Author Topic: Muni-Bonds  (Read 2535 times)

gebraset

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Muni-Bonds
« on: February 17, 2015, 04:19:20 PM »
After going through a bunch of tax laws recently, I'm interested in knowing if muni bonds should replace an index bond fund within a portfolio.

Looking at two different funds for comparison purposes (VBTLX and VOHIX).

VTBLX has provided investors with a 3.20% return over a 10-year period, after taxes on distributions (federal only is computed here, yes?). Meanwhile, VOHIX has provided investors with a 4.61% return over a 10-year period. The fund is a bit riskier, which I understand. However, it offers federal and state tax advantages. While the fund profile says that it benefits those found within higher tax brackets, would it not benefit those in the 15% bracket quite a bit as well, since not only are they not paying federal tax on their dividends, but state tax as well?

I guess I'm looking to receive some input on the ability of a muni-bond fund to replace a bond index fund within a portfolio. Obviously, from what I have read, the community tends to favor index funds (which I agree with). However, when looking at bonds, would it not be smart, if you are in a state that offers state-tax free municipal bonds, to invest in those instead?

Thanks all.

Turkey Leg

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Re: Muni-Bonds
« Reply #1 on: February 24, 2015, 05:42:47 PM »
About three years ago, I started saving some money in a municipal bond fund that's only offered to the employees of the firm where I work. ER is 0.16%. My goal, at the time, was to use it in 5-6 years to pay off my mortgage.

I'm in a high income tax bracket, so when I cash that in, most of those earnings will be tax-exempt, which saves me quite a bit of money.

Vanguard offers some muni bond funds.

If you're in a low income tax bracket, I would think a regular bond fund would be okay (no need for muni bond fund). But, yes, if you're in a state that offers tax-free munis, I would jump on them, assuming you pay state taxes.

Frugal Consumerist

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Re: Muni-Bonds
« Reply #2 on: February 25, 2015, 06:37:22 AM »
After going through a bunch of tax laws recently, I'm interested in knowing if muni bonds should replace an index bond fund within a portfolio.

Looking at two different funds for comparison purposes (VBTLX and VOHIX).

VTBLX has provided investors with a 3.20% return over a 10-year period, after taxes on distributions (federal only is computed here, yes?). Meanwhile, VOHIX has provided investors with a 4.61% return over a 10-year period. The fund is a bit riskier, which I understand. However, it offers federal and state tax advantages. While the fund profile says that it benefits those found within higher tax brackets, would it not benefit those in the 15% bracket quite a bit as well, since not only are they not paying federal tax on their dividends, but state tax as well?

I guess I'm looking to receive some input on the ability of a muni-bond fund to replace a bond index fund within a portfolio. Obviously, from what I have read, the community tends to favor index funds (which I agree with). However, when looking at bonds, would it not be smart, if you are in a state that offers state-tax free municipal bonds, to invest in those instead?

Thanks all.

Here is a great Closed End Fund screener with a lot of muni-bond ETFs. It takes a little more work to find one that fits your needs. A lot of these have done well not only on distributions but on capital gains given the low interest rate environment (which is not to say that this can't reverse).

http://www.cefconnect.com/Screener/FundScreener.aspx

themagicman

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Re: Muni-Bonds
« Reply #3 on: February 25, 2015, 07:19:38 AM »
After going through a bunch of tax laws recently, I'm interested in knowing if muni bonds should replace an index bond fund within a portfolio.

Looking at two different funds for comparison purposes (VBTLX and VOHIX).

VTBLX has provided investors with a 3.20% return over a 10-year period, after taxes on distributions (federal only is computed here, yes?). Meanwhile, VOHIX has provided investors with a 4.61% return over a 10-year period. The fund is a bit riskier, which I understand. However, it offers federal and state tax advantages. While the fund profile says that it benefits those found within higher tax brackets, would it not benefit those in the 15% bracket quite a bit as well, since not only are they not paying federal tax on their dividends, but state tax as well?

I guess I'm looking to receive some input on the ability of a muni-bond fund to replace a bond index fund within a portfolio. Obviously, from what I have read, the community tends to favor index funds (which I agree with). However, when looking at bonds, would it not be smart, if you are in a state that offers state-tax free municipal bonds, to invest in those instead?

Thanks all.

I think muni funds are great bond investments in taxable accounts. However I would not do a state specific bond fund. I would look at a fund like VWLTX. While most of your distributions will be subject to state tax (The portion of the bonds from Ohio will not), I think that the diversification is well worth the small additional tax. I am not sure of Ohio's tax rates but I would not imagine that it would not increase your tax owed by a significant amount. Meanwhile you are being much safer with this money. Having that much money in muni bonds from one state would really scare me. It is not unthinkable to see mass bankruptcies in one state,  in today's environment. Being in a national muni fund spreads out this risk significantly and is well worth the extra money in my opinion.