Changing tax brackets: When to transition out of muni bonds?
- AerialWombat
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Changing tax brackets: When to transition out of muni bonds?
2022 will be my final year in the 35% tax bracket. In 2023, I will be in the 22% bracket. In 2024, I will start doing Roth conversions, to the top of the 12% bracket. I am already retired.
When would it be best to swap my Vanguard Tax-Exempt Bond Index (VTEB) holdings for the fund that will replace it?
In my mind, the default Boglehead answer seems like it would be January 1, 2023, but this is one of several fixed income things I'm having analysis-paralysis over as I transition to my decumulation phase over the next 12 months.
Thank you!
When would it be best to swap my Vanguard Tax-Exempt Bond Index (VTEB) holdings for the fund that will replace it?
In my mind, the default Boglehead answer seems like it would be January 1, 2023, but this is one of several fixed income things I'm having analysis-paralysis over as I transition to my decumulation phase over the next 12 months.
Thank you!
This post is a work of fiction. Any similarity to real financial advice is purely coincidental.
Re: Changing tax brackets: When to transition out of muni bonds?
If you can sell for a loss, beginning of 2023.
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Re: Changing tax brackets: When to transition out of muni bonds?
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Re: Changing tax brackets: When to transition out of muni bonds?
OP, if you don’t mind, can you explain why your tax bracket is fluctuating so much?AerialWombat wrote: ↑Mon Jul 04, 2022 9:39 pm 2022 will be my final year in the 35% tax bracket. In 2023, I will be in the 22% bracket. In 2024, I will start doing Roth conversions, to the top of the 12% bracket. I am already retired.
Also, how did you determine your current and future tax brackets?
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Re: Changing tax brackets: When to transition out of muni bonds?
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Re: Changing tax brackets: When to transition out of muni bonds?
Thank you for the additional info.AerialWombat wrote: ↑Mon Jul 04, 2022 9:39 pm When would it be best to swap my Vanguard Tax-Exempt Bond Index (VTEB) holdings for the fund that will replace it?
In my mind, the default Boglehead answer seems like it would be January 1, 2023, but this is one of several fixed income things I'm having analysis-paralysis over as I transition to my decumulation phase over the next 12 months.
I’m not knowledgeable about the sale of a business but see that the IRS considers it as a collection of things that are each sold separately:
https://www.irs.gov/businesses/small-bu ... a-business
If part of the business is considered a Long term Capital Gain for this year, can’t you sell the bond fund (or anything else) that is a loss this year and have it cancel out part of this year’s gain?
However, if you re-purchased VTEB after selling it once, you need to wait over 30 days to avoid a wash sale.
Re: Changing tax brackets: When to transition out of muni bonds?
It seems to me that January 2023 is the time to do it. Not sure it has to be the first trading day of the year or that it all has to happen on one day.AerialWombat wrote: ↑Mon Jul 04, 2022 9:39 pm In my mind, the default Boglehead answer seems like it would be January 1, 2023, but this is one of several fixed income things I'm having analysis-paralysis over as I transition to my decumulation phase over the next 12 months.
Interesting that you are experiencing analysis-paralysis over this. It doesn't seem very important to me. More like a little detail to take care of than a significant decision.
De-cumulation nerves, perhaps.
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Re: Changing tax brackets: When to transition out of muni bonds?
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Re: Changing tax brackets: When to transition out of muni bonds?
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Re: Changing tax brackets: When to transition out of muni bonds?
Agree with waiting to start until Jan 23. You may be able to combine this with tax loss harvest, account simplification or other goals depending on the circumstances at the time.
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Re: Changing tax brackets: When to transition out of muni bonds?
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Re: Changing tax brackets: When to transition out of muni bonds?
What state do you live in and will that be changing?
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Re: Changing tax brackets: When to transition out of muni bonds?
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Re: Changing tax brackets: When to transition out of muni bonds?
it has been a few days but when I compared a Treasury fund to comparable muni fund, even without my state income tax Treasuries came out better at 22% Federal bracket. If I add in NIIT is was about a wash.AerialWombat wrote: ↑Tue Jul 05, 2022 5:43 pmI live in a state with no income tax, and that will not be changing (even though the actual state might).
It tends to wobble back and forth but 22% seems to be a rough break-even.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
Re: Changing tax brackets: When to transition out of muni bonds?
From the numbers I looked at today, and ignoring state tax, the fund you are using and BND pay about the same after federal taxes at 22% are concerned.
The "breakeven" rate, pre and post tax, tends to move around with time. 22% and 24% are kind of where it wobbles back and forth from what I've seen. I think any time after you leave the 35% bracket is the right time to move the money.
The "breakeven" rate, pre and post tax, tends to move around with time. 22% and 24% are kind of where it wobbles back and forth from what I've seen. I think any time after you leave the 35% bracket is the right time to move the money.
