Shanna, I loved what you said about timing the market because I never, except when your emails come in to my email, I never look at the market. I don’t have a clue what it’s doing until I read your email. And so you made me feel a little better about that. Good job.
So my question is, I know this is not on a buy list, so maybe you could answer it from a general standpoint versus… I’ll tell you the specific. Can I name the fund since it’s not on any of your lists?
Yeah, that’s fine.
Okay, it’s NXP. It’s a tax-free income, Nuveen, select tax-free income. I think it’s a muni bond that’s tax-exempt, has a 4.3% yield. But just in general, you can tell me what you think about those types of things.
OK, let me just start with the basics for those listening that might not understand what that is. So a tax-free bond is going to be a debt instrument. So, when states or municipalities, things like hospitals, universities, water treatment plants, things like that, when they want to borrow money, they do it in the form of bonds a lot of times, so they sell bonds to the public. And because it’s for some type of public improvement kind of project, usually they get preferential tax treatment. So the interest that you earn on tax-free bonds is not federally taxable.
So I guess your question is, do they fit in the portfolio? Is that kind of what you’re asking?
Yes, it is a fixed-income fund, and it pays 4.3%. So yeah, I need some fixed income. So maybe I should just look at our buy list instead. It is recommended by WISE, which is… they’re not necessarily BRI, but they usually have some things that are decent. But I generally follow FISM, but my husband gets this particular newsletter. So I needed some income… not income but fixed type things.
Right, so one of the things that you have to look at when you’re looking at municipal bonds is what tax bracket you’re in. Unless you’re in a pretty high tax bracket, the taxable equivalent yield from municipal bonds is not really going to give you much of an edge. So the theory with municipal bonds or tax-free bonds is that if you’re paying 30% in taxes and you have to pay taxes on your interest, you can get a lower rate and still make the same yield after you account for taxes. Now if you’re in a lower tax bracket, that’s not the case. You have to look at the spread. So if you can earn 4.3% tax-free versus 5% taxable, if you’re in the 12% tax bracket all day long, it’s going to be better for you just to buy the higher-yielding, fixed-income investment and pay the taxes on it.
In addition to that, if you’re looking at what type of account you’re buying it in, if you’re buying it in a tax-deferred account or tax-free account like a Roth or an IRA, that tax advantage for the municipal bonds just goes out the window. You also have to be really careful within certain states. I mean, I think you would also send this question in, and you mentioned a lot of states have balanced budgets and things like that, but a lot of states aren’t following their own rules. They don’t have balanced budgets. So when you have a fund like that, anytime you have a fund, whether it’s a mutual fund or an ETF, you’re really relying on professionals to pick and choose the individual things that are going to make up that fund for you. So you have to have a lot of trust that they’re doing their due diligence there. If you’re picking your own individual ones, then it’s really up to you to look at the issuer to see if they are running a balanced budget. Are they responsible?
One of the trends over the last decade or probably even more now, and I think one of the reasons that this ministry has really shied away from municipals is that a lot of municipalities are no longer issuing debt to fund projects. They’re issuing debt now to refinance their old debt.
Needless to say, I prefer the things that we have on our fixed income buy list, and I think there’s still sort of a rate advantage unless, of course, it’s a non-qualified account and you’re in a really high tax bracket.
And to the BRI nature of the question, when you’re buying bonds, you’re actually the lender to the institution. You’re letting them borrow your money, they’re paying you interest, and at some point later in time, they’re going to give the money back rather than the owner. So as far as the BRI question goes, most of them are probably pretty neutral.
OK. I think I’ll just go back to our buy list because I know that you have vetted those investments very well. So I think I’ll just go right back to the FISM buy list.
Thanks, Minda. You always call in with some really great questions.
We’re so grateful for you because you’re brave enough to ask the questions that maybe everybody else has but they’re not asking.
Thank you, you always give good education to our questions, and I appreciate it very much.
We appreciate you too, Minda.
Thank you.
Thanks, Minda. You too. God bless you.
Allocating Funds To Municipal Bonds