Keep VTEB vs. Switch to CA Muni even w/cap gain

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Topic Author
ma21n2
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Keep VTEB vs. Switch to CA Muni even w/cap gain

Post by ma21n2 » Thu Mar 14, 2019 12:41 am

Hello, I live in California and expect to be in 35% Fed / 9.3% CA tax brackets this year. I'm in my mid 30's and my AA is 85% stocks / 15% bonds.

I recently transferred my assets from Wealthfront to Merrill Edge (taxable). It has about $200K, and 17% of that is in VTEB (Vanguard Tax-Exempt Bond ETF). I think it's better to hold Vanguard CA Muni funds instead to avoid 9.3% CA income tax.

Unfortunately, I have about $1,000 in short term gain on VTEB. Should I:

1) sell it now (even w/$1000 short term cap gain), and switch to Vanguard CA Muni funds (which requires me to open a Vanguard brokerage account),

2) hold until November (at which point it'd be long term cap gain) and then switch,

3) hold until VTEB price drops and then switch, OR

4) keep VTEB

Thank you!

typical.investor
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Re: Keep VTEB vs. Switch to CA Muni even w/cap gain

Post by typical.investor » Thu Mar 14, 2019 12:49 am

Could you use short term losses to offset the short term gains? Anything you could sell? Emerging?

Topic Author
ma21n2
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Re: Keep VTEB vs. Switch to CA Muni even w/cap gain

Post by ma21n2 » Thu Mar 14, 2019 12:52 am

typical.investor wrote:
Thu Mar 14, 2019 12:49 am
Could you use short term losses to offset the short term gains? Anything you could sell? Emerging?
No loss to harvest at the moment. I think Wealthfront has harvested about $600 in losses this year. But I'd like to have at least $3,000 in cap loss every year, so I can offset my ordinary income.

typical.investor
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Re: Keep VTEB vs. Switch to CA Muni even w/cap gain

Post by typical.investor » Thu Mar 14, 2019 1:09 am

ma21n2 wrote:
Thu Mar 14, 2019 12:52 am
typical.investor wrote:
Thu Mar 14, 2019 12:49 am
Could you use short term losses to offset the short term gains? Anything you could sell? Emerging?
No loss to harvest at the moment. I think Wealthfront has harvested about $600 in losses this year. But I'd like to have at least $3,000 in cap loss every year, so I can offset my ordinary income.
I mean short term losses this year so you could sell ASAP without paying capital gains.

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unclescrooge
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Re: Keep VTEB vs. Switch to CA Muni even w/cap gain

Post by unclescrooge » Thu Mar 14, 2019 4:15 pm

ma21n2 wrote:
Thu Mar 14, 2019 12:41 am
Hello, I live in California and expect to be in 35% Fed / 9.3% CA tax brackets this year. I'm in my mid 30's and my AA is 85% stocks / 15% bonds.

I recently transferred my assets from Wealthfront to Merrill Edge (taxable). It has about $200K, and 17% of that is in VTEB (Vanguard Tax-Exempt Bond ETF). I think it's better to hold Vanguard CA Muni funds instead to avoid 9.3% CA income tax.

Unfortunately, I have about $1,000 in short term gain on VTEB. Should I:

1) sell it now (even w/$1000 short term cap gain), and switch to Vanguard CA Muni funds (which requires me to open a Vanguard brokerage account),

2) hold until November (at which point it'd be long term cap gain) and then switch,

3) hold until VTEB price drops and then switch, OR

4) keep VTEB

Thank you!
You have $34k in VTEB with $1,000 in capital gains.
VTEB yields 2.4%, or $816 a year.
15% of VTEB's holdings are in CA bonds, so roughly 85% of this would be taxable at 9.3%.
So you're looking at $64.5 in tax, leaving you with $752 or TEV of 2.2%

On the other hand VCTXX yields 2% or $680.

I would do NOTHING now, and nothing in the future.

Topic Author
ma21n2
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Re: Keep VTEB vs. Switch to CA Muni even w/cap gain

Post by ma21n2 » Thu Mar 14, 2019 5:28 pm

unclescrooge wrote:
Thu Mar 14, 2019 4:15 pm
ma21n2 wrote:
Thu Mar 14, 2019 12:41 am
Hello, I live in California and expect to be in 35% Fed / 9.3% CA tax brackets this year. I'm in my mid 30's and my AA is 85% stocks / 15% bonds.

