Howdy, Stranger!

It looks like you're new here. If you want to get involved, click one of these buttons!

In this Discussion

Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.

    Support MFO

  • Donate through PayPal

Municipal Bond Outlook

I wrote two articles for the MFO newsletter this month. One is on municipal bond funds. Columbia Threadneedle Investments just published an article, "Municipal Bond Outlook". The author's conclusion which I agree with is:

"Historic tax-equivalent yields alone are a good enough reason to consider allocating into municipal bonds. Doing it in the current yield environment also allows investors to pursue a longer-term buffer against the potential for falling interest rates or the impacts of a recession."

My article evaluates several quality municipal bond funds.


  • Which funds were those? I read through the article but did not see any specific funds mentioned.
  • edited August 2023
    Sorry, Lynn. Paywall on that referenced article. Somehow, that's become a permanent problem between my laptop and Seeking Alpha. But I'm glad to find out the other stuff you just shared. In my tax situation, munis would serve no real purpose, anyhow.
  • Maybe Lynn's article "this month" means September, coming up on Friday? Looking forward to it ...

    The Columbia piece: It seems to be industry standard, given that they're trying to sell something, but the maximum tax-equivalent yield of a muni is misleading as the only yardstick offered. To elucidate the obvious, investors need to run their own numbers based on their marginal tax rate to get their very own equivalent yields for a given fund before getting too excited about it.
  • Yes, my article is coming out in September. Munis will mostly benefit those in high tax brackets. They benefit me because they help keep income low while doing a Roth conversion.
  • I sold all of my muni funds earlier this year because their yields were so low compared to other income investments— CDs, Treasuries, money markets, taxable bond funds, etc. They make no sense at current yields unless you are in a high tax bracket. We’ve been in the 12% bracket for a while, but munis had competitive yields until this year. Now they’re not competitive even if we bump up to the 22% bracket.
  • @lynnbolin2021

    All depends on what interest rates do which depends on hard or soft landing or "no landing". Long term muni funds like VWLTX are down 3% or so this year. They pay about the same so if interest rates don't go up you may be whole in a while.

    Given the various state tax rates and laws, and federal brackets, Medicare 3.8% surcharge everybody's situation is different.

    I am leery of articles like This Columbia one. touting a vague "tax equivalent yield" because one size does not fit all.

    Don't forget, also ( which I am sure you didn't) that tax exempt dividends are added back to AGI in calculating the Medicare B premiums.

  • edited August 2023
    The generally low IG muni yields with my lower marginal tax rate is why for several years, my only muni investments have been in high yield, and only when they're good buys with a fresh spot of momentum. (And after a good run slows/stops, it's good-bye.)

    Thanks for the clarification of your situation, @lynnbolin2021. Of course all of us have individual situations that can make any specific investment a go or no-go.
  • Munis including junk munis have been a major disappointment to date in 2023. Without getting into a bunch of technical or fundamental jargon or research, I would simply say so goes the 10 year so goes munis. It has pretty much always been that way.
  • Thanks for the feedback.

    The funds that I write about in the article generally have high quality since the possibility of a recession next year is high.

    Most of my money is in tax advantaged accounts which use taxable bond funds and ladders. Munis are more suited for taxable bond funds. RMDs and Roth conversions can push some people into higher tax brackets or impact Medicare Premiums. The Munis that I cover are exempt from Federal Taxes. I invested in one that invests in the state that I live in and is also exempt from state taxes.
  • Munis are more suited for taxable bond funds. "

    Sorry, rough night last night. This should read, "Munis are more suited for taxable accounts."
  • msf
    edited September 2023
    Getting pushed into a higher tax bracket itself (without other effects like triggering IRMAA) is often not a good enough reason to use munis instead of taxable bonds.

    Say you're at the top of the 12% tax bracket. By assumption any extra taxable dollars will be taxed at 22% and there are no other effects.

