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Hello Fools,

I don't see any reason for anyone to buy Muni bonds because it seems any tax savings are eaten up by the broker's markup/commission. My wife and I are saving to buy a new home in about six years. I thought because we are in the 31% tax bracket I would check out munis for the tax saving. Looking at all the online bond brokers, I cannot find a muni in my state (VA) with a YTM greater than 4% because the bonds are being sold for so much over par. When looking into Corporate bonds....it is easy to find bonds with the same rating and maturity with a YTM of 6.5 to 7%. These would give me an after tax yield of about 4.2 to 4.5%.....Why would I ever want to buy the Muni and hand over all my "tax savings" to the broker? Please let me know if I am missing something here b/c it seems like a no brainer to me.

Thanks in advance,

ericjp1
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I don't see any reason for anyone to buy Muni bonds ... we are in the 31% tax bracket

I'd be surprised to find a tax advantage in this tax bracket. These bonds will always be more valuable to people in the 36% and 39.6% brackets. These higher bracket individuals will always be willing to outbid you because the bonds are more valuable to them. It would require a true glut on the supply side for tax benefits to survive all the way down to 31%.
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Gee, why don't you ask the people who bought Paficic Gas and Electric and Edison bonds what they think of their higher rate returns when their bonds just sank in value 50%. Muni's have a tendency not to go out of business, they tend to pay their dividends when they are due. Before Bonds became junk bonds, they were regular bonds with attractive yields until they stopped paying their dividends or got into financial trouble. Trace the history of junk bonds, and then the history of mini's.

BelAirpatrol.com
Los Angeles
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There are fashions in investments.
A few years ago, munis paid only about 1/2 of 1% less
than taxable corporates, and even for someone in the 28%
tax bracket, the munis made sense. Now the fashion
pendulum has shifted and people have abandoned the
corporates and flocked to munis. As you say, now the
munis don't make sense.
So you buy good quality corporate bonds to save for
your house.
5% or so on treasuries doesn't sound that good, either.
7% on a good corporate sounds much better.
Another item you might have your broker check out is
taxable munis. Sometimes a municipal agency issues a
bond for some revenue purpose that does not qualify for
tax-free status. They may have better credit than a
comparable corporate and pay an equivalent yield.
So over the few years until you are ready to buy your
house, when there is money for a bond, always check out
the municipals, corporates, taxable munis, treasuries
and mortgages--and realize that the pick you made 6 months
ago may not apply today.
Best wishes, Chris
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Muni's have a tendency not to go out of business, they tend to pay their dividends when they are due.

That is not to say there isn't risk with municipal bonds--remember Orange County, California. 8(
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LA Times April 111, 2001

San Luis Obispo County gets 10% of its tax base from the BK Pacific Gas and Electric. All bonds obligations back by State of California have dropped in value, and a 20 billion dollar sale in a couple of weeks is going to carry a premium interest rate.

BelAirPatrol.com
Los Angeles
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1. By the time you add up the state and federal taxes, there is little if any savings vs. munis within your state.
2. The tax savings is determined by the market, not the broker, hence your hand over the tax savings to the broker statement is puerile.
3. If you really are concerned about the taxes that you are paying(both in the past and future), then buy Section 42 tax credits. You can save up to $7750 per year in actual taxes paid in the 31% bracket. These credits are prefunded by Congress and administered by the US Tresury. The credits are given for each program for 10 years in advance.
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