Muni - Questioning use and/or viability in taxable account

[Lazyfabs]

Muni Fund - ?ing use and/or viability in taxable account

Summary:
-We max out all tax-deferred accounts, 401k, back door roth, etc.
-529 and other education/children accounts funded appropriately

-Asset allocation historically hovered and maintained in the 65/35 range through the ups and downs of market fluctuations.
-mostly invested in index funds both in tax deferred and taxable accounts

-solidly cemented in the 33% tax bracket or higher depending on DW bonus.
-live in MN so get to pay 8-9.45% state tax depending on income
-get to experience the wonderful feeling of AMT every year and don't see this changing any time soon

-Debt none besides mortgage, ~17 years left on 30 yr loan at 3.75%
-equity ~$750k+

Dilema, what p we are trying to figure out is in our taxable account held at Fidelity brokerage. Currently the balance is ~$285k which encompasses ~10%-12% of or entire portfolio. We basically live off DW salary and save mine after all deductions are taken out. We dont think of our liquid assets as an emergency fund per say, but liquidity for the most part is important for major purchases/fixes/etc.

Currently the balance is split:
-20% cash
-20% SMTFX (MN muni exp ratio .82%, currently receive ~$130/month dividends that are re-invested)
-25% handful of non-dividend stock/etf we have had for long time.
-35% FUSVX (S&P 500 exp ratio .035%, dividends re-invested)

Monthly we contribute $3000+ to this Fidelity brokerage split:
~16.5% (~$500) cash
~16.5% (~$500) SMTFX
~67% (~$2000) FUSVX

We do add to our individual stock/etf holdings occasionally, but do so equally according to the overall allocation above and if we have excess $ after bonuses, gifts, etc.

Our dilema. Given our high tax bracket both fed and state, we were questioning the use of the MN Muni. Choices are limited in this small sliver of options. We are ok with the added risk given the duration and interest sensitivity, especially since interest rates are poised to only gong go up in the near distant future. We have never been to enamored with the higher exp ratio. We are also aware that a portion income is/might be susceptible to AMT, upto 20% as i understand it per description and SEC limits/rules for type of fund.

Since we are at Fidelity there several other options we are considering instead of SMTFX if it makes sense in the overall scheme of things and either exchange all or partition SMTFX for one of the options belo/similar and/or not use muni type of option at all and just keep bit more cash and put rest in FUSVX S&P 500. Changes if made would carry on forward with any additional monies we add to the account as well.

Options being considered:
FTABX (national muni, exp ratio .25, no AMT, duration less than SMTFX)
SUB (AMT free national short muni, exp .25, no-fee trading)
MUB (AMT free national intermediate muni, exp .25, no-fee trading)
CD ladder, (1yr ~1.4%; 3yr ~1.6%; 5yr ~1.9%)

In addition, does the 'tax benefit' of using MN Muni and/or National Muni with the amount we have invested now and going fwd gets eroded due to AMT and our tax brackets both fed and state, where as not using muni is a mute point?

Thanks for any insight.

 

[kaneohe]

.............................
-get to experience the wonderful feeling of AMT every year and don't see this changing any time soon
...............................................................

.................................... We are also aware that a portion income is/might be susceptible to AMT, upto 20% as i understand it per description and SEC limits/rules for type of fund.

..................................................

Options being considered:
FTABX (national muni, exp ratio .25, no AMT, duration less than SMTFX)
SUB (AMT free national short muni, exp .25, no-fee trading)
MUB (AMT free national intermediate muni, exp .25, no-fee trading)
CD ladder, (1yr ~1.4%; 3yr ~1.6%; 5yr ~1.9%)

In addition, does the 'tax benefit' of using MN Muni and/or National Muni with the amount we have invested now and going fwd gets eroded due to AMT and our tax brackets both fed and state, where as not using muni is a mute point?

Thanks for any insight.

I believe the only effect of AMT is that the PAB part of income gets taxed .
Since you are subject to AMT every yr, you should know the effect of this already. If a fund is AMT free , then there would not be this extra income to be taxed.

 

[OldShooter]

Why pay someone big bucks to buy munis for you? Look at the fee as a percentage of your yield; it's huge! You have enough money to be reasonably diversified buying individual bonds and since you are investing in your home state you will know what you are buying.

I use Schwab and they have dedicated, salaried, bond specialists that advise and take the orders. I just bought a bunch of T-bills and I checked the guy I worked with: 16 years experience in the business. I would expect that Fidelity has something similar & hopefully with a quality staff.

 

[DrRoy]

You have enough money to be reasonably diversified buying individual bonds and since you are investing in your home state you will know what you are buying.

I use Schwab and they have dedicated, salaried, bond specialists that advise and take the orders. I would expect that Fidelity has something similar & hopefully with a quality staff.

+1. This is what I am doing. Fidelity only charges $1 per bond and the people at the bond trading desk are very helpful.

 

[OldShooter]

+1. This is what I am doing. Fidelity only charges $1 per bond and the people at the bond trading desk are very helpful.

Wise.

I see only two purposes for bond funds: (1) For someone who has only tiny money and cannot buy enough bonds to reasonably diversify. (2) For someone who wants to buy junk, emerging markets, or other stuff where it is hard to judge credit quality and the excitement level is potentially high.

 

[Peter]

Wise.

I see only two purposes for bond funds: (1) For someone who has only tiny money and cannot buy enough bonds to reasonably diversify. (2) For someone who wants to buy junk, emerging markets, or other stuff where it is hard to judge credit quality and the excitement level is potentially high.

There is at least one more purpose: (3) For someone who has enough money to buy a diversified bond portfolio, but doesn't want to spend the time to set it up and manage it.

 

[OldShooter]

There is at least one more purpose: (3) For someone who has enough money to buy a diversified bond portfolio, but doesn't want to spend the time to set it up and manage it.

Yeah. I thought about that and maybe should have put it in. The thing is, there is very little time required --- IMO much less than people think.

It's not quite the same, but I just had a couple of brokered CDs mature at Schwab: One of the bond specialists called to remind me (Schwab also sent a letter) and in one telephone conversation I bought well over $100K in T-bills. The scenario would have been roughly the same if it was bonds maturing, with a slightly longer conversation to pick some replacement bonds. Absolute max time investment would be ten minutes. I am talking govvies, agencies, munis, and high-grade corporate bonds here, not junk or internationals, and not agonizing over 2bps yield differences. So, ten minutes maybe two or three times a year. YMMV, however.

 

[Peter]

Fair point if what you're talking about is maintenance of an existing bond portfolio. But I'd want to spend more than 10 minutes picking, say, 10 or 20 bonds for a suitably diversified mix.

I suppose what it boils down to is that I think professional bond fund managers are likely to make better picks than me. Possibly this is wishful thinking! But the funds that I have in my portfolio have very low expenses, so it's not as if it's costing me anything significant.

 

[marko]

There is at least one more purpose: (3) For someone who has enough money to buy a diversified bond portfolio, but doesn't want to spend the time to set it up and manage it.

That would be me.

Not only do I not want to spend the time, I also believe the fund managers are more savvy on this narrow subject than I am. Have had bond funds for 16 years now and no regrets.