Should Add a Municipal Bond Fund in Our Joint Account?

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Topic Author
Sammy123
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Joined: Mon May 16, 2022 2:05 pm

Should Add a Municipal Bond Fund in Our Joint Account?

Post by Sammy123 »

I am in the process of consolidating 30 separate funds in 7 “tax treatment” accounts into the Core 4 funds (BND, BNDX, VTI, VXUS) in 6 “tax treatment" accounts (unfortunately there’s no way to consolidate to less than 6 “tax treatment” accounts). I am trying to get close to a 60:40 stock to bond ratio. Portfolio stats are as follows:

Total Portfolio Value = $4,800,000
Annual Income Need = $140,000 (3.5% of Portfolio Value)
Current Asset Allocation = 75% stock / 21% Bond / 4% Cash

The 6 “tax treatment accounts” are as follows (percentages are of total assets):

1. Taxable Joint Account - 51% of total assets (current stock:bond 100:0)
- 4% Cash
- 33% VTI
- 14% VXUS

2. His Rollover IRA - 35% of total assets (current stock:bond 40:60)
- 10% VTI
- 4% VXUS
- 15% BND
- 6% BNDX
-
3. Her Inherited IRA - 3% of total assets (current stock:bond 100:0)
- 2% VTI
- 1% VXUS

4. His Inherited IRA - 3% of total assets (current stock:bond 100:0)
- 2% VTI
- 1% VXUS
- Yes, his is same as hers.

5. Her Roth IRA - 1% of total assets (current stock:bond 100:0)
- 0.7% VTI
- 0.3% VXUS

6. His Roth IRA - 6% of total assets (current stock:bond 100:0)
- 4% VTI
- 2% VXUS

As can be seen, all of the bond funds are in the rollover IRA. This bothers me a little in that I was planning on this account will be 4th on the list to withdraw from (first = joint account; second = her inherited IRA, third = his inherited IRA, fourth = his rollover IRA). So I have all stocks in the accounts from which I will be withdrawing first, and all of my bonds in the account I withdraw from in maybe 15 years. I have kept bonds out of the taxable account with the knowledge that interest payed on bonds is taxed at your income tax rate. I have been trying to stick with the “Core 4” approach (VTI, VXUS, BND, BNDX) but maybe I should let that go - or at least make an exception. If I want to add more bonds to my portfolio (to get closer to a total allocation of 60:40) I don’t really want MORE bonds (meaning LESS stock) in my Rollover IRA. Should I consider adding a municipal bond fund to our Joint Account? If yes, what fund would you recommend (I like to stay with Vanguard). Any other ideas?
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retiredjg
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Re: Should Add a Municipal Bond Fund in Our Joint Account?

Post by retiredjg »

This seems way more complicated that it needs to be. And 21% bonds is not enough to get you anywhere near your desired allocation of 40% bonds and cash.

You need 15% more in bonds and you need way fewer funds. And you don't need bonds in taxable but could have some if you want. Whether they should be munis or not depends on your tax bracket.


Are you in retirement now/soon?

What is/will be your tax bracket?

Is there other income?

Do you plan to do Roth conversions?

Are you familiar with wash sales and how to avoid them or how to document them on your taxes?

Why do you plan to spend from taxable first?
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Artsdoctor
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Location: Los Angeles, CA

Re: Should Add a Municipal Bond Fund in Our Joint Account?

Post by Artsdoctor »

I really like the idea that you're trying to consolidate things as much as possible. In general, you're going to want to view all of your accounts as a whole and you appear to be doing that.

I agree with you that having bonds in your taxable account increases your flexibility. Depending on your marginal tax rate, the Vanguard intermediate-term tax-exempt fund is used by many on the forum so look into that. It's an intermediate term fund, the funds has a huge number of bonds, the credit quality is good, and the ER is tiny.

Given the size of your portfolio, you might be interested in tax-loss harvesting. If you think that that might benefit you, you might want different ETFs in the taxable account to avoid wash sale rules. For example, you can't sell your VTI in your taxable account and buy VTI in your IRA soon thereafter without running into a wash sale. You may not be interested in TLH so perhaps you wouldn't apply to you.
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grabiner
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Re: Should Add a Municipal Bond Fund in Our Joint Account?

Post by grabiner »

Given your income, you are probably in the 22% bracket, and in that bracket, munis are not attractive unless Vanguard has a fund for your state. While you do pay tax on taxable bonds, my rule of thumb is that the yield on a muni fund is 75% of the yield on a taxable fund of comparable risk. In the 22% bracket, you would keep 78% of the taxable yield.

The order in which you withdraw from the IRAs doesn't matter. If you have to withdraw from an IRA which contains only bonds, and you want to sell stock to keep your target allocation, you can withdraw the bonds in that IRA, and move an equal amount from bonds to stock in some other account.