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Re: Changing tax brackets: When to transition out of muni bonds?
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Re: Changing tax brackets: When to transition out of muni bonds?
However, the break-even between two funds may not be the point at which the two funds are equally desirable. If two funds have the same after-tax yield, but one has lower risk, that one is better.retiredjg wrote: ↑Tue Jul 05, 2022 6:04 pm From the numbers I looked at today, and ignoring state tax, the fund you are using and BND pay about the same after federal taxes at 22% are concerned.
The "breakeven" rate, pre and post tax, tends to move around with time. 22% and 24% are kind of where it wobbles back and forth from what I've seen. I think any time after you leave the 35% bracket is the right time to move the money.
My rule of thumb is that 25% is break-even at the same risk level, so I would switch at 24% if you are not subject to the Net Investment Income Tax (marginal tax rate 27.8%) or some other phase-out such as the child tax credit. If you can use a Vanguard fund for your own state, keep that fund even in the 22% bracket.
Re: Changing tax brackets: When to transition out of muni bonds?
If you have losses, it seems that you should sell in late December 2022 in order to offset ordinary income in your current tax bracket. If you have substantial long-term gains, you could consider waiting to sell if you will have any opportunity to harvest at a lower LTCG rate (20% -> 15% or ideally 0%).
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Re: Changing tax brackets: When to transition out of muni bonds?
Agree with all of this, with one slight addendum: "If you can use a Vanguard fund for your own state [add: or you live in DC where a national muni fund is exempt], keep that fund even in the 22% bracket."grabiner wrote: ↑Tue Jul 05, 2022 9:29 pmHowever, the break-even between two funds may not be the point at which the two funds are equally desirable. If two funds have the same after-tax yield, but one has lower risk, that one is better.retiredjg wrote: ↑Tue Jul 05, 2022 6:04 pm From the numbers I looked at today, and ignoring state tax, the fund you are using and BND pay about the same after federal taxes at 22% are concerned.
The "breakeven" rate, pre and post tax, tends to move around with time. 22% and 24% are kind of where it wobbles back and forth from what I've seen. I think any time after you leave the 35% bracket is the right time to move the money.
My rule of thumb is that 25% is break-even at the same risk level, so I would switch at 24% if you are not subject to the Net Investment Income Tax (marginal tax rate 27.8%) or some other phase-out such as the child tax credit. If you can use a Vanguard fund for your own state, keep that fund even in the 22% bracket.
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Re: Changing tax brackets: When to transition out of muni bonds?
Lots of moving parts to this decision. A further wrinkle not yet discussed: the OP mentioned plans to use to ACA exchange coverage, which implicitly increases the effective marginal tax rate beyond the statutory bracket rate. It is worth noting that tax-exempt interest income is included in computation of MAGI for ACA purposes and will also be taken into account in ACA cliff effects.HootingSloth wrote: ↑Wed Jul 06, 2022 9:13 amAgree with all of this, with one slight addendum: "If you can use a Vanguard fund for your own state [add: or you live in DC where a national muni fund is exempt], keep that fund even in the 22% bracket."grabiner wrote: ↑Tue Jul 05, 2022 9:29 pmHowever, the break-even between two funds may not be the point at which the two funds are equally desirable. If two funds have the same after-tax yield, but one has lower risk, that one is better.retiredjg wrote: ↑Tue Jul 05, 2022 6:04 pm From the numbers I looked at today, and ignoring state tax, the fund you are using and BND pay about the same after federal taxes at 22% are concerned.
The "breakeven" rate, pre and post tax, tends to move around with time. 22% and 24% are kind of where it wobbles back and forth from what I've seen. I think any time after you leave the 35% bracket is the right time to move the money.
My rule of thumb is that 25% is break-even at the same risk level, so I would switch at 24% if you are not subject to the Net Investment Income Tax (marginal tax rate 27.8%) or some other phase-out such as the child tax credit. If you can use a Vanguard fund for your own state, keep that fund even in the 22% bracket.
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Re: Changing tax brackets: When to transition out of muni bonds?
That's a good point too. There's a lot of potential complexity that falls within the "or some other phase-out" caveat. It's hard to write down a comprehensive list. There's also a bunch of uncertainty, e.g., about how those ACA cliffs/phaseouts are going to work in the future. One way of looking at things is that all the complexity is magnified in the 22% bracket ("the messy middle") because smaller changes could make the difference. But another way of looking at things is that you probably won't go too far wrong either way.dodecahedron wrote: ↑Wed Jul 06, 2022 9:29 amLots of moving parts to this decision. A further wrinkle not yet discussed: the OP mentioned plans to use to ACA exchange coverage, which implicitly increases the effective marginal tax rate beyond the statutory bracket rate. It is worth noting that tax-exempt interest income is included in computation of MAGI for ACA purposes and will also be taken into account in ACA cliff effects.HootingSloth wrote: ↑Wed Jul 06, 2022 9:13 amAgree with all of this, with one slight addendum: "If you can use a Vanguard fund for your own state [add: or you live in DC where a national muni fund is exempt], keep that fund even in the 22% bracket."grabiner wrote: ↑Tue Jul 05, 2022 9:29 pmHowever, the break-even between two funds may not be the point at which the two funds are equally desirable. If two funds have the same after-tax yield, but one has lower risk, that one is better.retiredjg wrote: ↑Tue Jul 05, 2022 6:04 pm From the numbers I looked at today, and ignoring state tax, the fund you are using and BND pay about the same after federal taxes at 22% are concerned.
