A scholarly paper opined:

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The original poster, then mused:

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I would not be so hasty to eschew munibonds as a taxable investment. As
somebody else has noted in this thread, munibonds have tax advantages even
when held in a taxable account. The interest earned is exempt at the
federal level, and possible exempt at the state level. (But beware the
AMT, which has different rules for some munibond income.) Moreover,
whether the investor holds munibond funds or individual bonds if he's
lucky enough to have a capital gain it gets exactly the same tax treatment
as would a capital gain earned in equities. Finally, in the event of the
investor's death his heirs take a stepped-up basis in any munibond
holdings in a taxable account.

If you have a high marginal rate, I like munibonds in a taxable account as
a nice middle ground between cash and equities. If you keep an eye on the
duration of your munibond portfolio, and if you have a time horizon that
permits riding out periods like we've seen lately where munibonds take a
hit because of rising rates, I believe there is a place for municipal
bonds in a taxable account. For most investors I think this is best
accomplished via mutual funds, given the high transaction costs involved
in the retail purchase of small lots of munibonds. The ideal situation
would be a state-specific fund that charges a fee less than 50 basis
points.

Muni bonds usually aren't taxable.

You have less risk than stocks, but more gains than money markets. I don't
see any reason not to have a portion of your money in munis as a second
stage
"emergency" fund.

David Viles


"MTW" <mtwingcpa[at]yahoo.com> wrote in message
news:2hhsk9Fbpjg0U1[at]uni-berlin.de...
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beliavsky[at]aol.com wrote:

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I haven't read any of the resources you cited, but common tax
planning would generally suggest that you place income generating
assets in the tax deferred accounts, and capital gain generating
assets in taxable accounts.

MTW

There is a paper in the June 2004 issue of Journal of Finance,
"Optimal Asset Location and Allocation with Taxable and Tax-deferred
Investing", by
Robert M. Dammon, Chester S. Spatt, and Harold H. Zhang, that is
relevant to individual investors. The paper can downloaded from
http://www.afajof.org/June_04.shtml , and the working paper from
http://papers.ssrn.com/sol3/papers.c...ract_id=281681 .

It looks at where investors should put the stock and bond portions of
their portfolios -- in their taxable or tax-deferred accounts. To
summarize their findings (p1031 of the 6/2004 JoF), "investors may
optimally hold a mix of stocks and bonds in the tax-deferred account,
but only if they hold an all-equity portfolio in the taxable account".
The authors assume that stocks are held in a tax-efficient manner such
as a low-turnover index fund.

James M. Poterba, John B. Shoven, and Clemens Sialm come to a
different conclusion in the paper "Asset Location for Retirement
Savers", (abstract at
http://papers.ssrn.com/sol3/papers.c...ract_id=248597 and PDF file
at
http://econ-www.mit.edu/faculty/download_pdf.php?id=312 ) , in part
because many of the stock funds investors actually hold are
tax-inefficient.

I have a lot of taxable money in muni bonds and tax-deferred money in
stock funds, so I should probably rethink my asset location.