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Which Muni Funds or ETF's to buy?
Old 07-18-2009, 08:33 AM   #1
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Which Muni Funds or ETF's to buy?

Hi. My wife is about to ER in the next two to three years (right now she is 47) and we are in the 35 percent tax bracket (2011..it may be 45%).

I plan on working another 15 years..but as a principal of an elementary, once she retires my income will only provide a minimal contribution (I currently make 65k/yr. )

We have a large amount if fixed income investments in taxed brokerage accounts.

I wanted to see what municipal bond funds you all recommended right now or ETF's. We own a bunch of Vanguard's Inter Tax exempt Admiral funds and Vanguard Limited Term Tax Exempt funds too.

Any suggestions so I can have more diversity with muni bond funds? Thanks.
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Old 07-18-2009, 09:31 AM   #2
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I mostly just buy the munis themselves, usually long, about 65% of them GO bonds. Are you looking for tax free cash flow? I picked up some Perris CA bonds the other day, 'A' rated, 6.5% coupon, selling at about a discount og 96.5 or so, yielding 6.7 or so. Not GO, but it fits in my port. fed/amt and state tax free in CA anyway.

I have some bond funds in my non-qual def comp plan that I need to change around...not worth keeping muni funds in the non qual.

To add to the question, if I buy florida tax free munis, are they also tax free if I live in CA?

R
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Old 07-18-2009, 09:52 AM   #3
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I'm in FHIGX for my muni portion... 5 star, good historical yield.
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Old 07-18-2009, 10:03 AM   #4
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I own both Vanguard's intermediate term tax exempt and short term tax exempt funds and I do not feel the need to diversify further. Those funds are already ultra diversified.

In addition, it looks like once your wife retires you will be in a much lower tax bracket (15-25%?), so owning munis might not make sense anymore at that time.
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Old 07-18-2009, 01:05 PM   #5
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If you have ANY stock funds in tax-sheltered accounts, you should exchange them for bond funds. For the ultimo in tax efficiency, you should try to own bond funds in tax-sheltered accounts. So look at your 401(k)/403(b) and look at your spouse's 401(k)/403(b) and look at all your assets as one big portfolio.

Your 401(k)/403(b) could be all bonds if you need fixed income. That way you may be able to avoid bonds and muni bonds in taxable.

We just had a discussion about this:
FIRE and tax-advantaged accounts

When I became more enlightened about not holding tax-inefficient investments like bonds in a taxable account, I reduced my income tax by tens of thousands of dollars.
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Old 07-18-2009, 06:48 PM   #6
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Quote:
Originally Posted by LOL! View Post
If you have ANY stock funds in tax-sheltered accounts, you should exchange them for bond funds. For the ultimo in tax efficiency, you should try to own bond funds in tax-sheltered accounts. So look at your 401(k)/403(b) and look at your spouse's 401(k)/403(b) and look at all your assets as one big portfolio.

Your 401(k)/403(b) could be all bonds if you need fixed income. That way you may be able to avoid bonds and muni bonds in taxable.

We just had a discussion about this:
FIRE and tax-advantaged accounts

When I became more enlightened about not holding tax-inefficient investments like bonds in a taxable account, I reduced my income tax by tens of thousands of dollars.
...But, this would be for taxable bond funds, like corporates, right? Why would you want to put tax free munis in an IRA or 401k...where you will have to pay tax on the proceeds? I prefer my tax free muni interest to remain tax free. What am I missing?

R
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Old 07-18-2009, 07:08 PM   #7
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Originally Posted by Rambler View Post
...But, this would be for taxable bond funds, like corporates, right? Why would you want to put tax free munis in an IRA or 401k...where you will have to pay tax on the proceeds? I prefer my tax free muni interest to remain tax free. What am I missing?

R
Right, you don't necessarily want munis in a tax-sheltered account.

Some of what you are missing wrt munis is discussed in this thread:
Bogleheads :: View topic - Tax advice regarding my parents portfolio

By holding munis in taxable and equities in tax-deferred you are missing tax-loss-harvesting opportunities for your equities and making the gains in equities taxed as ordinary income tax rates instead of at the lower LTCG tax rate (which could be 0%).

