Off Topic: Fixed Income Alternatives

Kaight | Oct 31, 2023 | 1,192 posts since 2011

This post is off the topic of certificates of deposit. However, it remains on the topics of fixed income investments, safety, and yield. While likely of most interest to high income investors living in certain states, others might also wish to be aware of what's here:

There are today available some rather high yielding, well rated, munis. In the muni world, state GOs are perhaps among the most highly rated credits. We are not discussing hospital bonds here, or county debt either for that matter (yes, I well remember the insane Orange County, CA, default and bankruptcy filing in 1994). While nothing is for certain in today's world, the credit quality here is respectable and might, for some, justify tax equivalent yields approaching 10%.

This off topic post is NOT a recommendation. I am merely here to raise awareness. Any risk you might decide to assume is entirely on you:

https://finance.yahoo.com/news/york-jersey-muni-bond-buyers-182929259.html

https://fixedincome.fidelity.com/ftgw/fi/FILanding#tbcurrent-yields|highest-yield

Note for anyone unfamiliar:

Safety is paramount. State GO (General Obligation) bonds have a long history of safety. The most recent default came during the Great Depression in Arkansas. The ability of any state to file for bankruptcy is a topic of debate. More can be found here:

https://en.wikipedia.org/wiki/State_defaults_in_the_United_States

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choice1 | Oct 31, 2023 | 372 posts since 2023

My alternative this year was (as noted before) a IRA charitable gift annuity where up to $50k can be given/distributed to a charity, satisfy RMD for the year and provides a return approaching 10% per year on a joint life. This is the only vehicle that provides a return for IRA charity distribution.

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CuriousDave | Nov 1, 2023 | 233 posts since 2018

The 10% “return” is not a yield percentage comparable with interest rates. Like all annuities in pay status, it includes a partial return of principal.

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bobert456 | Nov 2, 2023 | 187 posts since 2022

thanks for that post. I knew you could do that with taxable funds, but did not understand you could do a CRT similar to a QCD, but allowed to participate in a return. TOO late for this year, but I will look into for next year. THANKS

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NYCDoug | Nov 1, 2023 | 335 posts since 2011

A muni novice, I'm being courted by Fido to open up one of their SMAs ($350k minimum) dedicated to an Intermediate Municipal Strategy — munis yields offering a "once in a generation" opportunity now, per Alliance Bernstein [Muniland etc] — with a fee (expense ratio, as far as I'm concerned) of .35.

Additionally, I've been nibbling at FMNY — when my limit orders at $25 get filled, in drips and drabs. Their expense ratio: .40

Continuing our "off-topic" discussion, I'm wondering if there are any red flags that an experienced muni veteran here might see, and be willing to share?

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Kaight | Nov 1, 2023 | 1,192 posts since 2011

I can comment, but I'm unable to help. I once was VERY heavy into the muni marketplace. But that ended several decades ago.

I bought individual muni bonds of all sorts and never lost a dime or paid any tax on the interest. But I did it all personally, never turning my investment decisions over to another person. So the SMA thing is foreign to me. However, those with actual SMA experience have commented here:

https://www.bogleheads.org/forum/viewtopic.php?t=286559&start=50

One final thing:

As highlighted in the OP, muni yields today are impressive. But it would not surprise me if they went still higher. And I would NEVER, EVER want another person picking and choosing my munis, or free to invest my money in some muni bond fund (ugh!) . . . . most particularly not if there was commission involved. What a chilling concept.

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NYCDoug | Nov 1, 2023 | 335 posts since 2011

Thank you, Kaight; very helpful!

I'm now shifting gears (having neither your experience nor prior time/energy/motivation) to begin seriously researching Vanguard's NY Muni fund(s). They're long duration, but with a (current) high yield, and an expense ratio of only .09 for the "Admiral" shares (VNYUX) — which has a $50k minimum. In comparison, this seems to me a better way to go than Fido's SMA offer . . . (And, in fact, it was your Boggleheads link that got me thinking about Vanguard's offerings in this space.)

VNYUX seems like a safe, convenient place to get my feet wet. Less interest than I'd get from taxable CDs, but I do get to keep it all! And, if lucky, in coming years this new direction (Munis) may help forestall falling off the cliff into the next higher IRMAA bracket. It seems, after feasting on CDs for the past two decades, I've got too much of a good thing, with annual taxable interest beginning to climb over $100k . . .

And who knows . . . with more time on my hands, I may eventually do a little individual bond picking on my own — for fun, and maybe profit, too :-) Have you any muni books / websites to recommend, that us newbies / amateurs might find worthwhile?