Since you have a large taxable account, it's likely a good deal to convert the rollover IRA to a Roth IRA up to the top of the 22% tax bracket, paying the tax from the taxable account. This will give you more tax-free growth in the future, and avoid the risk that you have to take RMDs that are more than you need to spend.
Wiki David Grabiner
Topic Author
Sammy123
Posts: 38
Joined: Mon May 16, 2022 2:05 pm

Re: Should Add a Municipal Bond Fund in Our Joint Account?

Post by Sammy123 »

retiredjg wrote: Sat Aug 13, 2022 4:48 pm This seems way more complicated that it needs to be.

Sammy123 - I have only 4 funds: VTI, VXUS, BND, BNDX. I suppose I could reduce this to 2 funds, but that's not that much of a simplification.

Sammy123 - I do have 6 "tax treatment" accounts but I have been told by multiple sources that there is no fast way to reduce the 6 amounts into something fewer. Do you see a way to simplify my portfolio that others have missed?

And 21% bonds is not enough to get you anywhere near your desired allocation of 40% bonds and cash. You need 15% more in bonds and you need way fewer funds. And you don't need bonds in taxable but could have some if you want. Whether they should be munis or not depends on your tax bracket.

Are you in retirement now/soon?

Sammy123 - My wife and I just retired this year (2022)

What is/will be your tax bracket?

Sammy123 - Our "normal" tax bracket is 24%. But to keep the full Obamacare medical coverage subsidy for the next few years (from not until we are on medicare), we may fund our income needs with a combination of cash and stock to keep our income below $85,000.

Is there other income?

Sammy 123 - Not until we take social security which we will do in accordance with the advice in www.opensocialsecurity.com

Do you plan to do Roth conversions?

Sammy 123 - Yes. We would like to convert some of the Rollover IRA to Roth IRA. Unfortunately, we can't do this until we are on medicare and no longer get the Obamacare medical coverage subsidy. Converting from Rollover IRA to Roth IRA would make our income so high as to eliminate some or all of the subsidy.

Are you familiar with wash sales and how to avoid them or how to document them on your taxes?
Sammy 123 - Yes. I think I understand wash sales. If you sell a fund at a loss, make sure not to but the same or very similar fund for at least a month,

Why do you plan to spend from taxable first?

Sammy123 - Everything I have read says the order should be as follows: First = Taxable (Joint Account) Second = Tax Deferred (Conventional IRA) Third = Roth IRA. The reason, they say, is that you want as much investment earnings as possible to grow tax free (Roth) or tax deferred (conventional IRA) and not taxed immediately.
Topic Author
Sammy123
Posts: 38
Joined: Mon May 16, 2022 2:05 pm

Re: Should Add a Municipal Bond Fund in Our Joint Account?

Post by Sammy123 »

Artsdoctor wrote: Sat Aug 13, 2022 4:59 pm I really like the idea that you're trying to consolidate things as much as possible. In general, you're going to want to view all of your accounts as a whole and you appear to be doing that.

I agree with you that having bonds in your taxable account increases your flexibility. Depending on your marginal tax rate, the Vanguard intermediate-term tax-exempt fund is used by many on the forum so look into that. It's an intermediate term fund, the funds has a huge number of bonds, the credit quality is good, and the ER is tiny.

Given the size of your portfolio, you might be interested in tax-loss harvesting. If you think that that might benefit you, you might want different ETFs in the taxable account to avoid wash sale rules. For example, you can't sell your VTI in your taxable account and buy VTI in your IRA soon thereafter without running into a wash sale. You may not be interested in TLH so perhaps you wouldn't apply to you.
Sammy 123
- Thanks for your help. I will look into the Vanguard intermediate-term tax-exempt fund.
- I am practicing tax loss harvesting. When I sell an investment at a gain, I sell a comparable investment at a loss. So for, my total for this year are for an un realized gain close to zero.
Topic Author
Sammy123
Posts: 38
Joined: Mon May 16, 2022 2:05 pm

Re: Should Add a Municipal Bond Fund in Our Joint Account?

Post by Sammy123 »

grabiner wrote: Sat Aug 13, 2022 9:19 pm Given your income, you are probably in the 22% bracket, and in that bracket, munis are not attractive unless Vanguard has a fund for your state. While you do pay tax on taxable bonds, my rule of thumb is that the yield on a muni fund is 75% of the yield on a taxable fund of comparable risk. In the 22% bracket, you would keep 78% of the taxable yield.

Sammy123 - Thanks for your input. What is your opinion of the Vanguard intermediate-term tax-exempt fund to be held in a taxable account (say 10% or so vs 90% stock).

The order in which you withdraw from the IRAs doesn't matter. If you have to withdraw from an IRA which contains only bonds, and you want to sell stock to keep your target allocation, you can withdraw the bonds in that IRA, and move an equal amount from bonds to stock in some other account.

