Muni fund (for specific state) in taxable account
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Anonymous
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The bulk of our retirement savings are in 401k accounts (about $4M). We have a taxable account that I would like to grow to $1M from $400,000 over the next couple years (from additional investments). We are mid 50s and plan to retire in 3 years.
The plan is to use taxable account to fund living expenses for the first few years (maybe do rollovers into Roth during those years). In the taxable account, I have t-bills and VTI only, about 50/50. Would adding muni bond fund be good step? We are in 37% tax bracket now. |
Anonymous
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You can either add muni bond funds or actual municipal bonds.
Bond funds are somewhat of a cyclical investment. In theory, right now they are a good investment if the Fed starts lowering rates. You do want to pay attention to how much leverage (or not) the bond fund uses to "juice" returns and you need to decide between a mutual fund or closed-end fund. You can purchase highly rated state-specific municipal bonds through your broker. If you go this route, you know the dividend you will receive and you will get back your principal. I think right now is a good time to add municipal bonds to your portfolio...just understand if you buy a mutual fund or closed-end fund you want to pay attention to when the Fed ends its rate-cut cycle and of course when it intends to increase rates again. |
Anonymous
| OP here. Thanks for that reply. I will read more about closed-end funds and decide. |
Anonymous
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We have a lot of municipal bonds in a high income city and state. As I think you know, you have to get bonds in your income-taxed state for them to be worthwhile because then your 5% coupon has a higher yield due to no tax, whereas with funds (someone can speak to this) I'm not sure if those are tax free. Also, does your state have a tax free muni fund?
Moreover, for 400K invested over 3 years, you'd have to have nearly a 36% annualized return to hit 1MM. I can't imagine that is even possible. |
Anonymous
| ^^^ with bonds |
Anonymous
OP here. We are in NY currently, so I see there are NY specific muni funds. On that last point, that’s why we plan to hit $1M with additional investments. We basically save my husband’s entire earnings at this point. Returns on our account will be only a very small portion of what gets us to $1M. |
Anonymous
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Given your federal tax rate and that NY state taxes are high, your after tax returns are likely higher with NY munis than on USTs.
You might be able to do some quick math to verify, taking into account expense ratios of the funds, as well as the fact that interest will be free from both state and federal tax. Munis do carry credit risk that USTs don't, but you should be okay with a fund over a single issue. |
Anonymous
| OP here. Looking to buy a muni fund on Fidelity that is not a Fidelity fund. I see it is flagged as having a fee for transactions, but the fee shown for this fund is listed as $0. Are there other fee? I probably need to call Fidelity. |
Anonymous
Avoid anything that has more then a $0 up front fee, sometimes called a front-end load. But there are always ongoing expense fees for managing the fund. This is what you want to minimize, once you have selected a fund that matches your needs. Expense ratio 0.16% https://investor.vanguard.com/investment-products/mutual-funds/profile/vyfxx Expense ratio 0.17% https://investor.vanguard.com/investment-products/mutual-funds/profile/vnytx Expense ratio 0.09% https://advisors.vanguard.com/investments/products/vnyux/vanguard-new-york-long-term-tax-exempt-fund-admiral-shares |
Anonymous
Thanks, but these all have transaction fees at Fidelity. I will look for a similar fund without one, although the similar Fidelity fund does not look as good. |
Anonymous
Just open a Vanguard account |