I recently transferred my assets from Wealthfront to Merrill Edge (taxable). It has about $200K, and 17% of that is in VTEB (Vanguard Tax-Exempt Bond ETF). I think it's better to hold Vanguard CA Muni funds instead to avoid 9.3% CA income tax.

Unfortunately, I have about $1,000 in short term gain on VTEB. Should I:

1) sell it now (even w/$1000 short term cap gain), and switch to Vanguard CA Muni funds (which requires me to open a Vanguard brokerage account),

2) hold until November (at which point it'd be long term cap gain) and then switch,

3) hold until VTEB price drops and then switch, OR

4) keep VTEB

Thank you!
You have $34k in VTEB with $1,000 in capital gains.
VTEB yields 2.4%, or $816 a year.
15% of VTEB's holdings are in CA bonds, so roughly 85% of this would be taxable at 9.3%.
So you're looking at $64.5 in tax, leaving you with $752 or TEV of 2.2%

On the other hand VCTXX yields 2% or $680.

I would do NOTHING now, and nothing in the future.
Thank you so much for that analysis! It really helps to look at the actual numbers.
I have one follow up question -- in the future, if VTEB price goes down so there's no cap gain, would it make sense then to switch to something like VCITX (Vanguard CA Long-Term Tax Exempt Fund)? Thanks!

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unclescrooge
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Re: Keep VTEB vs. Switch to CA Muni even w/cap gain

Post by unclescrooge » Thu Mar 14, 2019 8:51 pm

ma21n2 wrote:
Thu Mar 14, 2019 5:28 pm
unclescrooge wrote:
Thu Mar 14, 2019 4:15 pm
ma21n2 wrote:
Thu Mar 14, 2019 12:41 am
Hello, I live in California and expect to be in 35% Fed / 9.3% CA tax brackets this year. I'm in my mid 30's and my AA is 85% stocks / 15% bonds.

I recently transferred my assets from Wealthfront to Merrill Edge (taxable). It has about $200K, and 17% of that is in VTEB (Vanguard Tax-Exempt Bond ETF). I think it's better to hold Vanguard CA Muni funds instead to avoid 9.3% CA income tax.

Unfortunately, I have about $1,000 in short term gain on VTEB. Should I:

1) sell it now (even w/$1000 short term cap gain), and switch to Vanguard CA Muni funds (which requires me to open a Vanguard brokerage account),

2) hold until November (at which point it'd be long term cap gain) and then switch,

3) hold until VTEB price drops and then switch, OR

4) keep VTEB

Thank you!
You have $34k in VTEB with $1,000 in capital gains.
VTEB yields 2.4%, or $816 a year.
15% of VTEB's holdings are in CA bonds, so roughly 85% of this would be taxable at 9.3%.
So you're looking at $64.5 in tax, leaving you with $752 or TEV of 2.2%

On the other hand VCTXX yields 2% or $680.

I would do NOTHING now, and nothing in the future.
Thank you so much for that analysis! It really helps to look at the actual numbers.
I have one follow up question -- in the future, if VTEB price goes down so there's no cap gain, would it make sense then to switch to something like VCITX (Vanguard CA Long-Term Tax Exempt Fund)? Thanks!
You're over thinking this.
I have 50k in SUB and I live in CA with 32% marginal tax and 9.3% state.
With the income you're generating, making an extra 75 bucks in tax free income should be the least of your worries!

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grabiner
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Re: Keep VTEB vs. Switch to CA Muni even w/cap gain

Post by grabiner » Fri Mar 15, 2019 10:42 pm

unclescrooge wrote:
Thu Mar 14, 2019 4:15 pm
You have $34k in VTEB with $1,000 in capital gains.
VTEB yields 2.4%, or $816 a year.
15% of VTEB's holdings are in CA bonds, so roughly 85% of this would be taxable at 9.3%.
So you're looking at $64.5 in tax, leaving you with $752 or TEV of 2.2%

On the other hand VCTXX yields 2% or $680.

I would do NOTHING now, and nothing in the future.
This is not a fair comparison. VCTXX (CA Money Market) is less risky than VTEB (Tax-Exempt Bond Index). A CA fund with the same risk as VTEB would have the same 2.40% yield on Admiral shares; this would be somewhere between the CA intermediate-term (2.11%) and long-term (2.59%).

