Muni bonds in taxable

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theorist
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Muni bonds in taxable

Post by theorist »

Hello:

I have a growing taxable account which I’ve been keeping at a 70/30 allocation between stocks and bonds. (I mirror the allocation in accounts — this is a choice one needn’t make, but I have for some kind of simplicity.) The bonds are

50% intermediate term tax exempt
50% California intermediate term tax exempt

I have been reading in many articles — eg the Wall Street Journal today — that muni bonds may face a challenging environment. I’m looking for advice about possible courses of action:

1) do nothing. Keep investing in the muni funds as I’d planned. This is my current inclination.

2) reallocate away from CA muni bonds to the national fund to lower state specific risk.

3) hold taxable bonds instead — low bond yields mean this isn’t as bad in taxable accounts as it normally would be. Eg switch some or all munis to VBTLX.

4) lower bond fraction due to low rates, and lower muni allocation to 25% or 20% instead of 30%. This is my least favorite option, but is something I’ve seen discussed in many articles and threads here as an option worth entertaining.

Comments on options welcome! The taxable account is a small fraction of holdings now but is growing at 100k per year or more, so I want to be smart about what I do here.
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beyou
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Re: Muni bonds in taxable

Post by beyou »

I have been concerned about impact of economy on state, I went to taxable bonds in my taxable portfolio. Definitely traded yield vs risk.
LFT_PFT
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Re: Muni bonds in taxable

Post by LFT_PFT »

I did something similar to your 4th consideration. Lowered allocation to muni's. Rather than adding more taxable bonds to portfolio, added some CD's to the portfolio. Don't like adding another account to the mix, but wanted to lower the muni holdings.
hitchman
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Re: Muni bonds in taxable

Post by hitchman »

Hello theorist,

I deal in munis all day long. I have a few responses to your questions.

1) This is your best option. Municipal budgets will be challenged, but cities and towns across the country are not going to just collapse. Many city bonds are backed by property and sales taxes, and, depending on the locale, property values are high (and rising) and sales taxes receipts are steady. The same can be said for county and state bonds. In general (and this is very general), just about any state GO is safe, ex. IL, CT, KY, NJ. Those states are saddled with rising taxes and unsustainable pension expenses.

2) CA munis are some of the more expensive bonds, due to the recent economic prosperity the state has enjoyed (pre-covid). I assume that you live in CA, because you are buying those bonds for exemption. In that case, I would look for strong issuers, with high resident wealth and strong diversity of taxpayers. You can diversify state risk, but then the exemption benefit is likely reduced.

3) As for credit risk, there is no difference between exempt and taxable bonds. Many times, a bond issuance has exempt and taxable portions, because there are limits on exempt issuance and uses of exempt bond proceeds.

4) Rates right now are historically low. I can't get a sense of your investment timeline, but I wouldn't want to load up on 20-30 yr bonds at sub 3% (though where else would you go?)

Here are some of my own thoughts.

1) Munis have absurdly low default levels. Shockingly low. Now, we're in unprecedented times, but still, high quality muni bonds are an incredible option for "safe income". For example, there has never, ever, been a municipal default due to a natural disaster.
2) That doesn't mean a "well-run, affluent" issuer can't have problems. See Orange County. A lot of the derivatives that got OC into trouble are no longer used, though.
3) If you do want to keep your allocation to munis, I would look at shorter points on the curve. The increased yield pick up to go from 20yr to 30yr maturities isn't worth locking up your money at these rates for another 10 years.
4) Muni "safe havens" include public utilities, state GOs, and higher quality public and private universities (you know the names and systems). In CA, the Cal system and Stanford are both excellent choices. Obviously, these safe havens come with tighter spreads.
5) Riskier subsectors include rural hospitals, any bond backed with tourism taxes (hotel taxes, TIF districts, etc.), and continuing care facilities (retirement homes).

