Muni bonds and temporary riches

[Paul der Krake]

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?

[MustacheAndaHalf]

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]

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]

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.