So, at the same risk level, you would save 0.22% per year in CA state tax. It is worth waiting for the capital gain to become long-term, because the current tax on the gain is 48.1% (including Net Investment Income tax), while it will drop to 28.1% when it becomes long-term; that is a savings of 1.2% if the gain is 6%.
Wiki David Grabiner

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unclescrooge
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Re: Keep VTEB vs. Switch to CA Muni even w/cap gain

Post by unclescrooge » Sat Mar 16, 2019 1:47 am

grabiner wrote:
Fri Mar 15, 2019 10:42 pm
unclescrooge wrote:
Thu Mar 14, 2019 4:15 pm
You have $34k in VTEB with $1,000 in capital gains.
VTEB yields 2.4%, or $816 a year.
15% of VTEB's holdings are in CA bonds, so roughly 85% of this would be taxable at 9.3%.
So you're looking at $64.5 in tax, leaving you with $752 or TEV of 2.2%

On the other hand VCTXX yields 2% or $680.

I would do NOTHING now, and nothing in the future.
This is not a fair comparison. VCTXX (CA Money Market) is less risky than VTEB (Tax-Exempt Bond Index). A CA fund with the same risk as VTEB would have the same 2.40% yield on Admiral shares; this would be somewhere between the CA intermediate-term (2.11%) and long-term (2.59%).

So, at the same risk level, you would save 0.22% per year in CA state tax. It is worth waiting for the capital gain to become long-term, because the current tax on the gain is 48.1% (including Net Investment Income tax), while it will drop to 28.1% when it becomes long-term; that is a savings of 1.2% if the gain is 6%.
You are right, I meant VCAIX, which is a comparable fund. According to morningstar the SEC yield is 2%.

VCTXX yield is only 1.27%.

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ma21n2
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Re: Keep VTEB vs. Switch to CA Muni even w/cap gain

Post by ma21n2 » Sat Mar 16, 2019 2:12 am

unclescrooge wrote:
Sat Mar 16, 2019 1:47 am
grabiner wrote:
Fri Mar 15, 2019 10:42 pm
unclescrooge wrote:
Thu Mar 14, 2019 4:15 pm
You have $34k in VTEB with $1,000 in capital gains.
VTEB yields 2.4%, or $816 a year.
15% of VTEB's holdings are in CA bonds, so roughly 85% of this would be taxable at 9.3%.
So you're looking at $64.5 in tax, leaving you with $752 or TEV of 2.2%

On the other hand VCTXX yields 2% or $680.

I would do NOTHING now, and nothing in the future.
This is not a fair comparison. VCTXX (CA Money Market) is less risky than VTEB (Tax-Exempt Bond Index). A CA fund with the same risk as VTEB would have the same 2.40% yield on Admiral shares; this would be somewhere between the CA intermediate-term (2.11%) and long-term (2.59%).

So, at the same risk level, you would save 0.22% per year in CA state tax. It is worth waiting for the capital gain to become long-term, because the current tax on the gain is 48.1% (including Net Investment Income tax), while it will drop to 28.1% when it becomes long-term; that is a savings of 1.2% if the gain is 6%.
You are right, I meant VCAIX, which is a comparable fund. According to morningstar the SEC yield is 2%.

VCTXX yield is only 1.27%.
If I’m getting this right, I actually have a higher after-tax return on VTEB than VCAIX (which has a comparable duration), right? Thanks!

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Re: Keep VTEB vs. Switch to CA Muni even w/cap gain

Post by grabiner » Sat Mar 16, 2019 8:48 am

ma21n2 wrote:
Sat Mar 16, 2019 2:12 am
unclescrooge wrote:
Sat Mar 16, 2019 1:47 am
grabiner wrote:
Fri Mar 15, 2019 10:42 pm
This is not a fair comparison. VCTXX (CA Money Market) is less risky than VTEB (Tax-Exempt Bond Index). A CA fund with the same risk as VTEB would have the same 2.40% yield on Admiral shares; this would be somewhere between the CA intermediate-term (2.11%) and long-term (2.59%).

