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Quotes below
-High-yield municipal bonds typically offer higher yields than investment-grade munis, but carry additional risk.
-A small allocation to high-yield munis can make sense for more aggressive muni investors—but today’s yields are low relative to alternatives.
-If you choose to venture into this part of the market, we suggest you do so via an exchange-traded fund (ETF), mutual fund or separately managed account, to help with diversification and ongoing credit monitoring.
-High-yield munis yield more than high-yield corporate bonds only for investors in the top tax brackets
-High-yield munis have historically offered returns similar to high-yield corporate bonds, but with less volatility
-High-yield munis don’t provide the same level of diversification benefits as investment-grade munis
End quotes============================
My Comments based on the above:
As the article said, HY Munis performance is similar to HY corp with lower volatility and why I rarely own a dedicated HY corp fund.
I don’t agree with point 6. I would replace the word diversification with ballast. HY Muni have more risk but also more diversification and sometimes lower volatility than IG Munis because HY react better to rates changes. Most times HY Munis is a pretty good ballast category unless markets are really bad like 2008.
As a retiree with taxable accounts, I invest a big % in HY Munis and since early 2018 I even use it in my IRA because its performance is very good with lower volatility.
An important point is that only high-income earners are really benefitting from the tax break and why I don't like it when a typical investor is looking for lower distribution funds and lose on performance. If a bonds fund performance is 6% annually with 4% distribution while another bond performance is 4% annually with only 2% distribution, the first fund is still better after-tax.
In the last several weeks HY Munis is the biggest category I own and more than 50% of my portfolio, this is by no mean a recommendation but based on my own goals.
Comments
Interesting to note that gains (on muni bonds) are tax free and losses (on muni bonds) can be claimed against other taxable gains.
Thumbnail sketch:
- "gain" (actually accretion) due to OID is reportable annually as tax exempt interest (can affect SS, IRMAA)
- "gain" due to market discount is taxable as ordinary taxable income (unless de minimus, which is reported as cap gain); may be reported annually or upon bond redemption/sale
- "loss" is reported as amortized bond premium (ABP), essentially return of capital, on a yearly basis (see Form 1040-INT box 13). Cost basis is reduced accordingly.
- any additional loss is reported as capital loss at time of sale.
Simple examples:
$1K par bond is purchased for $900 (no OID), redeemed at maturity five years later for $1K. The $100 "gain" is reported as ordinary income.
$1K noncallable par bond is purchased for $1100, redeemed at maturity five years later for $1K. Each year, the tax-free interest is reduced by some amount (ABP) according to formula, which over five years totals $100. There is no loss; the adjusted purchase price is $1K.
The best pages I've found on muni bond taxation are at InvestingInBonds.com.
See http://investinginbonds.com/learnmore.asp?catid=8&subcatid=60
See also: https://scs.fidelity.com/webxpress/help/topics/learn_tax_info_year_to_date.shtml
The fun really begins when multiple considerations are combined. You can purchase an OID bond at a premium to its discounted price, called acquisition premium. In that case you have to net the OID accretion and the premium amortization.
All my HY munis funds' monthly distributions for 2018 (and all priors years) were Fed exempt. I never buy single bond and probably will never do it in the future.
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I made a mistake in my first post. Early 2019(not 2018) was the first time I ever bought HY Munis in an IRA and not taxable. I also did it again several weeks ago when HY Munis took off compared to Multisector funds. I'm a momentum investor.
Year to date...NHMAX 2%...ORNAX 1.9%...OPTAX 1.7%
It looks to me it was straightforward.
Your Muni dist may affect your Medicare premiums but for most it's not relevant. Example: when married filed jointly income is over $174K they will pay higher premiums for Part B.
@FD1000, bonds are taxed differently from funds. Sales are taxed differently from interest (bonds) or distributions (funds).
Sure, muni interest, whether received directly from bonds or indirectly via distributions from muni funds, is generally federally tax exempt. That's the easy question. The harder question which @bee raised is how "gains" or "losses" are handled. A different matter altogether. And one where what you know about muni fund distributions is irrelevant.
What many people think of as a capital gain on a muni bond (buying at a market discount and redeeming at par) is usually treated as ordinary taxable income upon sale. Unless the amount is de minimus, in which case it's treated as a capital gain. Or unless one has opted to declare the "appreciation" (accretion) annually as taxable ordinary income.
I haven't even gotten started on straight line vs. constant yield accretion for muni bonds.
https://www.investopedia.com/terms/a/accretion-of-discount.asp
IRMAA is not the only thing affected by tax-exempt interest. Tax credits for health insurance you purchase yourself is also based on a MAGI calculation that includes tax-exempt interest.
That said, there are other MAGI calculations for different purposes that don't include tax-exempt interest. For example, the MAGI calculation for Roth contribution eligibility excludes not only tax-exempt interest but the amount of Roth conversions. (See line 2 of IRS Pub 590a Worksheet 2-1).
The point is not to make assumptions about what is or isn't included as part of MAGI without checking the particular purpose of the MAGI calculation. That's what the 'M' (modified) stands for.
NHMAX +0.3%...ORNAX 0.4%...OPTAX 0.9%(looks suspicious).
YTD estimation...NHMAX 3.4%...ORNAX 3.3%...OPTAX 3.4%