notice it being there since I'm a PA resident so I don't pay PA tax on it either
hudson
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Re: Muni bonds for taxable account?

Post by hudson »

jajare58 wrote: Sat Jan 16, 2021 11:07 pm Based on all the information shared, I think I will hold small % of muni bond allocation in taxable account to compare against the taxable bond funds.
That's what I would do.
Sometimes you have to own something to really know it.
VWIUX...Vanguard Intermediate Muni is my favorite. BMBIX...an even safer intermediate muni fund is worth a look.
Vanguard's long muni fund would be OK if the duration matches needs.

I know that Grabiner recommends taxable bonds at the 22% bracket. I think that he said munis are much more risky than say a total bond fund; that's why he would go with taxable...total bond. I can't warm up to that. I speculate that high quality muni funds are still less risky than total bond. When I look at the holdings of total bond and VWIUX, VWIUX seems to be less risky. Taxable and Muni ratings aren't apples to apples. For example A muni ratings are considered less risky than A taxable ratings.

Total Bond: https://investor.vanguard.com/mutual-fu ... olio/vbtlx
VWIUX...intermediate muni: https://investor.vanguard.com/mutual-fu ... olio/vwiux

Total bond holders in taxable, pay federal tax; the OP would pay 22%
VWIUX holders get to keep the 22%
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Re: Muni bonds for taxable account?

Post by JonnyDVM »

willthrill81 wrote: Sat Jan 02, 2021 8:07 pm Muni bonds don't make sense in the 22% bracket.
Agreed
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