Author Topic: Muni bonds and temporary riches  (Read 1860 times)

Paul der Krake

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Muni bonds and temporary riches
« on: June 08, 2017, 08:07:24 PM »
Is it worth it to buy muni bonds if you don't intend to remain in a high tax bracket for very long, say, 10 years max? What about 5 years?

Undecided

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Re: Muni bonds and temporary riches
« Reply #1 on: June 09, 2017, 11:20:42 PM »
Is it worth it to buy muni bonds if you don't intend to remain in a high tax bracket for very long, say, 10 years max? What about 5 years?

I decided no, for me, with about four years anticipated remaining in the top bracket. One factor for me was that no low-cost muni bond fund is offered for my state (which has a very high tax rate), but even absent that factor, I didn't see it being worthwhile. I've left my bond fund investing in my 401(k). I anticipate that in four years, my 401(k) will have become approximately 100% bond funds. In retirement I could see some periodic shifting out of bonds in the 401(k) and into bonds in taxable, assuming I'll have some opportunities to sell stocks in taxable without paying capital gains (on top of what I will need for spending).

MustacheAndaHalf

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Re: Muni bonds and temporary riches
« Reply #2 on: June 10, 2017, 10:18:06 AM »
Just to compare tax situations, here's two bond ETFs and their yields:

VTEB, tax-exempt 1.96%
BND, taxable 2.36%

To me it looks like even the 25% tax bracket benefits from tax-exempt bonds.  In the 25% tax bracket, BND yields 1.77% after tax versus 1.96% for VTEB.

Aside from that, it also allows you to have more space in your tax brackets for other things (like converting IRAs to Roth IRAs).

Paul der Krake

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Re: Muni bonds and temporary riches
« Reply #3 on: June 10, 2017, 10:40:11 AM »
Just to compare tax situations, here's two bond ETFs and their yields:

VTEB, tax-exempt 1.96%
BND, taxable 2.36%

To me it looks like even the 25% tax bracket benefits from tax-exempt bonds.  In the 25% tax bracket, BND yields 1.77% after tax versus 1.96% for VTEB.

Aside from that, it also allows you to have more space in your tax brackets for other things (like converting IRAs to Roth IRAs).
That's not a good comparison, IMHO. BND is intermediate term with mostly treasuries and some commercial paper. VTEB is long term and munis don't have the same risk profile at all. Liquidity problems in the muni market became apparent in the great recession, so I would expect to be compensated quite a bit to account for that. And there's also 4 basis points of difference in costs between the two ETFs.

Also, damn Vanguard wants a lot of moolah in their muni funds to get the admiral pricing. That makes the ETFs a little more attractive.


MustacheAndaHalf

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Re: Muni bonds and temporary riches
« Reply #4 on: June 10, 2017, 06:26:26 PM »
Just to compare tax situations, here's two bond ETFs and their yields:

VTEB, tax-exempt 1.96%
BND, taxable 2.36%

To me it looks like even the 25% tax bracket benefits from tax-exempt bonds.  In the 25% tax bracket, BND yields 1.77% after tax versus 1.96% for VTEB.

Aside from that, it also allows you to have more space in your tax brackets for other things (like converting IRAs to Roth IRAs).
That's not a good comparison, IMHO. BND is intermediate term with mostly treasuries and some commercial paper. VTEB is long term and munis don't have the same risk profile at all. Liquidity problems in the muni market became apparent in the great recession, so I would expect to be compensated quite a bit to account for that. And there's also 4 basis points of difference in costs between the two ETFs.

Also, damn Vanguard wants a lot of moolah in their muni funds to get the admiral pricing. That makes the ETFs a little more attractive.
Not according to Vanguard's website: VTEB is not a long-term bond fund.  It has an effective duration of 5.9 years compared to BND's duration of 6.1 years.  So not only are you wrong, but VTEB actually has a shorter duration.

As to bond quality, 15% of BND are barely investment grade (BBB) versus 6% for VTEB.  Your point about minimums also doesn't apply: you can buy 1 ETF share at a time, for no transaction cost.