So, at the same risk level, you would save 0.22% per year in CA state tax. It is worth waiting for the capital gain to become long-term, because the current tax on the gain is 48.1% (including Net Investment Income tax), while it will drop to 28.1% when it becomes long-term; that is a savings of 1.2% if the gain is 6%.
You are right, I meant VCAIX, which is a comparable fund. According to morningstar the SEC yield is 2%.

VCTXX yield is only 1.27%.
If I’m getting this right, I actually have a higher after-tax return on VTEB than VCAIX (which has a comparable duration), right? Thanks!
You would get a higher after-tax yield, but there are several components to a yield difference.

One is that VCAIX has higher expenses; if you have $50K, you can use the Admiral class VCADX and save 0.10%. This is an advantage for VTEB, which is an ETF with Admiral-level expenses.

The second is that duration is an incomplete model of interest-rate risk. Most municipal bonds are callable, and that has a larger effect on VTEB, which holds many bonds with very long terms. If rates rise, callable bonds will be less likely to be called, increasing their duration. Thus VTEB will lose significantly more than VCAIX/VCADX if rates rise substantially. (This is also why the "long-term" muni funds with a 7-year duration yield so much more than the "intermediate-term" funds with a 5-year duration; rising rates might move those numbers to 10 and 6.)

A third factor is bond quality, but these two funds hold bonds of comparable quality.

Since there is a trade-off between return and risk, it makes more sense to assume that risk is fairly priced, and compare the return of portfolios having bonds of equal yield. VTEB has 0.08% expenses, so its bonds yield 2.48%. A combination of the two CA funds holding bonds with a 2.48% yield would have a 2.39% yield on Admiral shares, and 2.29% on Investor shares. So, at the same risk level, the CA funds would have a higher after-tax yield.

However, the higher expenses cut that difference in half, so it isn't worth selling VTEB for a capital gain to make the switch.
Wiki David Grabiner

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ma21n2
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Re: Keep VTEB vs. Switch to CA Muni even w/cap gain

Post by ma21n2 » Sun Mar 17, 2019 7:27 pm

grabiner wrote:
Sat Mar 16, 2019 8:48 am
ma21n2 wrote:
Sat Mar 16, 2019 2:12 am
unclescrooge wrote:
Sat Mar 16, 2019 1:47 am
grabiner wrote:
Fri Mar 15, 2019 10:42 pm
This is not a fair comparison. VCTXX (CA Money Market) is less risky than VTEB (Tax-Exempt Bond Index). A CA fund with the same risk as VTEB would have the same 2.40% yield on Admiral shares; this would be somewhere between the CA intermediate-term (2.11%) and long-term (2.59%).

So, at the same risk level, you would save 0.22% per year in CA state tax. It is worth waiting for the capital gain to become long-term, because the current tax on the gain is 48.1% (including Net Investment Income tax), while it will drop to 28.1% when it becomes long-term; that is a savings of 1.2% if the gain is 6%.
You are right, I meant VCAIX, which is a comparable fund. According to morningstar the SEC yield is 2%.

VCTXX yield is only 1.27%.
If I’m getting this right, I actually have a higher after-tax return on VTEB than VCAIX (which has a comparable duration), right? Thanks!
You would get a higher after-tax yield, but there are several components to a yield difference.

One is that VCAIX has higher expenses; if you have $50K, you can use the Admiral class VCADX and save 0.10%. This is an advantage for VTEB, which is an ETF with Admiral-level expenses.

The second is that duration is an incomplete model of interest-rate risk. Most municipal bonds are callable, and that has a larger effect on VTEB, which holds many bonds with very long terms. If rates rise, callable bonds will be less likely to be called, increasing their duration. Thus VTEB will lose significantly more than VCAIX/VCADX if rates rise substantially. (This is also why the "long-term" muni funds with a 7-year duration yield so much more than the "intermediate-term" funds with a 5-year duration; rising rates might move those numbers to 10 and 6.)

A third factor is bond quality, but these two funds hold bonds of comparable quality.

Since there is a trade-off between return and risk, it makes more sense to assume that risk is fairly priced, and compare the return of portfolios having bonds of equal yield. VTEB has 0.08% expenses, so its bonds yield 2.48%. A combination of the two CA funds holding bonds with a 2.48% yield would have a 2.39% yield on Admiral shares, and 2.29% on Investor shares. So, at the same risk level, the CA funds would have a higher after-tax yield.

