Municipal Bonds

jazz4cash said:
I get that, but I live in a state (MD) with fairly high bond ratings and high state income taxes. I was looking to spread the risk among various issues with some emphasis on self funding agencies (e.g. water company revenue bonds are AAA rated). I also see at the county level some have better ratings/finances than others. I realize ratings can get downgraded.

I am still wondering if I buy a national muni bond fund, can I at least exclude the portion of income derived from bonds in my home state. I do see Fido provides a state by state breakdown so that could help with selection of a specific national muni bond fund.
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Exactly. I hold a diversified muni fund for my muni holdings to spread risk. I'd like to augment it with a few funds from municipalities I know pretty well in my state. I'm not talking a lot. NC tax rate is high enough though, that this matters. It saves me at least a dinner with DW out every year in taxes with my current national fund portion.

Vanguard doesn't have an NC specific fund, so that's out of question anyway. And there are some municipalities here I would not touch.

As for your "exclude a portion", why yes, you should be able to. That's why Fido sent you that table that most people just throw away. This allows you to do the calculation.
 
jazz4cash said:
I get that, but I live in a state (MD) with fairly high bond ratings and high state income taxes. I was looking to spread the risk among various issues with some emphasis on self funding agencies (e.g. water company revenue bonds are AAA rated). I also see at the county level some have better ratings/finances than others. I realize ratings can get downgraded.

I am still wondering if I buy a national muni bond fund, can I at least exclude the portion of income derived from bonds in my home state. I do see Fido provides a state by state breakdown so that could help with selection of a specific national muni bond fund.
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You can certainly do so, just do your due diligence. Also be aware that the standards for disclosure and investor protection are far lower in the muni world than they are for corporates.
 
jazz4cash said:
I believe the tax free status is generally limited to residents of the state issuing the bond. If using FTABX or another multi-state muni bond fund, I presume the fund company provides a table showing the composition of the fund. Is that correct?
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Yes. I'm another fan of FTABX and Fidelity gives you the data here on their website.
 
brewer12345 said:
I guess I get a little uncomfortable at the idea of single state funds. If you look at some of the high income tax states, many of them have kind of shaky finances (IL, NJ, CA, etc.). These are credits I don't want to load up on. So in the interest of diversification, it isn't a horrible idea that you would buy out of state munis to save on the federal income taxes and forgo the state tax exemption.
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Brewer-

Thx for that insight. Having read about Cali's recent budget 'surpluses', I'd not done any research on its fiscal health. Well, 5 mins of searching reveals that it's not good! It's not the worst but, Cali is definitely in the bottom quartile.

Based on that, I'll stay with FTABX & accept the ~0.5% reduction in net after tax return (ER + taxes), in exchange for the better diversification.
 
Suze used to tell people to buy individual bonds rather than bond funds because they won't "lose money" if you hold them to maturity. This advice was just wrong, and demonstrated her lack of understanding of how bond funds work.

If you really know what you're doing, no problem building a bond ladder with individual bonds. But you're unlikely to buy them as cost effectively as a professional fund manager. With Vanguards bond funds having such low fees, what's the purpose of buying individual bonds?

Holding a bond to maturity at an interest rate that is below market is no better than having your bond fund's NAV go down in value but having it's yield increase as new higher rate bonds replace the lower yielding ones in the fund.
 
Ready said:
If you really know what you're doing, no problem building a bond ladder with individual bonds. But you're unlikely to buy them as cost effectively as a professional fund manager. With Vanguards bond funds having such low fees, what's the purpose of buying individual bonds?
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One purpose, as we've been discussing, is for state tax exemption purposes.

Vanguard has some targeted state funds, but only for a few states.

That said, I'm still in diversified funds myself and haven't gone laddering or anything yet.
 
JoeWras said:
One purpose, as we've been discussing, is for state tax exemption purposes.

Vanguard has some targeted state funds, but only for a few states.

That said, I'm still in diversified funds myself and haven't gone laddering or anything yet.
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Good point. I live in California, where they have a state specific fund. If you live in a state that does not have its own fund, you have to decide if the state tax savings outweighs the challenges of buying individual bonds.

But for someone who is only looking to make small investments over a period of time, I don't see individual bonds being an option. For moving a larger amount of money all at once into different bonds to create a ladder, it may make sense.
 
Ready said:
Good point. I live in California, where they have a state specific fund. If you live in a state that does not have its own fund, you have to decide if the state tax savings outweighs the challenges of buying individual bonds.

But for someone who is only looking to make small investments over a period of time, I don't see individual bonds being an option. For moving a larger amount of money all at once into different bonds to create a ladder, it may make sense.
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So, does California's fiscal state cause you anxiety? Would you pick a diversified muni bond fund (say FTABX) vs an all-Cali one (iShares CMF)?

https://www.mercatus.org/statefiscalrankings
 
Huston55 said:
So, does California's fiscal state cause you anxiety? Would you pick a diversified muni bond fund (say FTABX) vs an all-Cali one (iShares CMF)?

https://www.mercatus.org/statefiscalrankings
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No, I'm not worried at all. The bonds are spread out across all counties in California, and if I worried about things like California going into default I would never invest in anything. We pay significant taxes in California and might as well take advantage of this fund. Otherwise, you are just paying around 10% additional taxes for nothing.
 
Ready said:
No, I'm not worried at all. The bonds are spread out across all counties in California, and if I worried about things like California going into default I would never invest in anything. We pay significant taxes in California and might as well take advantage of this fund. Otherwise, you are just paying around 10% additional taxes for nothing.
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Understood. I was just curious what your calculus would be, and it seems logical to me.

Regarding paying 10% taxes for nothing, my view differs. The additional diversity provided by FTABX is something that has value to me; and likely to others as well.
 
Huston55 said:
Understood. I was just curious what your calculus would be, and it seems logical to me.



Regarding paying 10% taxes for nothing, my view differs. The additional diversity provided by FTABX is something that has value to me; and likely to others as well.
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I'm still evaluating but generally agree with Ready. I looked at FTABX after you mentioned it. The performance is nearly identical to SMDMX my in-state fund but I would pay ~8% in taxes for FTABX.
 
jazz, have you looked at the Trowe MDXBX fund for maryland? I own that for most of my bond allocation.
 
wrl11 said:
jazz, have you looked at the Trowe MDXBX fund for maryland? I own that for most of my bond allocation.
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I think I looked awhile ago since they are based here I knew they'd have a fund for MD but I have Fido for 401k and it was easier to stay with them. I'll probably look again.
 
wrl11 said:
jazz, have you looked at the Trowe MDXBX fund for maryland? I own that for most of my bond allocation.
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OK,I looked again and it does look really good. As I recall now, I did choose this fund as my 1st choice when I was comparing different state funds awhile back, but I chose Fido since their fund is almost as good and I already have an account with them.
 
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