These are appropriately broad and high level responses, because there is some important information missing in your question. However, I think they apply to just about anyone. In my opinion, munis offer safety almost equivalent to treasuries, but with an extra point or so of return, depending on quality and tenor.

I hope this helps, and I'll check back to see if there are any more questions.

Hitchman
BogleFan510
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Re: Muni bonds in taxable

Post by BogleFan510 »

Good post above.

One thing to remember is that unless your bond is uncallable (rare), 20 and 30 year bonds are most likely called at 10 years, should rates stay low or drop further, so creating a lifelong tax free income stream is challenging. We had a sweet portfolio of 30 year CA tax free bonds, bought directly at discounts, with intention to hold 30 years (around 2008). Almost all have been called at par shortly after the 10 year minimum pay periods. Reinvesting from 8% ytm (they were lower investment grade by choice, for best spot on yield curve) to 2% ytm was pretty unattractive. Still have a smaller amount in a CA tax free muni bond fund in taxible, but yields are pretty disappointing.

Guess we should be spending to stimulate the economy, as the low rates are intended to encourage.
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theorist
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Re: Muni bonds in taxable

Post by theorist »

hitchman wrote: Fri Nov 06, 2020 12:59 pm Hello theorist,

I deal in munis all day long. I have a few responses to your questions.

1) This is your best option. Municipal budgets will be challenged, but cities and towns across the country are not going to just collapse. Many city bonds are backed by property and sales taxes, and, depending on the locale, property values are high (and rising) and sales taxes receipts are steady. The same can be said for county and state bonds. In general (and this is very general), just about any state GO is safe, ex. IL, CT, KY, NJ. Those states are saddled with rising taxes and unsustainable pension expenses.

2) CA munis are some of the more expensive bonds, due to the recent economic prosperity the state has enjoyed (pre-covid). I assume that you live in CA, because you are buying those bonds for exemption. In that case, I would look for strong issuers, with high resident wealth and strong diversity of taxpayers. You can diversify state risk, but then the exemption benefit is likely reduced.

3) As for credit risk, there is no difference between exempt and taxable bonds. Many times, a bond issuance has exempt and taxable portions, because there are limits on exempt issuance and uses of exempt bond proceeds.

4) Rates right now are historically low. I can't get a sense of your investment timeline, but I wouldn't want to load up on 20-30 yr bonds at sub 3% (though where else would you go?)

Here are some of my own thoughts.

1) Munis have absurdly low default levels. Shockingly low. Now, we're in unprecedented times, but still, high quality muni bonds are an incredible option for "safe income". For example, there has never, ever, been a municipal default due to a natural disaster.
2) That doesn't mean a "well-run, affluent" issuer can't have problems. See Orange County. A lot of the derivatives that got OC into trouble are no longer used, though.
3) If you do want to keep your allocation to munis, I would look at shorter points on the curve. The increased yield pick up to go from 20yr to 30yr maturities isn't worth locking up your money at these rates for another 10 years.
4) Muni "safe havens" include public utilities, state GOs, and higher quality public and private universities (you know the names and systems). In CA, the Cal system and Stanford are both excellent choices. Obviously, these safe havens come with tighter spreads.
5) Riskier subsectors include rural hospitals, any bond backed with tourism taxes (hotel taxes, TIF districts, etc.), and continuing care facilities (retirement homes).

These are appropriately broad and high level responses, because there is some important information missing in your question. However, I think they apply to just about anyone. In my opinion, munis offer safety almost equivalent to treasuries, but with an extra point or so of return, depending on quality and tenor.

I hope this helps, and I'll check back to see if there are any more questions.

Hitchman
Thanks to all responders! The above is a particularly detailed and useful response from an evident expert. I can provide some of the missing info you brought up, hitchman:

— yes, I am a CA resident.

— timeframe over which I’ll still be adding funds, and not withdrawing, is most likely at least 15-20 years (though we all know what Yogi Berra said about prediction).

