In Retirement Cash or Tax Free bond funds?

[engineernerd]

Sorry it too long to reply to your questions. I am not saying I did it right but the BH way to me is when you are in retirement not trying to build up your retirement. Since i have retired it has changed. Fido has a place to check stock/ bond allocations but last time i looked it was 70/30.

Hey, no worries! Sorry if you felt a bit bombarded, that can happen on these forums. A lot of opinionated folks here, but I love ‘em all.

You don’t like paying tax at 22-24% on the interest and nonqualified dividends your taxable account is generating, and you have some stocks/stock funds in your IRA (which is not a Roth IRA, correct?).

What I propose is, switch those investments.

If your cash is in money-market accounts there is no cost to buying stocks with that money, if it’s in CDs then you might want to wait until they mature unless the penalty for early withdrawal is minimal.

Selling stocks and stock funds in an IRA does not trigger tax. So you could do what I did recently, and place a buy order in your brokerage account on the same day you place a sell order in your IRA. If it’s a mutual fund, both orders will automatically transact at the same price. If it’s an ETF, you might want to place limit orders at the current price, odds are very good both transactions will go through at that price or at slightly better prices.

Then going forward your taxable brokerage account will throw off dividends instead of interest and will also accumulate capital gains. If you choose the right stock funds most or all of the dividends will be qualified dividends.

A side benefit of this approach is that your tIRA will grow more slowly and will generate smaller RMDs when you reach that age.

The best place for stocks is a Roth IRA, assuming your plan is to use most of that money as late in life as possible. The second-best place is your taxable accounts, because of the low tax rates on QDs and CGs.

BTW, I think 70% stocks is fine, so is 80% stocks.

 

[joejetski]

If you invested $100,000 in the tax free funds listed above in April, 2021, then you would have $105,180 or $106,230 on May 1, 2026. The $5,180 or $6,230 is federal tax free.

On the other hand, if you invested $100,000 in the CD on April, 2021, then you would have $118,000 on May 1, 2026. Subtract 22% federal taxes on the $18,000 and that leaves you with $114,040. The CD made about 2.5 times more money, even after paying taxes.

Or invest in a TF municipal bond CEF like NPV 2X tax free if you live in VA, and make around $7k a year.

 

[Bruno]

Yea not sure the move to VA would be for me. Not many tax free thing happening here in Okla. listening to AI18 I might end up on the corner with my cardboard sign...

 

[Mr_Pink]

What is NFZ? Not finding that one.

Probably meant NZF, a Nuveen Muni CEF.

 

[yclipse]

We keep too much cash and each year i vent about all the taxes i pay at the normal 22-24% bracket. Yesterday my Fido FA said maybe look at FTABX a Tax Free Bond Fund. Still have to pay the OK 5% tax but no Federal tax and it Yield TTM is 3.20% about the same as FZDXX. I would rater have a ETF just staerting to look at my options. Any comment pro or cons is welcome.

CDs, Treasuries, and tax-free bonds are not the only options. I still have many CDs in my retirement account, but in my taxable account I have added equities that pay qualified dividends rather than standard dividends. Qualified dividends are taxed at capital gains rates, and depending on the company the dividend yield is about double the interest rate being paid on CDs.

 

[FD1000]

FTABX and VWAHX are terrible investments, averaging 1.02%/1.22% interest per year over the past 5 years according to https://www.portfoliovisualizer.com/fund-performance?s=y&sl=6AAsyJtK64hax5xv0JQPXr

Which is exactly why certain opportunities can become more attractive after periods of stress or underperformance.

For example, mortgage-backed securities (MBS) were heavily criticized and performed poorly during the 2008 financial crisis. Yet in the years that followed, they became one of the stronger-performing fixed income segments as spreads normalized and risk was better priced.

In rising interest rate environments, bank loan bonds (floating-rate instruments) tend to be more resilient because their coupons adjust with rates, reducing duration risk.

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In taxable accounts, some investors prefer stock funds with low distributions, since they can reduce current tax drag while allowing gains to compound. At death, those assets may also receive a step-up in basis, which can significantly reduce capital gains taxes for heirs.

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My own approach has been different. I have never invested primarily for tax efficiency. My focus has been on maximizing risk-adjusted returns over time, even if that meant paying taxes along the way. Eventually, our taxable accounts will be depleted as we complete the traditional IRA to Roth conversion process.

 

[Bruno]

CDs, Treasuries, and tax-free bonds are not the only options. I still have many CDs in my retirement account, but in my taxable account I have added equities that pay qualified dividends rather than standard dividends. Qualified dividends are taxed at capital gains rates, and depending on the company the dividend yield is about double the interest rate being paid on CDs.

Thank You... I was looking at the savings of investing $100k in both VTEB and SCHD and with the tax free of VTEB difference in SCHD Qualified Divs was only $1200. in a year. And you miss out on all the growth. I hope my math is correct.

 

[wceruzzi]

TLR, I skimmed through the article and didn’t find the ETF BOXX listed as a way to reduce taxable interest. I suggest researching this ETF to determine if it aligns with your goals. Under current tax law, returns are taxed as long-term capital gains (LTCG), or short-term capital gains (STCG), depending on the holding period. Both LTCG and STCG offer more flexibility compared to interest or dividends. The primary advantage I perceive is that any redemptions are partially (and initially mostly) a return of capital.