However, the higher expenses cut that difference in half, so it isn't worth selling VTEB for a capital gain to make the switch.
Thank you! I had assumed expense ratio was already taken into account in calculating the 30-day SEC yield, but it sounds like it is not.

typical.investor
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Re: Keep VTEB vs. Switch to CA Muni even w/cap gain

Post by typical.investor » Sun Mar 17, 2019 7:43 pm

ma21n2 wrote:
Sun Mar 17, 2019 7:27 pm
grabiner wrote:
Sat Mar 16, 2019 8:48 am
ma21n2 wrote:
Sat Mar 16, 2019 2:12 am
unclescrooge wrote:
Sat Mar 16, 2019 1:47 am
grabiner wrote:
Fri Mar 15, 2019 10:42 pm
This is not a fair comparison. VCTXX (CA Money Market) is less risky than VTEB (Tax-Exempt Bond Index). A CA fund with the same risk as VTEB would have the same 2.40% yield on Admiral shares; this would be somewhere between the CA intermediate-term (2.11%) and long-term (2.59%).

So, at the same risk level, you would save 0.22% per year in CA state tax. It is worth waiting for the capital gain to become long-term, because the current tax on the gain is 48.1% (including Net Investment Income tax), while it will drop to 28.1% when it becomes long-term; that is a savings of 1.2% if the gain is 6%.
You are right, I meant VCAIX, which is a comparable fund. According to morningstar the SEC yield is 2%.

VCTXX yield is only 1.27%.
If I’m getting this right, I actually have a higher after-tax return on VTEB than VCAIX (which has a comparable duration), right? Thanks!
You would get a higher after-tax yield, but there are several components to a yield difference.

One is that VCAIX has higher expenses; if you have $50K, you can use the Admiral class VCADX and save 0.10%. This is an advantage for VTEB, which is an ETF with Admiral-level expenses.

The second is that duration is an incomplete model of interest-rate risk. Most municipal bonds are callable, and that has a larger effect on VTEB, which holds many bonds with very long terms. If rates rise, callable bonds will be less likely to be called, increasing their duration. Thus VTEB will lose significantly more than VCAIX/VCADX if rates rise substantially. (This is also why the "long-term" muni funds with a 7-year duration yield so much more than the "intermediate-term" funds with a 5-year duration; rising rates might move those numbers to 10 and 6.)

A third factor is bond quality, but these two funds hold bonds of comparable quality.

Since there is a trade-off between return and risk, it makes more sense to assume that risk is fairly priced, and compare the return of portfolios having bonds of equal yield. VTEB has 0.08% expenses, so its bonds yield 2.48%. A combination of the two CA funds holding bonds with a 2.48% yield would have a 2.39% yield on Admiral shares, and 2.29% on Investor shares. So, at the same risk level, the CA funds would have a higher after-tax yield.

However, the higher expenses cut that difference in half, so it isn't worth selling VTEB for a capital gain to make the switch.
Thank you! I had assumed expense ratio was already taken into account in calculating the 30-day SEC yield, but it sounds like it is not.
I believe the expense ration is taken into account when calculating the 30-day SEC yield.

The point was about risk. If two bond funds have the same 30-day SEC Yield, and one of them has a much higher ER, it means that the fund with the higher ER is riskier -- it simply must be holding riskier (and higher yielding) bonds in order to arrive at the same 30-day SEC Yield as the fund with a lower ER.

Topic Author
ma21n2
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Re: Keep VTEB vs. Switch to CA Muni even w/cap gain

Post by ma21n2 » Sun Mar 17, 2019 8:30 pm

typical.investor wrote:
Sun Mar 17, 2019 7:43 pm
ma21n2 wrote:
Sun Mar 17, 2019 7:27 pm
grabiner wrote:
Sat Mar 16, 2019 8:48 am
ma21n2 wrote:
Sat Mar 16, 2019 2:12 am
unclescrooge wrote:
Sat Mar 16, 2019 1:47 am

You are right, I meant VCAIX, which is a comparable fund. According to morningstar the SEC yield is 2%.

VCTXX yield is only 1.27%.
If I’m getting this right, I actually have a higher after-tax return on VTEB than VCAIX (which has a comparable duration), right? Thanks!
You would get a higher after-tax yield, but there are several components to a yield difference.

One is that VCAIX has higher expenses; if you have $50K, you can use the Admiral class VCADX and save 0.10%. This is an advantage for VTEB, which is an ETF with Admiral-level expenses.