— The fund I’ve been using (I haven’t chosen individual issuers) for my CA munis has a 4.80 year average duration, and is purportedly investing in high quality bonds — 8% AAA, 72% AA, 12% A grade bonds, for instance.

Based on what you advised above, I’m guessing you’ll say “tune out the noise and stick with your plan.”

Thanks!
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Toons
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Re: Muni bonds in taxable

Post by Toons »

do nothing. Keep investing in the muni funds as I’d planned. This is my current inclination.

That is what I am doing
Purchased More Intermediate Term Exempt today
Regarding the pundits
I pay no attention.
"Stick To The Plan"

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Re: Muni bonds in taxable

Post by grabiner »

theorist wrote: Fri Nov 06, 2020 12:22 pm 50% intermediate term tax exempt
50% California intermediate term tax exempt
My preference is 50% Vanguard Limited-Term Tax-Exempt, and 50% Vanguard CA Long-Term Tax-Exempt. This still gives you an intermediate-term duration with half the bonds in CA, but more than half the interest is exempt from CA tax.
I have been reading in many articles — eg the Wall Street Journal today — that muni bonds may face a challenging environment.
Bond investors already know that, and they price bonds accordingly. The current yield on Admiral shares of Vanguard Intermediate-Term Tax-Exempt is about the same as on Total Bond Market; this is a risk premium, as the munis have a higher yield after tax.
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Dandy
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Re: Muni bonds in taxable

Post by Dandy »

Think fixed income vs "bonds". FDIC products should be considered. Rates are low but risk is also -- so some allocation to FDIC products won't generate much of a tax burden. I have a decent allocation to muni's but prefer not adding to it in this Covid environment which almost everyone agrees is going to get worse before it gets better. States are hurting for tax revenue and that might take awhile to resolve.
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Re: Muni bonds in taxable

Post by steve roy »

We had a sizable bond allotment in our taxable account, all of it tax exempt. When COVID-19 hit, we moved everything to Treasuries, opting for safety. The Fed is backstopping Munis right now, but we're staying in Treasuries and taking the tax consequences.
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Re: Muni bonds in taxable

Post by Outer Marker »

theorist wrote: Fri Nov 06, 2020 12:22 pm I have a growing taxable account which I’ve been keeping at a 70/30 allocation between stocks and bonds. (I mirror the allocation in accounts — this is a choice one needn’t make, but I have for some kind of simplicity.)

Comments on options welcome! The taxable account is a small fraction of holdings now but is growing at 100k per year or more, so I want to be smart about what I do here.
The decision to mirror asset your allocation across all accounts is a potentially costly mistake. You're foregoing better fixed income options in tax-advantaged accounts as well as favorable treatment of long term capital gains and somewhat limiting the ability to tax loss harvest that is facilitated by keeping 100% equities in taxable. Filling your Roth with 30% bonds is also likely costing you. Once you do the initial math and set up a spreadsheet, managing across all accounts is just as easy, if not easier, than rebalancing each account separately. I would rethink this fundamental aspect of your portfolio. Taxes are one of the few things we can control. See, https://www.bogleheads.org/wiki/Tax-eff ... _placement
hitchman
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Re: Muni bonds in taxable

Post by hitchman »

steve roy wrote: Sat Nov 07, 2020 10:43 pm We had a sizable bond allotment in our taxable account, all of it tax exempt. When COVID-19 hit, we moved everything to Treasuries, opting for safety. The Fed is backstopping Munis right now, but we're staying in Treasuries and taking the tax consequences.
This is not exactly true. The Fed did introduce the Municipal Liquidity Program, but the penalty to tap funds in the program is very steep and all but the worst issuers will do far better in the capital markets. To date, only the State of Illinois and the New York Metro Transit Agency have gone to the Fed window for support.

I would caution all of you to not read too much into the headlines you see regarding municipal bonds. They make for some very clickable stories. In my opinion, given the amazingly low rate of municipal defaults, I would be looking for opportunities to buy more. Yes, rates are historically low, but you can still pick up 100bps against treasuries without doing much in the way of screening.