    As tarheel observed, with current yields one would be better off investing in a taxable fund and getting taxed at 22% than investing in a muni fund. Even if those extra taxable dollars are what's bumping you into the higher 22% bracket.

    Likely getting pushed into the 24% bracket is also not enough to make munis attractive today. The 32% bracket would be a different story.

    For example, comparing sma3's VWLTX (SEC yield 3.84%) with VWESX (SEC yield 5.25%), the latter yields 3.99% after tax @ 24%. Taxable bonds still "win" (disregarding other concerns like IRMAA).
  • @msf - I thought muni income was added back in before IRMAA determination.
  • That's correct, muni income is included in the IRMAA calculation.

    However, if you get the same net income (after taxes) from a taxable fund and a muni fund, the muni fund looks better from an IRMAA perspective.

    For example, and to simplify arithmetic, suppose you're in a 25% tax bracket. A taxable bond fund yielding 4% returns the same amount after-tax as a muni bond fund yielding 3%.

    $100 invested in the taxable fund generates $4 of income (gross), while generating just $3 of income in the muni fund. The latter is better in terms of IRMAA.

    Even in a 22% bracket, it might be worth taking the $3 tax-free from the muni fund instead of going for $3.12 after- tax return from the taxable fund. You give up a small amount (12¢) of net (after-tax) income with the muni fund but reduce gross income by much more ($1).

    That could make the difference between owing IRMAA and staying below its threshold.

  • @msf Thanks. LOL, the example was spot-on. (I'm in the 24% bracket.) I live in a no income tax state (WA) but I haven't paid much attention to Federal tax advantages that might be found. Actually, I am enough into the bracket since my RMDs started falling that I don't think anything could help with IRMAA anyway.
  • The time between retirement and taking Required Minimum Distributions (Age 72) is often called the "Golden Years" because income for retirees is lower than in the future. Deferring Social Security increases this effect. Federal Taxes cuts in 2017 are set to expire in 2026 which means taxes are likely to be a little higher in the future increasing the benefit of a Roth Conversion.

    Below are the Income Adjustments (2023) based on the Modified Adjusted Income including tax exempt income for Medicare known as IRMAA. Couple is calculated on an annual basis. Note that if one's MAGI crosses the $194,000 threshold, IRMAA for a couple goes up by $1,874 for a couple for that year. Crossing the $306,000 and $366,000 thresholds increases a couple's IRMAA by $5,669 for the year.

    Part B Part D
    Individual Individual Couple Incremental
    0 $164.90 $ 0.00 $ 3,958
    194,000 $230.80 $12.20 $ 5,832 $1,874
    246,000 $329.80 $31.50 $ 8,671 $2,839
    306,000 $428.60 $50.70 $11,503 $2,832
    366,000 $527.50 $70.00 $14,340 $2,837
    750,000 $560.50 $76.40 $15,286 $ 946

    Below are the Federal Tax thresholds (2023). There is a jump from 24% to 32% by crossing the $340,100 threshold.

    Lower Upper Marginal
    $ 0 $ 20,550 10%
    $ 20,550 $ 83,550 12%
    $ 83,550 $178,150 22%
    $178,150 $340,100 24%
    $340,100 $431,900 32%
    $431,900 $647,850 35%
    $647,850 + 37%

    Optimizing a Roth Conversion probably means converting as much as possible because the IRMAA decreases above $750,000 and the federal tax rates increase by small increments above $340,100. However, when you take into account the additional taxes that have to be paid for both Federal Taxes and IRMAA it becomes more of a cash flow constraint. As a recent retiree, I have three years before Federal Tax rates sunset, and four years until reaching 72. This three-to-four-year window is the optimum time to do Roth Conversions. Using municipal bonds, tax-efficient accounts, tax loss harvesting, and deferring Social Security are useful methods for targeting Federal and Medicare thresholds.
  • I believe your numbers for tax thresholds are off. According to my sources, the upper limit for the 12% bracket is $89,450 and 22% bracket is $190,750. Other brackets also off. Perhaps these numbers were from a previous year.
  • Sorry, I missed that you were showing tax brackets for individuals. My numbers are for couples filing jointly.
  • Lots to comment on here.