If your tax-sheltered accounts are filled with fixed income and other tax-inefficient assets and you have no more room in them for the rest of your fixed income allocation so that you must put fixed income in taxable, then munis are a good solution. Too often though, folks still have plenty of large cap stocks and foreign stock funds in their tax-sheltered accounts while buying munis in their taxable accounts. This is bass-ackwards.
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Old 07-18-2009, 08:36 PM   #8
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I'm overseas, have been for a long time. Make too much to participate in megacorp's 401k, or to take advantage of an IRA or a Roth. I was only able to take advantage of the 401k for 5 years out of a 24 year career, between 1993 and 1998. I didn't have IRAs figured out back then. So, most of my assets are in my taxable, maybe 1% are in the tax sheltered 401k, and another 10% or so in a non-qualified deferred comp plan, which is essentially a tax sheltered plan, if you use it right. I have some bond funds in that, maybe 30%, along with domestic and intl equity funds. My miniscule 401k balance is all equity. My taxable (about 80% of total port) is split roughly half and half between equities (domestic large and mid, intl and a small bit of emerging mkts), and long coupon bearing munis (not funds - coupon interest is about 5.7% of face value). Last 9% or so is a home that I will sell 2 years after returning to live in the US. The above does not include my primary home.

My take on your earlier posts is that my additions in the def comp plan would be better as corp bonds/funds, adding equities plus maybe a tad of munis as AA balance requires in the taxable. Does this sound reasonable?

Note that I am still working, and very deep into the 35% federal bracket. I am trying to engineer a cash flow for FIRE within 2-3 years that is both tax efficient now and satisfies my target AA for the first year so of FIRE. That's why I'm heavily into munis in my taxable.

Thx,

R
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Old 07-18-2009, 08:56 PM   #9
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Originally Posted by Rambler View Post
My take on your earlier posts is that my additions in the def comp plan would be better as corp bonds/funds, adding equities plus maybe a tad of munis as AA balance requires in the taxable. Does this sound reasonable?
Yes. If your tax-sheltered accounts are 1% of assets in 401(k) and 10% in deferred comp, then I think they should all be fixed income and not in equities. (Where is the other 9% tax-sheltered? -- oh, it's the home.) But it's been years since I lived overseas and I have no clue about the nuances of retirement plan taxes by foreign countries.

Quote:
Note that I am still working, and very deep into the 35% federal bracket. I am trying to engineer a cash flow for FIRE within 2-3 years that is both tax efficient now and satisfies my target AA for the first year so of FIRE. That's why I'm heavily into munis in my taxable.
Munis are OK for you, but if one has enough tax-sheltered space for all their fixed income, that's where it should be.

Cash-flow is not a problem with 100% equities in taxable. As described above and in the links, simply sell equities in taxable to raise cash. It won't matter whether equities are sold low because you will simply buy them low in tax-sheltered (after selling bonds in tax-sheltered) to maintain your asset allocation. Indeed, it is best tax-wise if equities are sold at a loss to raise cash because you won't pay any taxes on the money and you will get a small tax break on other income.

See also: https://institutional.vanguard.com/i...P_TotalRet.pdf
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Old 07-18-2009, 09:30 PM   #10
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Yes. If your tax-sheltered accounts are 1% of assets in 401(k) and 10% in deferred comp, then I think they should all be fixed income and not in equities. (Where is the other 9% tax-sheltered? -- oh, it's the home.) But it's been years since I lived overseas and I have no clue about the nuances of retirement plan taxes by foreign countries.


Munis are OK for you, but if one has enough tax-sheltered space for all their fixed income, that's where it should be.

Cash-flow is not a problem with 100% equities in taxable. As described above and in the links, simply sell equities in taxable to raise cash. It won't matter whether equities are sold low because you will simply buy them low in tax-sheltered (after selling bonds in tax-sheltered) to maintain your asset allocation. Indeed, it is best tax-wise if equities are sold at a loss to raise cash because you won't pay any taxes on the money and you will get a small tax break on other income.

See also: https://institutional.vanguard.com/i...P_TotalRet.pdf
Thx, LOL. I'm tax equalized, such that I pay taxes as though I had not left the US. Megacorp picks up the tax on the cost of living allowance, housing allowance, and any local tax that is above what I would have paid in the US...another good reason to be tax efficient in the taxable acct.

Good advice. I had not paid a lot of attention to the def comp acct, and the 401k was so small it didn't matter much. I think now would be a good time to start sorting this stuff out.

Thanks

R
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