The "breakeven" rate, pre and post tax, tends to move around with time. 22% and 24% are kind of where it wobbles back and forth from what I've seen. I think any time after you leave the 35% bracket is the right time to move the money.
My rule of thumb is that 25% is break-even at the same risk level, so I would switch at 24% if you are not subject to the Net Investment Income Tax (marginal tax rate 27.8%) or some other phase-out such as the child tax credit. If you can use a Vanguard fund for your own state, keep that fund even in the 22% bracket.
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Re: Changing tax brackets: When to transition out of muni bonds?
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Re: Changing tax brackets: When to transition out of muni bonds?
I think if I were in your shoes, I would switch over at some point in 2023 but not make any special effort to do it at a particular time during that year. I probably would even wait more towards the end of the year if I thought there was a decent chance that my plans might evolve.AerialWombat wrote: ↑Wed Jul 06, 2022 10:47 amNo income tax in my state, so that avoids those concerns. And when I start arranging affairs to get the ACA credit, I’ll be hunkering down in the 12% (15% in 2026) tax bracket, where I will probably remain for the rest of my life.HootingSloth wrote: ↑Wed Jul 06, 2022 10:13 amThat's a good point too. There's a lot of potential complexity that falls within the "or some other phase-out" caveat. It's hard to write down a comprehensive list. There's also a bunch of uncertainty, e.g., about how those ACA cliffs/phaseouts are going to work in the future. One way of looking at things is that all the complexity is magnified in the 22% bracket ("the messy middle") because smaller changes could make the difference. But another way of looking at things is that you probably won't go too far wrong either way.dodecahedron wrote: ↑Wed Jul 06, 2022 9:29 amLots of moving parts to this decision. A further wrinkle not yet discussed: the OP mentioned plans to use to ACA exchange coverage, which implicitly increases the effective marginal tax rate beyond the statutory bracket rate. It is worth noting that tax-exempt interest income is included in computation of MAGI for ACA purposes and will also be taken into account in ACA cliff effects.HootingSloth wrote: ↑Wed Jul 06, 2022 9:13 amAgree with all of this, with one slight addendum: "If you can use a Vanguard fund for your own state [add: or you live in DC where a national muni fund is exempt], keep that fund even in the 22% bracket."grabiner wrote: ↑Tue Jul 05, 2022 9:29 pm
However, the break-even between two funds may not be the point at which the two funds are equally desirable. If two funds have the same after-tax yield, but one has lower risk, that one is better.
My rule of thumb is that 25% is break-even at the same risk level, so I would switch at 24% if you are not subject to the Net Investment Income Tax (marginal tax rate 27.8%) or some other phase-out such as the child tax credit. If you can use a Vanguard fund for your own state, keep that fund even in the 22% bracket.
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Re: Changing tax brackets: When to transition out of muni bonds?
Note that when you start drawing SS benefits your effective marginal tax rate can be a lot higher than your bracket rate. Details here:AerialWombat wrote: ↑Wed Jul 06, 2022 10:47 am And when I start arranging affairs to get the ACA credit, I’ll be hunkering down in the 12% (15% in 2026) tax bracket, where I will probably remain for the rest of my life.
https://www.bogleheads.org/wiki/Taxatio ... y_benefits
Re: Changing tax brackets: When to transition out of muni bonds?
But munis don't help much here, as muni income is counted as income for the phase-in. For example, suppose you are in the 15% bracket, but in the upper phase-in so that every $1 of income makes 85 cents of SS taxable. Your marginal tax rate is 27.75%, but your marginal tax rate on muni interest is 12.75%, so you still won't want to use munis.dodecahedron wrote: ↑Fri Jul 08, 2022 11:20 pmNote that when you start drawing SS benefits your effective marginal tax rate can be a lot higher than your bracket rate. Details here:AerialWombat wrote: ↑Wed Jul 06, 2022 10:47 am And when I start arranging affairs to get the ACA credit, I’ll be hunkering down in the 12% (15% in 2026) tax bracket, where I will probably remain for the rest of my life.
https://www.bogleheads.org/wiki/Taxatio ... y_benefits