Since you have a large taxable account, it's likely a good deal to convert the rollover IRA to a Roth IRA up to the top of the 22% tax bracket, paying the tax from the taxable account. This will give you more tax-free growth in the future, and avoid the risk that you have to take RMDs that are more than you need to spend.
Sammy 123 - Converting from Rollover IRA to Roth IRA is in my plan. However, we have just retired (me=60; wife= 62.5) and are receiving medical coverage via ACA (aka Obamacare). We need to keep our income below $85,000 to retain 100% of the subsidy (about $21,000 per year). If we convert from Rollover IRA to Roth IRA today we will loose some or all of the subsidy. So we will convert after we are in medicare and before we take Social Security and RMDs from Rollover account.
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retiredjg
Posts: 54082
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Re: Should Add a Municipal Bond Fund in Our Joint Account?

Post by retiredjg »

Sammy123 wrote: Mon Aug 15, 2022 1:01 pm Sammy123 - I have only 4 funds: VTI, VXUS, BND, BNDX. I suppose I could reduce this to 2 funds, but that's not that much of a simplification.

Sammy123 - I do have 6 "tax treatment" accounts but I have been told by multiple sources that there is no fast way to reduce the 6 amounts into something fewer. Do you see a way to simplify my portfolio that others have missed?
This can be much simpler by holding only one fund in several of those accounts. I'll try to come up with an example later today. And you are correct that you can't get to fewer than 6 accounts at the present time.

Sammy123 - Our "normal" tax bracket is 24%. But to keep the full Obamacare medical coverage subsidy for the next few years (from not until we are on medicare), we may fund our income needs with a combination of cash and stock to keep our income below $85,000.
This is a good reason to spend from the taxable account first.

Is the $85k you need to stay under your gross income, AGI or MAGI, or taxable income?

Are you familiar with wash sales and how to avoid them or how to document them on your taxes?
Sammy 123 - Yes. I think I understand wash sales. If you sell a fund at a loss, make sure not to but the same or very similar fund for at least a month,
That is a decent short version, but people tend to forget (or don't know) that those "buys" can be reinvestment of dividends in your IRAs and Roth IRAs. And it is 30 days before and 30 days after the sale from taxable at a loss.

The way you have set the portfolio up - with the exact same funds in taxable and in your other accounts - you will have to always be watching for wash sales. You will either need to do something to prevent the wash sale or you will have to deal with it on your taxes. People do it different ways, but my preference is to simply never have the same funds in taxable as the other accounts. I'll show you how to do that but if you prefer to hold the same things in all the accounts, that's OK as long as you know what to do with it.


Sammy123 - Everything I have read says the order should be as follows: First = Taxable (Joint Account) Second = Tax Deferred (Conventional IRA) Third = Roth IRA. The reason, they say, is that you want as much investment earnings as possible to grow tax free (Roth) or tax deferred (conventional IRA) and not taxed immediately. .
This "advice" gets thrown around a lot, but it is pretty much hogwash and would be pretty contrary to what would be best if you were not trying to stay under a limit for the ACA. However, spending first from taxable (and maybe some Roth) is a common strategy for people wanting ACA subsidies.
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retiredjg
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Re: Should Add a Municipal Bond Fund in Our Joint Account?

Post by retiredjg »

Here's an idea to consider. It is 60% stocks and 40% bonds. I may not have your US vs Foreign split how you like it, but this is just an example.

1. Taxable Joint Account - 51%
- 4% Cash or bonds
- 33% VTI
- 14% VXUS

2. His Rollover IRA - 35%
- 3 500 index
- 2 some other international ETF (or hold all the international in taxable)
-30% bonds (split how you like)
-
3. Her Inherited IRA - 3%
3% bonds

4. His Inherited IRA - 3%
3% bonds

5. Her Roth IRA - 1%
1% extended market index

6. His Roth IRA - 6%
6% 500 index


The combination of 500 index and extended market index (at roughly 80:20 but don't it does not have to be real accurate) is about the same as total stock.


As you spend from taxable, adjust His Rollover IRA or the inherited IRAs to maintain something in the neighborhood of 60% stocks and 40% bonds. It does not have to be exact. You can wander up or down 5% with no problems.

Don't worry about selling stocks in taxable "low" because you can turn around and sell bonds in the rollover IRA and buy stocks at that same low price. This is exactly the same as having sold bonds in the first place.

You might want to actually start with more than 4% in cash or bonds in taxable - I didn't change it because that may be what you actually have right now and you may not want to change it.

In your low tax bracket, you do not need to use a tax-exempt bond in taxable under most circumstances. Tax-exempt bonds are useful in the higher tax brackets.

When you do get to Roth conversions, get rid of the tiny inherited IRAs first. Since you will be selling bonds, you will have to put bonds in Roth or bonds in taxable to maintain your AA - you pick which you hate the least.
Topic Author
Sammy123
Posts: 38
Joined: Mon May 16, 2022 2:05 pm

Re: Should Add a Municipal Bond Fund in Our Joint Account?

Post by Sammy123 »

Hey Retiredjg - Thank you very much for all of your help!
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