    - RMDs now begin at age 73, giving an extra "golden year".

    - Several states give capped exclusions for retirement income including conversions; this is a consideration in deciding whether to exhaust the Trad IRA (via conversions) or spread out conversions & withdrawals past age 73 to benefit from lower (state) taxes.
    (See, e.g. Arkansas and Colorado; there are others.)

    - Couples are often (usually?) not the same age. So a couple may be assessed a single IRMAA surcharge (if only one person is on Medicare) while still getting the benefit of broader (couple) tax brackets. This effectively halves the impact of IRMAA.

    For example, in the first IRMAA bracket, a couple (same age) would pay $1874 more, while being able to increase income by $52K before crossing into the next bracket. That's an effective surcharge rate of 1874/52,000 = 3.6%.

    Similarly, a single would pay half as much IRMAA, while being able to add only half as much income before reaching the next IRMAA level, so the single would also have an effective surcharge rate of 3.6%. But a couple with one IRMAA would pay just $1874 more while being able to add $52K of income, for an effective surcharge rate half as much, "just" 1.8%.

    - RMDs aren't necessarily subject to tax. They can be used for QCDs. If the T-IRA balance is low enough that RMD does not exceed cash needs plus intended charitable contributions, there is less value in converting more (especially if the additional amount pushes income into a higher tax bracket).

    - Cash flow is a limiting factor, though the broader constraint is the amount of cash available, regardless of whether it comes from income or taxable account assets. The object of the game, so to speak, is to move everything into tax-sheltered accounts.

    Once taxable assets are consumed, there is less value in doing further conversions.

    Optimizing a Roth Conversion probably means converting as much as possible because the IRMAA decreases above $750,000 and the federal tax rates increase by small increments above $340,100

    It is true that taking a big IRMAA hit one year is better than taking smaller IRMAA hits in multiple years, all else being equal. The problem is that converting more in higher brackets can subject that conversion income to taxes (aside from IRMAA) that are much higher than they would be if spread out over multiple years.

    It may be better to convert a little bit each year even before the "golden years", and then increase the conversion amounts as income drops in retirement. This is especially true if one is comparing small conversions at one's working year tax rate with a one-time conversion getting taxed at an even higher rate.

    IOW, it can be rather painful to take a one-time hit in a 32%-37% bracket, especially compared with paying taxes at 22%-24% for several years of conversions (whether while working or in retirement).
  • Thanks for all of the wonderful comments, and the links to the articles!
  • Don't forget the 3.8% Medicare surcharge that kicks in over $250,000

    You would think there would be a nice spreadsheet to calculate the long term outcomes of various conversion amounts.

    I can't find one. My daughter and I tried to write one but it gets more complicated than our feeble Excel talents could handle at least in a quick walk though
  • edited September 2023

             2023 tax brackets: married, filing jointly

    Tax rate     Taxable income bracket        Taxes owed

        10%                   $0 to $22,000             10% of taxable income.

        12%               $22,001 to $89,450         $2,200 plus 12% of the amount over $22,000

        22%              $89,451 to $190,750        $10,294 plus 22% of the amount over $89,450

        24%             $190,751 to $364,200        $32,580 plus 24% of the amount over $190,750

        32%             $364,201 to $462,500        $74,208 plus 32% of the amount over $364,200

        35%             $462,501 to $693,750        $105,664 plus 35% of the amount over $462,500

        37%                 $693,751 or more           $186,601.50 plus 37% of the amount over $693,750

    Link to Information Source

  • Thanks for the update @Old_Joe
  • As with most other income-based taxes aside from IRMAA, muni bonds are exempt from the Medicare surcharge. That makes the case for munis somewhat stronger.

