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Bond fund advice
Old 04-25-2008, 11:38 AM   #1
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Bond fund advice

My mother invested 100k in a municipal bond fund(RMUCX) in a SEP IRA account without consulting anyone which is probably a bad decision. The total value has dropped about 11k since last year. The dividends are being reinvested in the fund. Should she sell and switch to a different fund knowing that she has a 12k loss so far? Any advice would be appreciated.
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Old 04-25-2008, 01:27 PM   #2
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Quote:
Originally Posted by mooko82 View Post
My mother invested 100k in a municipal bond fund(RMUCX) in a SEP IRA account without consulting anyone which is probably a bad decision. The total value has dropped about 11k since last year. The dividends are being reinvested in the fund. Should she sell and switch to a different fund knowing that she has a 12k loss so far? Any advice would be appreciated.
How old is she?
How much of the total is the $100,000??
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Old 04-25-2008, 01:30 PM   #3
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My mother invested 100k in a municipal bond fund(RMUCX) in a SEP IRA account without consulting anyone which is probably a bad decision.
Actually, I'd say munis in an IRA was *definitely* a bad decision regardless of their performance.

Get out of them NOW, and not because the NAV has taken a hit. These are simply not appropriate investments for tax-deferred accounts, period. Why turn tax-free income into taxable income?

I actually like some munis now because they've been beaten up so badly. But in a taxable account with a decently high marginal tax rate -- never in an IRA.
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Old 04-25-2008, 02:04 PM   #4
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Totally agree with ziggy29. A tax-free investment is totally inappropriate in an IRA. Sell now!
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Old 04-25-2008, 03:14 PM   #5
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Ziggy is right. Vanguard's taxable bond funds are a good alternative if she wants to stay in bonds.
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Old 04-25-2008, 03:28 PM   #6
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I like RPSIX as my diversified bond fund for tax defered accounts like IRAs and 401ks.
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Old 05-01-2008, 12:15 AM   #7
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Ziggy is right. Vanguard's taxable bond funds are a good alternative if she wants to stay in bonds.
Is this because all income earned in an IRA is taxable, and that the taxable bond funds have a higher yield than the tax-exempt bond funds?

What if the money to be invested is sitting outside of a tax deferred account, like in a MM? I live in California, and both my wife and I work. We are looking at the CA tax-exempt bond funds vs. the taxable bond funds and trying to determine the trade-offs.
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Old 05-01-2008, 12:26 AM   #8
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Is this because all income earned in an IRA is taxable, and that the taxable bond funds have a higher yield than the tax-exempt bond funds?

What if the money to be invested is sitting outside of a tax deferred account, like in a MM? I live in California, and both my wife and I work. We are looking at the CA tax-exempt bond funds vs. the taxable bond funds and trying to determine the trade-offs.
Start by calculating the equivalent taxable yield of a muni fund/bond with the equation given below and comparing it to the yield of the taxable funds.

If you're in a high tax bracket it usually makes sense to have muni bonds in a taxable account. If you're in a low tax brackets it usually makes sense to have taxable bonds in your taxable accounts. You should never have muni bonds/funds in a tax deferred account. Some think that you should have all of your bond exposure in tax deferred accounts so that you can take advantage of the higher yields of taxable bonds.

Muni bonds seem to be particularly attractive now because of the things going on in the credit market. Others that follow those markets may have comments?

Equivalent taxable yield = Yield of Muni Fund / (1 - your incremental tax rate expressed as fraction)

Vanguard has some pretty good CA tax exempt funds. I own both their CA money market and intermediate term funds.

MB
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Old 05-01-2008, 12:32 AM   #9
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Is this because all income earned in an IRA is taxable, and that the taxable bond funds have a higher yield than the tax-exempt bond funds?

What if the money to be invested is sitting outside of a tax deferred account, like in a MM? I live in California, and both my wife and I work. We are looking at the CA tax-exempt bond funds vs. the taxable bond funds and trying to determine the trade-offs.
Income earned in an IRA is tax deferred and yes taxable bond funds yield (in general) better then tax exempt so if at all possible you should keep your bond funds in a tax deferred account. If you can't there are calculators (Tax-Equivalent Yield Calculator) That can help determine which may work better for you in a taxable account depending on your tax bracket. I-bonds would be another choice.

DD
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