Hi Skeptical,My tax deferred is small compared to my taxable, so my taxable is about 40% bonds (50/50 overall allocation), all of which is in muni funds (VTEB).Please your thoughts on pros and cons of muni bond fund vs individual muni bonds, and at what taxable income makes most sense to go with munis.
I'm considering exchanging a portion of my taxable fixed income (about $500,000 of $1 million), currently in treasury money market and T-bills, to California muni bond fund VCADX or individual muni bonds. I need the income, along with my dividends, to live on.
Currently, I'm in federal tax bracket 24%, and state 9.3%
Annette Thau's "The Bond Book" says consider buying 3-7 year bond durations when interest rate risks are high. She was talking about treasuries.
I have considered going with a Municipal Bond Broker to invest in individual bonds. California currently has a huge budget deficit, which gives me pause with individual bonds, due to increased risks (in my mind). I interviewed two bond brokers, one of whom said he'd put $25,000 to $50,000 in individual bonds with 5-12 year durations. Another broker said he'd invest in $5000 increments up to 10 years.
My investment income last year was $138,000, with only standard deduction available to offset income. I expect this year will be a bit more income. As interest rates fall, and I take a portion of my cash to buy property (separate from aforementioned money above), my income will fall again.
Thank you for weighing in.
While I can understand why some people would buy individual treasury bonds, I do not see the point of individual Muni bonds, unless you have very specific and well defined needs. Muni bonds are complex, difficult to diversify unless you have a very large account, and have high costs when selling before maturity. I also do not believe that brokers can or will get you the best prices. Vanguard has, IMO, the best Muni funds. Bond funds are much, much, much easier to maintain, add to, and sell some, and allow you to do tax loss harvesting, as well as letting you easily switch in the future (national Muni, state specific, longer term, shorter term, etc.
You should also go beyond looking at tax equivalent yield. You need to look at your total tax situation, as Munis can lower your taxes in other areas of your portfolio. For example, you might have more space for zero cap gain bracket and/or Roth conversions, avoid or reduce NIIT, lower AGI for various federal and state tax credits, etc, etc. You also should look at total return, not just interest. I have found that intermediate Muni funds have matched or beaten total Bond and intermediate treasuries even before taxes are taken into account when total return is taken into account. This might be because Munis have or are perceived to have greater risk.
Great name, I am skeptical often too.
I appreciate you sharing VTEB thoughts. My tax-deferred is small too. I agree about looking at total return, though, I am more experienced with total healthy equity returns.Statistics: Posted by GetSmarter — Fri Sep 06, 2024 12:13 am — Replies 16 — Views 818