No Fed or State Tax

Is there such an investment that is exempt from both Federal and State tax?

Reply to
Jack Deuce
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Municipal bonds are free of federal income tax, and often are not taxed in their state of origin.

Dave

Reply to
Dave

Muni's from selected states are exempt from both state and federal taxes.

-john-

Reply to
John A. Weeks III

There are a few state-specific muni-bond funds that use these. Generally larger states that have state income tax.

Brian

Reply to
Default User

Maybe read up on qualified dividends for 2009 and 2010. If you are in a low enough tax bracket, these may be taxed at 0% state and federal.

Reply to
honda.lioness

Oops. Long term capital gains for 2009 and 2010 should be checked, too, for your specific situation.

Reply to
honda.lioness

Great point. Total after tax returns comparisons. (Any cap gains taxes would be on a profit.)

Reply to
dapperdobbs

Reply to
Jack Deuce

A Google search on "oklahoma municipal bond fund" without the quotes turned up:

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among others.

-- Doug

Reply to
Douglas Johnson

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The linked fund, Oklahoma Muni (OKMUX), is the only OK muni bond M* lists. The google search does turn up a number of funds but only some of their holdings, often a small amount, is in OK bonds. (There is a fund that is designed to be state/federal tax exempt in all 50 states, Franklin Double Tax Free Income (FPRTX), but because it invests heavily in Puerto Rico, which is BBB-, and at risk of being downgraded to junk, I would not consider it.)

Ignoring the fact that OKMUX is a load fund, it remains inferior to some national muni bond funds. It has an expense ratio of 1.26% (the fund manager has voluntarily waived expenses down to 1.07%, but that's voluntary and can be terminated at any time). That's a huge cost for a muni fund. Its yield is 3.89%.

Compare that with Vanguard Long-Term Tax-Exempt (VWLTX), expense ratio

0.15%, yield 4.72%. Or Vanguard Intermediate-Term Tax-Exempt (VWITX), expense ratio 0.15%, yield 4.06%. The former matches OKMUX's stated goal of 10-25 year average maturity, the latter comes close to matching OKMUX's actual average maturity of 6 years. Even at OK's top income tax rate of 5.5%, VWITX would yield 3.84%, with less due to diversification across states, across sectors (and more general obligation bonds).

You're not going to get back the extra 1% in expenses by avoiding OK taxes. With yields around 4%, OK taxes take a bite of 0.22% at worst. Going with a fund like OKMUX, you either wind up around 0.78% behind, or with a fund that is taking greater risks to make up that difference. And the bottom line is how much you net, not how much you pay in taxes to your state.

Mark Freeland snipped-for-privacy@nyc.rr.com

Reply to
Mark Freeland

I wanted to pull this out of the rest of your fine post. I am suspecting the OP is letting the tax tail wag the investment dog. Pay attention to how much you keep after paying loads, fees, and taxes. That's what matters.

Especially with bond funds, it is very hard for a fund manager to add enough value to overcome high loads and fees. This makes no-load, low cost funds like Vanguards very attractive.

-- Doug

Reply to
Douglas Johnson

"Mark Freeland" wrote: On OKMUX vs. VWITX and VWLTX --

OKMUX net yield (= after estimated taxes and taking into account the expense ratio but ignoring the load, as you wrote) is 3.89%. VWITX's net yield is estimated at, worst case, 3.84%. How is OKMUX 0.78% or so behind?

Regardless, I would not waste time splitting hairs over yields that ignore fund loads. The focus should be on the whopping 4.25% front load OKMUX (and typically other funds in its category) imposes on an investment under $50k (per the Integrity Funds web site). The load will tend to make OKMUX's net yield much lower.

Reply to
honda.lioness

"Mark Freeland" wrote: On OKMUX vs. {VWITX and VWLTX}

The net (= estimated after tax yield, ignoring the load, as you wrote) of OKMUX is 3.89%, right? The worst case net for VWITX is 3.84%. How is OKMUX behind? VWLTX may do better, but its average maturity is quite a bit higher, as you note.

Regardless, the above analysis is splitting hairs in view of the ridiculous load of OKMUX (and evidently like funds, looking at the average for its category). Up to 4.25% of principal vanished immediately, thanks to OKMUX's front load. According to Integrity Funds site, that 4.25% is reduced only for purchases over $50k. OKMUX's load by itself should rule it out.

Reply to
honda.lioness

I'm glad you asked. I gave a disjunction - when a bond fund, because of higher expenses, starts behind by 0.78%, then _either_ it will tend to return that much less _or_ it will assume higher risk to make up the difference. Obviously the fund can also take a mix of these approaches - increase risk somewhat, but not enough to make up the total difference.

could conclude that OKMUX is taking greater risks, just about enough to make up a 0.8% difference.

Mark Freeland snipped-for-privacy@nyc.rr.com

Reply to
Mark Freeland

Yours is not unreasonable conjecture, but I questioned it first because I looked at OKMUX's holdings vs. VWITX's holdings, and I cannot say it is clear OKMUX is riskier. Second because ISTM being a tax free vehicle it is naturally going to have a lower yield compared to the before tax yield of a taxable one of comparable risk, due to market forces. After all, it is usual for tax-free high grade bond funds and taxable high grade bond funds to have similar net yields. So I would not make the same conjecture as you do here. The only objection I have (and I suppose we may share) is to OKMUX's front load.

Reply to
honda.lioness

Correction: Substitute "only federal tax free" for "taxable" above.

Reply to
honda.lioness

OKMUX acknowledges that it is riskier. Under risk factors, its prospectus states: "Because the Fund is non-diversified and invests primarily in Oklahoma bonds, it is particularly susceptible to any economic, political or regulatory developments affecting a particular issuer or issuer of Oklahoma bonds in which it invests."