As for those low defaults, there have been some highly publicized problems (Detroit, Stockton, CA and Orange County, CA), but the vast majority of the still incredibly small number of defaults are for "business-like" municipal issuers. Think retirement communities, ethanol plants, public/private partnerships, etc. States, counties, and cities basically have to balance their budgets each year, and the bonds they issue to raise capital almost always come with reserve fund and debt service reserve covenants. At least in the highest quality (BBB+ and higher) bonds.

As mentioned, don't be so quick to move out of your munis. If anything, you're probably just selling at depressed prices.

My $.02.

Hitchman
MikeG62
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Re: Muni bonds in taxable

Post by MikeG62 »

hitchman wrote: Thu Nov 19, 2020 9:02 pm
steve roy wrote: Sat Nov 07, 2020 10:43 pm We had a sizable bond allotment in our taxable account, all of it tax exempt. When COVID-19 hit, we moved everything to Treasuries, opting for safety. The Fed is backstopping Munis right now, but we're staying in Treasuries and taking the tax consequences.
This is not exactly true. The Fed did introduce the Municipal Liquidity Program, but the penalty to tap funds in the program is very steep and all but the worst issuers will do far better in the capital markets. To date, only the State of Illinois and the New York Metro Transit Agency have gone to the Fed window for support.

I would caution all of you to not read too much into the headlines you see regarding municipal bonds. They make for some very clickable stories. In my opinion, given the amazingly low rate of municipal defaults, I would be looking for opportunities to buy more. Yes, rates are historically low, but you can still pick up 100bps against treasuries without doing much in the way of screening.

As for those low defaults, there have been some highly publicized problems (Detroit, Stockton, CA and Orange County, CA), but the vast majority of the still incredibly small number of defaults are for "business-like" municipal issuers. Think retirement communities, ethanol plants, public/private partnerships, etc. States, counties, and cities basically have to balance their budgets each year, and the bonds they issue to raise capital almost always come with reserve fund and debt service reserve covenants. At least in the highest quality (BBB+ and higher) bonds.

As mentioned, don't be so quick to move out of your munis. If anything, you're probably just selling at depressed prices.

My $.02.

Hitchman
Excellent advice from someone whose career has them living in this space.
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Hogan773
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Re: Muni bonds in taxable

Post by Hogan773 »

This is a relevant thread for me

Slightly different question for me....I have several hundred K sitting in Tax Exempt Money Mkt Fund Admiral. I also have similar chunks in High Yield Tax Exempt and Intermediate Term Tax Exempt. Through last year I was holding a good chunk in the MMF as it was paying out 1.3 to 1.5% pretax and I thought rates could rise, and also I liked having some dry powder to invest in case stock market stumbled.

I haven’t looked at things since February and now I see that the MMF is basically paying NOTHING again. So my question is, move EVERYTHING into a combo of the High Yield Tax Exempt and Intermediate Term Tax Exempt? Or should I be in one more than the other? I know lots of people on here knee jerk respond that “High Yield” is bad and risky and carries equity like returns in a downturn, but I feel like the High Yield TAX EXEMPT underlying bonds are much less risky than High Yield CORPORATE bonds and so I am okay grabbing for more yield by holding that fund. I just woke up to saying wow, I have several hundred thousand that is missing out each month on distributions of a couple percentage points pretax, so I am losing out on real money income every month and feel I should fix that “leak” in my portfolio. I am in max tax bracket so feel that Tax Exempt yields are worth it vs taxable corporate.

