I disagree. They lag behind stocks, even accounting for tax breaks.
Someone with a 20-year savings horizon should be considering
70-80% stocks.
I have both stock index funds and tax free munis in my portfolio.
they both throw off about 0.5-1% of taxable gains a year.
Yes have gains and losses if they trade before their terms.
The stock index have by far beaten munis over the last decade.

ChiSaver <hansnelson[at]yahoo.com> asked:

- quote -

Municipal bonds comes in various forms, but in this thread we're talking
about bonds issued by state or local governments to fund public works
projects. Generally, the interest paid on munibonds is exempt from federal
tax. (Although it may be subject to the AMT.) Interest on munibonds from
an Illinois issuer is going to be exempt from state tax, because the
original poster lives in that state.

IMHO, munibonds would be a good way for this couple to save in their
taxable accounts and to provide the nest egg they're looking for in 20
years when they reach age 50. I see elsewhere in the thread that the
original poster pays three percent in state tax. I assume he's in the 33
percent federal tax bracket as well. State income taxes are deductible on
the federal return, so his combined after-tax marginal rate is 35 percent.


It's possible to buy munibonds directly, but unless you've got big money
and you know what you're doing it's tough to assemble a diversified
portfolio and your transaction fees will be too high. For the munibond
novice, I recommend open ended mutual funds, such as Vanguard's Long Term
Tax Exempt Fund (VWLTX). The current yield on this fund is 3.88 percent,
which works out to a equivalent taxable yield of 5.88 percent for somebody
in the 33 percent bracket. Granted, this couple will have to pay Illinois
state tax on the interest earned. But with such a low state income tax
that's not a major problem. Another reason I like VWLTX is that the annual
management fee is a paltry 16 basis points.

The net asset value of this fund will fluctuate as interest rates change.
But if this couple invests on a regular basis (dollar cost averaging) and
reinvests the dividends the risk to principal is very small. When they are
ready to start a new chapter in life at age 50, they can start spending
the dividends.

"ChiSaver" <hansnelson[at]yahoo.com> wrote in message
news:1163011626.421308.72530[at]m7g2000cwm.googlegroups.com...
- quote -

They were not meant to be personal. They were meant to point
out something I've harped on over and over again in this newsgroup
and others.

If you sign something without both of the following:

(a) Fully reading the entire document, and all addendums, attachments
and exhibits -- and, more importantly

(b) *understanding* what, exactly it is that you signed, and your
legal obligations thereunder

Then you're, in general, NotTooSmart(tm) and could be in
for a world of hurt with no one to blame but yourself.

Nothing personal, just a general statement aimed at anyone
who signs something without being worried about what exactly
it is they're signing.

If you fit the bill, then it's your problem. If you don't, then
feel free to ignore my statement.

<snip
- quote -

That's one step in the right direction. It is necessary to read.
It is not, however, sufficient. It's the *understanding* that's
the important part.

<snip
- quote -

It was not meant as an insult. Don't take it as an insult. It's
purely an observation based upon your own statement that
you aren't worried about those forms.

You should be.

joetaxpayer wrote:

- quote -

I finally did some of the number crunching I had been meaning to do for
a long time anyway... turns out under 2005 tax law, for the OP's family
situation (MFJ, two dependents) -- and assuming NO itemized deductions
or any other AMT preference items -- the AMT only kicks in at a range of
income in the mid-$200K range. Lower or higher than that, ordinary tax
ends up being higher. When you graph the numbers, you see visually that
the AMT impact, if any, is very small.

Even with AMT preference items, it's usually a matter of "pushing in
here and popping out there". In other words, even if you reduce the
amount of itemized deductions that trigger AMT, it just increases your
ordinary tax.

-Mark Bole

Replying to no one in particular,

Another thing to watch out for is that mutual funds pay out their
capital gains for the year in December. If you buy into a fund late in
the year, you may get a big taxable distribution right away.

I just sold a bunch of IBM stock, and I'm looking to reinvest the
proceeds somewhere. There a couple of mutual funds I like, but I think
I'm gonna park the money in DIA or SPY for a couple of months first so I
don't get a nasty tax surprise.

In a tax deferred account, this is a non-issue.

Best regards,
Bob

"Sgt.Sausage" <nobody[at]nowhere.com> wrote in message news:28177$455216f5$42a1e606$3614[at]FUSE.NET...
- quote -

I'm sure the accountant would use a professional tax computation program
which knows about AMT and, if appropriate, would calculate the additional
AMT due (if any).

--
John Richards

joetaxpayer wrote:
- quote -


Remember AMT is designed to catch people who don't pay a lot of regular
tax. When you have $350k in salary income you're usually paying a lot of
regular tax, unless you are in a high-tax state that generates those
large itemized deductions that aren't deductible under AMT (like CA
where they'd be paying a marginal 9.3% on income, plus CA property tax).

Another trigger is large capital gains. The gains themselves are still
taxed at 15% federal under AMT but it can throw other income into the
AMT rate of 26% or 28%. So back to the point about long-term tax
planning...large CG distributions from mutual funds, or large CGs from
having to sell Fund A that has turned into a dog since you bought it 12
years ago, can create these AMT problems where in effect you lose the
15% rate on your long-term gains (because of AMT triggered on other income).