As I wrote in my first post, the Vanguard tax-exempt funds are less risky "due to diversification across states". And that they have greater diversification "across sectors (and more general obligation bonds)."

assets in ... similar types of projects, such as hospitals, housing, ... A change that affects one project ... would likely affect all similar projects, thereby increasing market risk." Indeed, OKMUX is more concentrated by sector. But lack of diversification of OKMUX goes further. About 1/3 of its assets are concentrated in ten bonds.

Its dollar-weighted average maturity is much longer than VWITX's, despite what M* reports. Look at its last quarterly report. It holds $36M in assets, and only $1.5M of that represents dollars in bonds with maturities under 10 years. Contrast that with VWITX's self-stated average maturity of

7.1 years.

So OKMUX has diversification risk (small number of issues, concentrated in top 10, single state), sector risk (less in G/O, concentrated in education), interest rate risk (longer maturities), etc., well in excess of VWITX's risk levels.

Correct (once incorporating your change). Which just shows that in all but the highest tax rate states, one is usually better off looking at national munis, like VWITX. But I already took this into account. I adjusted the expected difference in performance (for same risk level) by subtracting off the worst case OK tax impact on VWITX (about 0.22%).

Sure, there are other possible thoughts. Such as trailing twelve month yield (as M* reports) not being a good metric, because (a) it doesn't reflect the current portfolio, and (b) unlike SEC yield, it ignores the impact on total return of buying premium bonds (which provide higher yield, but at a cost of losing principal over time). If instead we compare total return of these two funds, we see a marked difference in performance. OKMUX falls short by 1.8% in the past year, 1.5% in the past three, and 0.8% over the past five. (Even after OK taxes, that's a big difference.) Yield isn't everything. I was doing a quick and dirty comparison, but if one really wants to delve into the portfolios and figures, OKMUX shows more and more clearly the risks it takes and how that impacts its total performance.

Muni bond funds are really pretty simple to compare, especially in a small sandbox like Oklahoma - cheaper is better, for the same risk level. If you see something different, you need to challenge the number crunching, as demonstrated.

Mark Freeland snipped-for-privacy@nyc.rr.com

Reply to
Mark Freeland

On OKMUX, and still setting aside the ridiculous front load that IMO nullifies any other merits OKMUX may have, I am going off the holdings breakdown at finance.yahoo for this cursory check. OKMUX as of the date of this finance.yahoo report holds 93% investment grade Oklahoma muni bonds and reports that the remaining 7% is "other" (unrated). I guess the 7% is suspect. But also ISTM one may certainly challenge the Moody's/S&P ratings system (especially in view of the joke it has made of much of the ratings game) and say who knows what the risk is with Oklahoma munis. But then we must question the ratings of every state's munis.

I suppose the (very important) point coming out of this is that any muni fund dedicated to one state (and so providing state income tax exemption for this state) could be said to be riskier than a muni fund diversified over many states (the latter fund being mainly only federally tax exempt). For any given muni fund dedicated to one state, a person would want to weigh how much advantage one gets with the state tax exemption vs. the supposed higher risk of buying bonds from only one state. (Mark, I know you know the latter. I am re-stating ad nauseam.) The "supposed" qualifier is there because I think it is too difficult to objectively rate a bond fund's investment grade quality based on geographical diversity. For all I know VWITX holds 10% California munis. (I just tried to see how much VWITX held in California but extracting this from the ever-stammering Vanguard web site is time consuming.) If California remains in trouble, and if we are to abandon any faith in Moody's/S&P, then I am not ready to say that VWITX is safer than OKMUX. It might be, but it is very hard for me to feel comfortable flat-out asserting this is so.)

Note to those feeling contempt for Moody's/S&P ratings these days and guffawing at every mention of them here: I tried to use language above reflecting the legitimacy of this contempt.

Reply to
honda.lioness

I agree with you on the dubious value of the NRSROs (Nationally Recognized Statistical Rating Organizations, i.e. Moodys, S&P, etc.) Perhaps this suggests yet another factor to consider when selecting a bond fund. There are some fund families that either specialize in, or at least dedicate significant resources to, their own bond analysis. They don't simply rely upon bond rating services, and I feel that they add value this way. Families that come to mind include PIMCO, Baird, MetWest, Vanguard, and Fidelity.

With respect to California, I trust Vanguard's research and generally conservative nature. As to their state-by-state breakdown of assets, for tax purposes they provide figures as of the end of 2008; this should give a fair picture.

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Mark Freeland snipped-for-privacy@nyc.rr.com

Reply to
Mark Freeland

(Aside: Not sure I was clear. I meant I have long found the Vanguard web site difficult to navigate quickly. But the judgement of Vanguard's managers and so on generally remains laudable, AFAIC.)

Well VWITX and VWLTX sure do emphasize California, with about 12% and

16% of the two bond funds' incomes being attributable to this one financially troubled state. (Granted California is so populous yada that it sells a lot of bonds, so funds similar to VWITX and VWLTX will likely have similarly large proportions of California bonds.) But to me, these high proportions in a single troubled state tend to undo some of the feeling of being safer via diversity with these two funds. On the third hand, excusing loads, it seems kind of a crap shoot these days with any muni fund as to which is truly better, for all the reasons discussed here already.

For the Oklahoma (or whatever state the OP is in), I suppose a study of the health of Oklahoma's (or whatever state's) budget and so on would be appropriate, along with bearing in mind the caveat Mark raises about less muni geographical diversity translating to more risk, in general.

Reply to
honda.lioness

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