What do you think?
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Re: Muni bonds in taxable

Post by MikeG62 »

Hogan773 wrote: Fri Nov 20, 2020 7:09 pm This is a relevant thread for me

Slightly different question for me....I have several hundred K sitting in Tax Exempt Money Mkt Fund Admiral. I also have similar chunks in High Yield Tax Exempt and Intermediate Term Tax Exempt. Through last year I was holding a good chunk in the MMF as it was paying out 1.3 to 1.5% pretax and I thought rates could rise, and also I liked having some dry powder to invest in case stock market stumbled.

I haven’t looked at things since February and now I see that the MMF is basically paying NOTHING again. So my question is, move EVERYTHING into a combo of the High Yield Tax Exempt and Intermediate Term Tax Exempt? Or should I be in one more than the other? I know lots of people on here knee jerk respond that “High Yield” is bad and risky and carries equity like returns in a downturn, but I feel like the High Yield TAX EXEMPT underlying bonds are much less risky than High Yield CORPORATE bonds and so I am okay grabbing for more yield by holding that fund. I just woke up to saying wow, I have several hundred thousand that is missing out each month on distributions of a couple percentage points pretax, so I am losing out on real money income every month and feel I should fix that “leak” in my portfolio. I am in max tax bracket so feel that Tax Exempt yields are worth it vs taxable corporate.

What do you think?
I'd definitely get the funds out of the MMF.

Whether or how you split between the two other tax exempt funds is your call. No one here can predict which will be better going forward over the long term (or your investing horizon). For that reason, a 50/50+/- split is not a horrible idea.
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Hogan773
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Re: Muni bonds in taxable

Post by Hogan773 »

MikeG62 wrote: Sat Nov 21, 2020 9:12 am
Hogan773 wrote: Fri Nov 20, 2020 7:09 pm This is a relevant thread for me

Slightly different question for me....I have several hundred K sitting in Tax Exempt Money Mkt Fund Admiral. I also have similar chunks in High Yield Tax Exempt and Intermediate Term Tax Exempt. Through last year I was holding a good chunk in the MMF as it was paying out 1.3 to 1.5% pretax and I thought rates could rise, and also I liked having some dry powder to invest in case stock market stumbled.

I haven’t looked at things since February and now I see that the MMF is basically paying NOTHING again. So my question is, move EVERYTHING into a combo of the High Yield Tax Exempt and Intermediate Term Tax Exempt? Or should I be in one more than the other? I know lots of people on here knee jerk respond that “High Yield” is bad and risky and carries equity like returns in a downturn, but I feel like the High Yield TAX EXEMPT underlying bonds are much less risky than High Yield CORPORATE bonds and so I am okay grabbing for more yield by holding that fund. I just woke up to saying wow, I have several hundred thousand that is missing out each month on distributions of a couple percentage points pretax, so I am losing out on real money income every month and feel I should fix that “leak” in my portfolio. I am in max tax bracket so feel that Tax Exempt yields are worth it vs taxable corporate.

What do you think?
I'd definitely get the funds out of the MMF.

Whether or how you split between the two other tax exempt funds is your call. No one here can predict which will be better going forward over the long term (or your investing horizon). For that reason, a 50/50+/- split is not a horrible idea.
Thanks

So you aren’t necessarily scared of having too much in the High Yield Tax Exempt. I know lots of posters on here treat that one like the plague but I figure it isn’t excessively risky. I guess my question is between the two, is one inherently better or is it just more yield for more potential risk simple as that
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Re: Muni bonds in taxable

Post by MikeG62 »

Hogan773 wrote: Sat Nov 21, 2020 9:30 am
MikeG62 wrote: Sat Nov 21, 2020 9:12 am
Hogan773 wrote: Fri Nov 20, 2020 7:09 pm This is a relevant thread for me

Slightly different question for me....I have several hundred K sitting in Tax Exempt Money Mkt Fund Admiral. I also have similar chunks in High Yield Tax Exempt and Intermediate Term Tax Exempt. Through last year I was holding a good chunk in the MMF as it was paying out 1.3 to 1.5% pretax and I thought rates could rise, and also I liked having some dry powder to invest in case stock market stumbled.

