Tax Efficient ETFs for MIL's Brokerage?

[Sandi_k]

OK, so my MIL is required to take RMDs. She had a small IRA, and last year, DFIL passed, so she now has a much larger IRA.

I am pretty much managing it, after explaining options to her. She and the sons agreed to a 50%/50% stock/bond split in her IRA (they want 0 International).

As a point of ease, I did the RMDs for MIL and my own mom this month. My mom needs the money; MIL does not. So we opened a brokerage account, into which I moved the RMD.

Now I need to invest it, and I know that mutual funds are much less tax efficient than ETFs. So my thinking is that we'd do a MUNI bond for the no-tax aspect in CA, and an S&P 500 ETF for the stock side.

Her accounts are at Schwab. My preliminary thinking is that I'd move the stock portion of the RMD into:

- IVV (iShares Core S&P 500)

But I'm unsure about the bond portion. A search of the Boglehead's forum suggests these options:

SUB or VTEB or MUB or CMF.

Thoughts?

[MustacheAndaHalf]

Years ago I allocated a fraction of my portfolio to VTEB, even though I lived in California at the time.  Looking closer, MUB looks like a better ETF in several ways (higher allocation to AAA bonds, fewer BBB bonds below investment grade, lower expense ratio).  Since 2022 was the first year for bonds in many decades, I peeked at the 2022 performance, and MUB did better there, too (-7.35% MUB vs -8.00% VTEB).
https://www.morningstar.com/etfs/arcx/mub/performance
https://www.morningstar.com/etfs/arcx/vteb/performance

Municipal (tax-exempt) bond funds are exempt from Federal tax, and California municipal bond funds are also exempt from California taxes.  But the yields of a CA tax-exempt bond fund are lower, so the decision varies by tax bracket.  And for geographical diversification (avoiding Orange county bankruptcy many years ago), a national tax-exempt fund is better.  Here is the "30-day SEC yield" for each ETF:

CMF: 3.25%
MUB: 3.48%
VTEB: 3.57%

CMF provides roughly a 6.6% lower yield, which means it becomes profitable in the 8% CA tax bracket ($56k single / $112k married or surviving spouse).

[Scandium]

Isn't it more efficient to keep the bonds in the IRA, and just stocks in the brokerage? Any US total market ETF should have pretty minor dividend/cap gains. In my schwab account I use SCHB. A 1.24% distribution. 

Also, tax-free bonds are only really worth it if you're in the highest tax brackets, due to the lower yield. Unless their spending is wild a retired person in rarely in the 32%+ bracket. Treasury bonds should be free from state tax.

[Sandi_k]

Isn't it more efficient to keep the bonds in the IRA, and just stocks in the brokerage? Any US total market ETF should have pretty minor dividend/cap gains. In my schwab account I use SCHB. A 1.24% distribution. 

Also, tax-free bonds are only really worth it if you're in the highest tax brackets, due to the lower yield. Unless their spending is wild a retired person in rarely in the 32%+ bracket. Treasury bonds should be free from state tax.

Yes, she's in the 32% bracket, between all her income sources, since FIL passed last year.

She has a decent balance of 50/50 stocks/bonds in the IRA. The brokerage account is about 10% of her Schwab account, so the "bond" goal is only 5% of her Schwab account. But she's 88, and wants a very balanced portfolio. She does not need more stocks. And she has cash in her bank accounts. So Muni bonds seemed like a reasonable, "safe" option for a risk averse elderly lady.

[Scandium]

Isn't it more efficient to keep the bonds in the IRA, and just stocks in the brokerage? Any US total market ETF should have pretty minor dividend/cap gains. In my schwab account I use SCHB. A 1.24% distribution. 

Also, tax-free bonds are only really worth it if you're in the highest tax brackets, due to the lower yield. Unless their spending is wild a retired person in rarely in the 32%+ bracket. Treasury bonds should be free from state tax.

Yes, she's in the 32% bracket, between all her income sources, since FIL passed last year.

She has a decent balance of 50/50 stocks/bonds in the IRA. The brokerage account is about 10% of her Schwab account, so the "bond" goal is only 5% of her Schwab account. But she's 88, and wants a very balanced portfolio. She does not need more stocks. And she has cash in her bank accounts. So Muni bonds seemed like a reasonable, "safe" option for a risk averse elderly lady.

Yes, but you create the AA across all accounts. So just do all stocks in the brokerage, and increase the bonds percentage in the IRA.

[Sandi_k]

I understand that the asset allocation is across all accounts. But SHE WANTS BONDS in her brokerage, given she's at 50/50 in the IRA, plus a lot of cash in the bank.

It's her account, I am merely responding to her preferences.