The second is that duration is an incomplete model of interest-rate risk. Most municipal bonds are callable, and that has a larger effect on VTEB, which holds many bonds with very long terms. If rates rise, callable bonds will be less likely to be called, increasing their duration. Thus VTEB will lose significantly more than VCAIX/VCADX if rates rise substantially. (This is also why the "long-term" muni funds with a 7-year duration yield so much more than the "intermediate-term" funds with a 5-year duration; rising rates might move those numbers to 10 and 6.)

A third factor is bond quality, but these two funds hold bonds of comparable quality.

Since there is a trade-off between return and risk, it makes more sense to assume that risk is fairly priced, and compare the return of portfolios having bonds of equal yield. VTEB has 0.08% expenses, so its bonds yield 2.48%. A combination of the two CA funds holding bonds with a 2.48% yield would have a 2.39% yield on Admiral shares, and 2.29% on Investor shares. So, at the same risk level, the CA funds would have a higher after-tax yield.

However, the higher expenses cut that difference in half, so it isn't worth selling VTEB for a capital gain to make the switch.
Thank you! I had assumed expense ratio was already taken into account in calculating the 30-day SEC yield, but it sounds like it is not.
I believe the expense ration is taken into account when calculating the 30-day SEC yield.

The point was about risk. If two bond funds have the same 30-day SEC Yield, and one of them has a much higher ER, it means that the fund with the higher ER is riskier -- it simply must be holding riskier (and higher yielding) bonds in order to arrive at the same 30-day SEC Yield as the fund with a lower ER.
Ahhh, I got it now. Thanks for the clarification. But doesn't the market also take into account of the fact that CA munis are CA income tax exempt, and thus the yield of CA munis would be lower than the yield for non-CA munis with a similar risk? (if so, I'd need to compare my CA income tax rate with the yield difference b/w national and CA munis? this is making my head spin....)

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grabiner
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Re: Keep VTEB vs. Switch to CA Muni even w/cap gain

Post by grabiner » Sun Mar 17, 2019 8:53 pm

ma21n2 wrote:
Sun Mar 17, 2019 8:30 pm
Ahhh, I got it now. Thanks for the clarification. But doesn't the market also take into account of the fact that CA munis are CA income tax exempt, and thus the yield of CA munis would be lower than the yield for non-CA munis with a similar risk? (if so, I'd need to compare my CA income tax rate with the yield difference b/w national and CA munis? this is making my head spin....)
I don't expect this to be much of an effect. CA munis are CA tax-exempt, which makes them more attractive for CA investors. On the other hand, the same is true for munis from 42 other states (excluding the seven with no income tax); smaller states have fewer investors who might buy their munis, but they also have fewer munis to sell. If there were a substantial difference, it would be that FL and TX munis have higher yields because they get no benefit from a tax exemption anywhere.
Wiki David Grabiner

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tooluser
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Re: Keep VTEB vs. Switch to CA Muni even w/cap gain

Post by tooluser » Sun Mar 17, 2019 9:36 pm

unclescrooge wrote:
Sat Mar 16, 2019 1:47 am
15% of VTEB's holdings are in CA bonds, so roughly 85% of this would be taxable at 9.3%.
Be aware of the California 50% rule for in/out of state investment mixes. As far as I can tell, VTEB California holdings are not deductible in the state of California because the earnings from the fund are less than 50% from CA bonds. There is a lawsuit about this, Ronald and Pamela Mass v. Franchise Tax Board.

However, the last I looked - and this may not hold true for all time periods or in any tax bracket but my own - VTEB without the CA tax exemption paid a higher yield than VCAIX with it.
"Budget: A mathematical confirmation of your suspicions” is a jocular quotation that was credited to A. A. Lattimer in 1949. Nothing else is known about the author besides this quotation.

jbranx
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Re: Keep VTEB vs. Switch to CA Muni even w/cap gain

Post by jbranx » Sun Mar 17, 2019 9:50 pm

Morningstar's tax calculator is an easy way to determine the effective tax yields on munis; I've chosen mostly VTEB because the state munis in states where I've lived have either higher ERs or the bonds are always overpriced and yield less because they are popular.

Link to the bond calculator:

https://screen.morningstar.com/BondCalc ... alent.html

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