I haven’t looked at things since February and now I see that the MMF is basically paying NOTHING again. So my question is, move EVERYTHING into a combo of the High Yield Tax Exempt and Intermediate Term Tax Exempt? Or should I be in one more than the other? I know lots of people on here knee jerk respond that “High Yield” is bad and risky and carries equity like returns in a downturn, but I feel like the High Yield TAX EXEMPT underlying bonds are much less risky than High Yield CORPORATE bonds and so I am okay grabbing for more yield by holding that fund. I just woke up to saying wow, I have several hundred thousand that is missing out each month on distributions of a couple percentage points pretax, so I am losing out on real money income every month and feel I should fix that “leak” in my portfolio. I am in max tax bracket so feel that Tax Exempt yields are worth it vs taxable corporate.

What do you think?
I'd definitely get the funds out of the MMF.

Whether or how you split between the two other tax exempt funds is your call. No one here can predict which will be better going forward over the long term (or your investing horizon). For that reason, a 50/50+/- split is not a horrible idea.
Thanks

So you aren’t necessarily scared of having too much in the High Yield Tax Exempt. I know lots of posters on here treat that one like the plague but I figure it isn’t excessively risky. I guess my question is between the two, is one inherently better or is it just more yield for more potential risk simple as that
I own a lot of individual muni bonds (multi seven-figure and around 3 dozen of them). The overall credit quality of the bonds I hold is 45% AAA, 50% AA and 5% A. I do own one bond rated below single A (a NYC MTA bond with a 3.5% coupon trading just a tad above par at the moment - it's my smallest individual bond holding and a rounding error on the %'s I just mentioned). For me, I don't see the need to purchase high yield muni's. Yield pickup not overly compelling for the added risk IMHO (and for my situation). Having said that, if I were to buy/hold them, I would rather do it through a mutual fund than to hold them individually simply to manage the credit risk. I think the VG high yield national muni fund owns/holds over 2,400 individual issues. Feels like the risk of any reasonably likely defaults would be mitigated for that reason.
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Re: Muni bonds in taxable

Post by backpacker61 »

Hogan773 wrote: Sat Nov 21, 2020 9:30 am So you aren’t necessarily scared of having too much in the High Yield Tax Exempt. I know lots of posters on here treat that one like the plague but I figure it isn’t excessively risky. I guess my question is between the two, is one inherently better or is it just more yield for more potential risk simple as that
If the fund you have is Vanguard's High Yield Tax-Exempt, it's only marginally in the High Yield category.

Morningstar categorizes it as muni national long rather than high yield, because the average credit quality is considerably higher than other high yield tax exempt funds. It could be worth a visit to your library to read the Morningstar review of the fund (I log into my public libraries' web site and can access 'Morningstar Investment Research Center' from there).

FWIW, it's also a Morningstar Gold rated fund.
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Re: Muni bonds in taxable

Post by grabiner »

Hogan773 wrote: Sat Nov 21, 2020 9:30 am So you aren’t necessarily scared of having too much in the High Yield Tax Exempt. I know lots of posters on here treat that one like the plague but I figure it isn’t excessively risky. I guess my question is between the two, is one inherently better or is it just more yield for more potential risk simple as that
Despite the name, this isn't really a high-yield fund; it holds only 6% junk and 10% unrated bonds, with most bonds rated BBB through AA. The credit quality is usually comparable to an all-corporate fund such as Vanguard Intermediate-Term Corporate Bond Index/ETF.

However, investors currently consider munis significantly riskier than corporate bonds of the same grade. Vanguard High-Yield Tax-Exempt, with a 2.30% yield on Admiral shares, has a higher pre-tax yield than Vanguard Intermediate-Term Corporate Bond ETF, with a 1.71% yield. Historically, the yield on the muni fund was about 75% of the yield on the corporate fund, implying comparable risk since they were break-even in the 25% tax bracket.
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Re: Muni bonds in taxable

Post by expatFIRE »

I believe it was Allan Roth who had a rule of thumb to keep muni-bonds at about 20% the total bond/fixed income amount. Maybe you don't need to make any drastic changes, but gradually reduce the muni-bond allocation with new contributions.

