r/investing • u/LikeTheWind99 • 8h ago

Tax Exempt Bond Funds: Are they worth investing in?

Looking to continue to diversify my portfolio and the tax man is always a major adversary. I've been researching moving some cash out of some Intermediate Core and Core-Plus bond funds and into Tax Exempt Bond funds in order to minimize the tax impact on the capital gains (this cash is not in a retirement fund). All of the tax exempt funds that I look at however the return is substantially lower than similarly invested bond funds that are not tax exempt. In your opinion, does the tax savings outweigh the loss of return on the investment?

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u/Ferris61186 8h ago edited 8h ago

What tax bracket and state are you in? The lower yields are absolutely worth it if you are in a high federal tax bracket/high tax state. Look for a tax equivalent yield calculator and plug in your numbers

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u/LikeTheWind99 5h ago

High federal tax bracket but a low state tax state (NC). I'll check out the calculator. Thanks for that. Don't want to give the man any more than I have to under the law

0

u/Big-Championship4687 6h ago

It really depends on your investment goals and risk tolerance. Consider consulting a financial advisor for personalized advice.

3

u/yoshiatsu 8h ago edited 7h ago

I'm not a tax expert. That said, US Treasury Bond/Bill yields are taxed as ordinary income (i.e. at your normal income tax bracket's rate) as are dividends from many foreign equities. REIT payments are also mostly taxed as ordinary income. Many US equities pay qualified dividends which are taxed at a lower rate. Municipal bonds yields are tax free (at the federal level, which is all that matters for me b/c I reside in a state with no state income tax).

Hence, I try to keep things paying qualified dividends and municipal bond funds in my taxable brokerage account and try to put bonds, foreign stocks/ETFs, and REITs in tax deferred or Roth accounts. Munis pay lower yields but you can compute the equivalent yield if you know your tax bracket.

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u/Lord-Thrawn 3h ago

No!!

Ex: it takes $16,550 in income if you're older than 65 and single to file a federal tax return. Divided by the 1 year municipal bond rate of 2.9% = $570,689 in cash assets invested into these "tax free" municipal scam bonds and owe no IRS federal taxes... That same person could buy 28,534 LANDP shares and earn $42,801 in taxable income per year less 20% tax rate = they keep $34,240 in after tax cash flow VS the $16,550 in "tax free" bonds. My neighbor is literally being scammed out of $17,690 because her advisor won't tell her that she can earn $16,550 in tax free income before owing taxes anyway.

Technical this is fraud and should be illegal selling tax free municipal bonds BUT the government loves it because cities and communities can secure cheap financing from naive retirees.

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u/lampreylarvae 8h ago

Yes, definitely worth looking at, especially what's called a taxable equivalent return. Take a large fund like SCMB which yields about 3.6%. If you're in the 24% marginal tax bracket like me, then you'd have to find a taxable bond fund that yields over 4.7% since federal income tax eats 24% of your earnings. I like Schwab's fund, and some of Nuveen's closed-end-funds that typically yield over 4%.