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Kaight | Nov 1, 2023 | 1,192 posts since 2011

Thank you for the kind words. But with all respect:

I have substantial disagreement with what you wrote. First of all, munis will not help you in the least with the IRMAA. Back in my day munis were tax free. I used to go to the bank, extract my safe deposit box, go into their little clipping room, close the door, and clip my coupons in total privacy. They were colorful paper bonds with paper coupons. The coupons went into coupon envelopes which then were deposited like cash. There was no government involvement whatsoever. That was then; this is now.

Today muni interest must be accounted for when you file your taxes. And that interest counts against you on the IRMAA. Muni interest now is not completely free of tax, as once was the case. Also, insofar as I'm aware, the bonds are no longer paper. So the government ends up being able to watch every move you make.

Second, bond funds are anathema. This is true for all of them, muni and otherwise. Why? Unlike with individual bonds, bond funds do not mature. Depending on the duration of the bonds in the fund (shorter is less hazardous), you can lose your shirt with a bond fund and never get your original investment back as happens eventually with individual bonds.

Third, as pointed to in the OP, safety matters a whole lot. I was pointing there to state GOs, which are modestly safe. Only God knows what some fund manager will buy to populate a bond fund, or re-populate it as bonds mature, especially when he is under pressure to goose the yield.

Fourth, often unanticipated capital gains events can easily happen with bond funds as the manager buys and sells securities. This is not under control of the fund share owner.

Bottom line my opinion is it's better to buy carefully chosen, highly rated individual muni bonds and not bond funds.

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NYCDoug | Nov 1, 2023 | 335 posts since 2011

Thank you again for your valued insight, perspective, and care! It sounds like I need to do some serious woodshedding with regard to the purchase of individual muni bonds.

Regarding IRMAA, the way I understand it (in simple round numbers): If I had $2 million earning a weighted average of 5% in CDs, each year I would receive $100k in interest. And keep around two thirds of it ($66k), given my combined city/state/federal tax brackets.

But if that same $2 million were instead invested in Munis (or a Muni ETF / Fund) with a composite yield of 3.3%, I would, in the end, receive the same $66k outright, to keep, tax free . . . but have lowered my MAGI by a third, from the CDs' $100k taxable interest income down to the muni bonds' tax-free interest income of $66k. And, with this tax-equivalent yield — courtesy of the munis' NYC triple tax free status — be around $33k further below a looming, yet unknown, future IRMAA precipice than I would have been had I remained entirely in CDs.

Does that make sense? That is the guiding principle / holy grail I'm pursuing right now, albeit clumsily, as an armchair muni know-nothing.

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Kaight | Nov 1, 2023 | 1,192 posts since 2011

Oh, sure. That makes a lot of sense. I was only trying to point out that interest earned from munis goes into the IRMAA calculation, lest anyone think muni interest was a way to sidestep that dilemma. But certainly you will have fewer such tax-free dollars which, indeed as you point out, will hurt you less severely when it comes to the IRMAA.

That's a really helpful insight on your part and surely worthy of consideration by anyone out there battling the IRMAA. I know I will be thinking about this. Thanks.

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CDCA | Nov 2, 2023 | 18 posts since 2023

The additional consideration is roll over risk assuming your CDs are for 5 yrs and munis may be callable.

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NYCDoug | Nov 3, 2023 | 335 posts since 2011

Exactly! That's why I'm seriously considering Vanguard's NY Muni bond fund (VNYUX) — which never "matures" of course, but is biased long duration, with a low expense ratio. Since it's a mutual fund, I'd be able to take money out from it at any time, without having to deal with secondary markets.

I spoke with a Vanguard rep this evening who also assured me that should my VNYUX account value ever drop below the minimum $50k for Admiral shares (whose expense ratio is .09) for any significant amount of time [say 2 months] then it would automatically convert to the lower tier "Investor" class (VNYTX) . . . which has an expense ratio of only .17 — still comparatively cheap! And vice versa, should my VNYTX holdings surpass $50k, then I'd be back in VNYUX.

All in all, not a bad deal methinks, especially if current yields continue to hold over time. (Something I'm counting on, with the longer duration targeted by both of these bond portfolios). And should there be a complete, across-the-board-market bear market collapse, I'll be eying Berkshire Hathaway’s BRK.B — reputed to never issue any dividends. There'd be no MAGI contributions at all with which to concern myself :-)

So between these two strategies (Munis & Buffet) that ought to keep IRMAA at bay!
(Or do I just have a bad case of the tax tail wagging the investment Doug?)

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choice1 | Nov 3, 2023 | 372 posts since 2023

Those with perceived IRMAA issues have too much in expenses, too much income, etc…try zero, or close thereto, taxes . But keep paying those income taxes…we luv it!

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