Here's my plan for new contributions:
  • Max out retirement accounts (401k, Roth IRA, etc.). I prefer bonds in tax deferred, and stocks in taxable/Roth. I treat the whole portfolio as one asset allocation).
  • If bond allocation can't fit into a taxable amount first goes into I Bonds and EE Bonds. I just started EE Bonds (the 3.53% return for 20 years is finally good enough).
  • If I still need bonds required above these contribution limits then contribute to into 5 Yr CDs or muni-bonds depending on the after-tax return at time of purchase.
Over time the muni-bond allocation will be reduced, and I don't need to make any moves that would cause me to have to pay taxes.
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Re: Muni bonds in taxable

Post by Hogan773 »

expatFIRE wrote: Sat Nov 21, 2020 7:55 pm I believe it was Allan Roth who had a rule of thumb to keep muni-bonds at about 20% the total bond/fixed income amount. Maybe you don't need to make any drastic changes, but gradually reduce the muni-bond allocation with new contributions.

Here's my plan for new contributions:
  • Max out retirement accounts (401k, Roth IRA, etc.). I prefer bonds in tax deferred, and stocks in taxable/Roth. I treat the whole portfolio as one asset allocation).
  • If bond allocation can't fit into a taxable amount first goes into I Bonds and EE Bonds. I just started EE Bonds (the 3.53% return for 20 years is finally good enough).
  • If I still need bonds required above these contribution limits then contribute to into 5 Yr CDs or muni-bonds depending on the after-tax return at time of purchase.
Over time the muni-bond allocation will be reduced, and I don't need to make any moves that would cause me to have to pay taxes.

Thanks

I do have a bunch of taxable bond funds in my 401K etc. my question here is just about getting that big chunk out of the Tax Exempt Money Mkt. When it was yielding 1.5 % I was happy to hold it rather than adding it all to one of the longer Tax Exempt funds, thinking it was not exposed to rising rates and was good dry powder for any equity market meltdown where I wanted to invest more there. Reality is the stock market crash happened and ended so quickly this spring that I didn’t even add more, and now I feel like the market is pretty toppy again so not rushing to add more to equities right now
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Re: Muni bonds in taxable

Post by abuss368 »

theorist wrote: Fri Nov 06, 2020 12:22 pm Hello:

I have a growing taxable account which I’ve been keeping at a 70/30 allocation between stocks and bonds. (I mirror the allocation in accounts — this is a choice one needn’t make, but I have for some kind of simplicity.) The bonds are

50% intermediate term tax exempt
50% California intermediate term tax exempt

I have been reading in many articles — eg the Wall Street Journal today — that muni bonds may face a challenging environment. I’m looking for advice about possible courses of action:

1) do nothing. Keep investing in the muni funds as I’d planned. This is my current inclination.

2) reallocate away from CA muni bonds to the national fund to lower state specific risk.

3) hold taxable bonds instead — low bond yields mean this isn’t as bad in taxable accounts as it normally would be. Eg switch some or all munis to VBTLX.

4) lower bond fraction due to low rates, and lower muni allocation to 25% or 20% instead of 30%. This is my least favorite option, but is something I’ve seen discussed in many articles and threads here as an option worth entertaining.

Comments on options welcome! The taxable account is a small fraction of holdings now but is growing at 100k per year or more, so I want to be smart about what I do here.
The “risks” of muni bonds have been discussed forever and many years. I have continued to stay the course and buy. This has worked well as intended.

I prefer Vanguard Intermediate Term Tax Exempt or the Tax Exempt Index fund for the diversification. A little more tax but we sleep better.
John C. Bogle: “Simplicity is the master key to financial success."
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