    However, conversion amounts are not directly subject to the Medicare surcharge. Though the surcharge may still indirectly affect taxes owed. Kitces explains this better than I could. (Well, in more gory detail than I care to provide, anyway:-) )

    The complexity of this surcharge alone illustrates why building a spreadsheet that handles the short term effects of one rule is difficult, let alone a spreadsheet showing long term effects or the interplay between different rules.
  • Thanks for the link. It seems that you will still pay the 3.8% if the conversion pushes your AGI over $200,000 or $250,000, but only on your "investment income".

    While complicated, it is still just math. My problem with building spreadsheets is trying to copy the formulas correctly.
  • The NIIT is 3.8% of the smaller of (a) the amount your MAGI exceeds the threshold ($250k, $200k, or $125k) or (b) your net investment income.

    See "Application to Individuals" section of
  • @orage
    Thanks for the link. complicated but not as bad as it looks unless most of your income is NIIT
  • @Sma3

    I included a Figure #1 in the August 2022 issue that calculated Federal Taxes Plus Medicare Premiums + the Net Investment Income Tax. The spreadsheet was easy for my particular circumstances. My intent was to estimate the optimum Roth Conversion.

    I started to update the spreadsheet to be more generic, but as @msf said,
    msf said:

    The complexity of this surcharge alone illustrates why building a spreadsheet that handles the short term effects of one rule is difficult, let alone a spreadsheet showing long term effects or the interplay between different rules.

    Here is a document describing how to calculate how much of Social Security Benefits are taxable:

    Here is an article describing how IRA withdrawals may impact the NIIT.

    Here are the Medicare Premium rates:

    As I started to update my spreadsheet to be more generic, it became complex. What I decided was to look for a spreadsheet much like you are looking for. What I found is a Spreadsheet that contains templates needed to complete the 1040 and follow the instructions in the 915 document. I downloaded the spreadsheet and it is comprehensive, although most is not relevant to me:

    One note is that the spreadsheet only has 15 formulas. It uses several hundred named ranges and it will be helpful but perhaps not necessary to know how these work. The spreadsheet is protected so you can't modify the existing formulas, but you can add a sheet and write new formulas.

    My approach will be to replicate my latest taxes to get familiar with the forms and then update it for this year. The final step will be to add in a sheet on Medicare Premiums. I can then play what if scenarios.

  • Maybe off topic not sure.... been reading a book from babson's notes from 1921.... paraphrasing.... aren't muni bonds the ultimate ESG investment? Babson noted isn't investing in munis that help build schools, sewers, hospitals doing real good for communities rather than most other faux ESG investments? Questioning why you don't really see munis listed in ESG mutual funds.
  • msf
    edited September 2023
    For decades, Jim Lebenthal sold muni bonds as investments in public works - power plants, sewers, parks, transit, etc. IOW, infrastructure.

    But infrastructure ≠ ESG. (Hard to see how a Yankee Stadium muni bond is ESG.)

    Here's a 1932 ad for munis to support construction damming Hetch Hetchy (part of Yosemite National Park), and John Muir's writing about the valley and the then proposed dam.
    That any one would try to destroy such a place seems incredible; but sad experience shows that there are people good enough and bad enough for anything. The proponents of the dam scheme bring forward a lot of bad arguments to prove that the only righteous thing to do with the people's parks is to destroy them bit by bit as they are able.
    These temple destroyers, devotees of ravaging commercialism, seem to have a perfect contempt for Nature, and, instead of lifting their eyes to the God of the mountains, lift them to the Almighty Dollar.

    Dam Hetch Hetchy! As well dam for water-tanks the people's cathedrals and churches, for no holier temple has ever been consecrated by the heart of man.

    The Sierra Club echoed that last line in its successful campaign against similarly damming the Colorado River at both ends of the Grand Canyon. "“Should we flood the Sistine Chapel, so tourists can get closer to the ceiling?”

    If you're interested in green bonds, that's a different matter. Here's a 10 minute background video from CNBC on green bonds.
Sign In or Register to comment.