Author Topic: muni bond tax exempt funds for home downpayment storage  (Read 2620 times)

StressLess

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muni bond tax exempt funds for home downpayment storage
« on: April 28, 2015, 02:31:32 PM »
thinking about VNYTX - Vanguard New York Long-Term Tax-Exempt Fund

for cash that I may want to use as a house downpayment in 5 - 10 years.  Do you think that the duration of the fund puts principal at risk?  I live in a very expensive area (NYC) so trying to buy something now is impossible but want to keep cash on hand in case there is a buying opportunity.  Stock market has too much risk for this purpose and right now the money is in a high yield savings account yielding 1%


Captain_Burrito_Pants

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Re: muni bond tax exempt funds for home downpayment storage
« Reply #1 on: April 28, 2015, 02:56:13 PM »
Long term bond funds will have a high interest rate risk, especially given currently low interest rates.

You might consider a REIT fund, such as VNQ, that gives a decent yield and is also tied to real estate so if real estate outperforms in the next 5-10 years your down-payment fund keeps up.


ElMono

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Re: muni bond tax exempt funds for home downpayment storage
« Reply #2 on: April 28, 2015, 03:18:19 PM »
Quote
You might consider a REIT fund, such as VNQ, that gives a decent yield and is also tied to real estate so if real estate outperforms in the next 5-10 years your down-payment fund keeps up

So... what if real estates underperforms? Also having VNQ in a non-tax sheltered account is gonna eat a bit of those gains...

Captain_Burrito_Pants

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Re: muni bond tax exempt funds for home downpayment storage
« Reply #3 on: April 28, 2015, 03:22:21 PM »
Quote
You might consider a REIT fund, such as VNQ, that gives a decent yield and is also tied to real estate so if real estate outperforms in the next 5-10 years your down-payment fund keeps up

So... what if real estates underperforms? Also having VNQ in a non-tax sheltered account is gonna eat a bit of those gains...

If it underperforms then presumably the property you're purchasing 5-10 years out is also going to be cheaper.

You could keep VNQ in a tax-advantaged account then make whatever adjustments are necessary when it's time to sell, such as selling assets from a taxable account and replacing the REIT in your tax-advantaged account with something else.  Look at the overall picture.

I should mention REITs also have interest rate risk.
« Last Edit: April 28, 2015, 03:24:28 PM by Captain_Burrito_Pants »

StressLess

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Re: muni bond tax exempt funds for home downpayment storage
« Reply #4 on: April 29, 2015, 08:29:03 AM »
Thanks.  REITS seem a little too risky for this though as there is a chance at loosing a considerable amount of principal in a downturn?

forummm

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Re: muni bond tax exempt funds for home downpayment storage
« Reply #5 on: April 29, 2015, 09:41:59 AM »
If you want the money in 5-10 years, you can put it in a bond fund that holds that duration of bonds. In your case, an intermediate term fund might suffice. Even if interest rates go up in the interim (which they almost certainly will), if you hold the bonds to maturity, there is no interest rate risk to principal. You lose out to the opportunity to have your money invested in the slightly higher yielding bonds. But that's already priced into the bond funds. Another option is a CD. Depending on what the yields and duration are, you might prefer the guarantee of principal return even if you break it. 5-10 years is a long time. I would be tempted to leave some or all of it in the market. Your risk tolerance and savings situation may differ though.

Captain_Burrito_Pants

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Re: muni bond tax exempt funds for home downpayment storage
« Reply #6 on: April 29, 2015, 11:11:43 AM »
Thanks.  REITS seem a little too risky for this though as there is a chance at loosing a considerable amount of principal in a downturn?

Since it seems like you're more risk averse, you could buy shorter term bonds.  I definitely wouldn't get long term bonds.  You could buy US treasuries that mature around your target date with no chance of losing principle if you buy them from the government rather than in a bond fund.



StressLess

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Re: muni bond tax exempt funds for home downpayment storage
« Reply #7 on: April 29, 2015, 04:05:38 PM »
Thanks.  The muni fund interested me because this would be in a taxable account and therefore tax exempt.

I will have a look at the medium term funds but off the bat I don't see any tax exempt ones with decent yield. 

CDs may be a better option...

spud1987

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Re: muni bond tax exempt funds for home downpayment storage
« Reply #8 on: April 29, 2015, 06:43:14 PM »
I am following a similar strategy. I am bought CA intermediate term muni bonds in a taxable account that may be used for a down payment in the next 5 years or so. The Vanguard fund I purchased has lost at most 15% since its inception in the mid-90's. That is some principal risk, but much lower than equities. Our state/federal marginal rate is roughly 45%, so the tax-sheltered nature of the fund has a meaningful impact (especially compared to returns I could achieve in other bond funds). I am currently earning a yield of about 4% aftertax.

StressLess

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Re: muni bond tax exempt funds for home downpayment storage
« Reply #9 on: May 01, 2015, 08:57:42 AM »
hey spud - whats the fund that lost 15%? 

I am following a similar strategy. I am bought CA intermediate term muni bonds in a taxable account that may be used for a down payment in the next 5 years or so. The Vanguard fund I purchased has lost at most 15% since its inception in the mid-90's. That is some principal risk, but much lower than equities. Our state/federal marginal rate is roughly 45%, so the tax-sheltered nature of the fund has a meaningful impact (especially compared to returns I could achieve in other bond funds). I am currently earning a yield of about 4% aftertax.