-Tad

I am kind of in the similar situation as you, therefore also have the
same questions as those your have. Just one more thought in addition
to all the other suggestions: maybe you can consider a bit more
aggressive in your investment. What you want to achieve is maximized
net-of-tax income. Surely you can to so by reducing tax, but you can
also achieve the same thing by trying to increase your return.

Many Americans think, probably take for granted, that investing in
foreign markets espcially emerging markets are much more risky than
investing in US. This perception may not be true (supoorted by
historical statistic). However, one thing is almost for sure is the
return is higher than a pure US portfolio.

- quote -

I won't even comment on the personal attacks, but I will try and answer
your concerns.

What good is it to have an accountant if they don't understand all the
tax laws and represent you accurately to the IRS given that you have
provided them with all the necessary information? If I have to
research every tax law, every trigger for AMT, every break I may be
missing, I might as well prepare them myself. My wife and I always
read everything prior to signing (she's an attorney by trade) and we
fully understand all material we are signing. Information that is not
provided, either in the agreement, or on the forms, would not be
something we could read, would it?

If you have suggestions as to how I can save for early retirement (my
origninal question), please feel free to participate in this
conversation. If not, then I suggest you go insult someone else on a
message board that encourages that sort of thing.

- quote -

Illinois State income taxes - 3%. Property Taxes: 3600.

"ChiSaver" <hansnelson[at]yahoo.com> wrote in message
news:1162965986.743795.116650[at]m73g2000cwd.googlegroups.com...

- quote -

Well you'd better start worrying.

Sure, your accountant prepares the forms, but who signs them?

You and your wife.

Who do you think the IRS will come after if/when there is a
problem?

You and your wife.

*You* are responsible for the information presented to the
IRS on those forms. Are you telling us that you are signing
these ... not fully knowing/understanding what it is that you
are signing?

If your accountant is like most ... take a good look at the
agreement you signed with him/her (you probably didn't
read that one either did you?) Most of these agreements
(I've seen about 8 over the last decade with the various
accountants/CPAs/tax advisors) -- most of these completely
absolve the accountant of any liability should things be
screwed up. They basically say: "We're preparing these
things for *you*, based upon information *you* provided,
and it's all checked/double-checked/verified by *you* before
*you* sign the IRS forms ... therefore should there be any
trouble ...*you* are responsible" (paraphrased, of course,
but that's the gist of every one of 'em I've dealt with).

Please ... this year and in all future years, take an active
interest in the forms your accountant has prepared and
asked you to sign. You'll likely be glad you did and, at
the minimum, you'll be that much more well informed
about your financial/tax situation.
..

ChiSaver wrote:

- quote -

In general, the schedule A deductions of State Income Tax, and Real
Estate tax are the triggers for most of those hit.
I would bet that your combined number for these two is reasonable, eg,
state tax is 5% of income, and property tax if any, is under $6K.
JOE

Its a very good point that tax management strategy becomes important
ten or so years into a high-end retirement savings plan.
Say if you have five years of savings outside of 401K. Some actively
managed mutual funds, e.g. real estate, sector, hedge-like, may throw
off distributions over 20% in a good year. If you are in the 35+%
combined
fed and state marginal bracket, thats a tax bill of 30% of your annual
income,
plus six times a year income tax calculations (four estimated, end of
year,
and filing). So then you may or may not start considering
tax-advantaged
instruments like munis, indexed funds (minimal turnover), direct real
estate,
and annutiies. High taxes were driving me crazy in the late 1990s,
so I've been gradually migrating over to better tax planning.

- quote -

Wish I could help you out. I have no idea what even triggers AMT, but
you are not the first person that has been intrigued that it hasn't hit
us yet. We have an accountant, so I don't worry about filling out our
individual tax forms. For what it's worth, we made about 50k more this
year than in 2005 due to increased salaries and bonsuses. Perhaps we
will be hit with AMT this tax year.

ChiSaver wrote:
- quote -

Are you sure about that? For Married Filing Joint status, two
dependents, a pretty normal mortgage and other Sched A items, and
combined wages of $300K less $28K for 401k contributions... my rough
calculation shows you owing almost $8K additional tax due to AMT
(alternative minimum tax) for tax year 2005. Plus all the phased out
deductions, exemptions, and credits I mentioned earlier.

If I'm wrong, I would appreciate the opportunity to learn why. I agree
with the opinion I have seen elsewhere, that AMT is by default becoming
the flat tax that some advocate and some fear, so I'm interested in
knowing about ways to avoid it.

-Mark Bole

"Tad Borek" <borekfm[at]pacbell.net> wrote in message
news:G694h.23701$TV3.20757[at]newssvr21.news.prodigy.com...
- quote -

American Funds, unlike Fidelity (Magellan) and some other fund families, has
"team managed" funds. They show much better ability to swap managers in and
out, especially since there are several managers on a given fund, and so
most of the team remains intact at any given time.

- quote -

FWIW, Morris Smith took over, did a great job, and then handed the fund over
to Vinik.

- quote -

IMHO, this is a bad rap, and not entirely accurate. Vinik made the right
call on bonds, but was early. The move drew criticism not so much for his
being aggressive (as the fund was with Lynch) or lagging the market, but for
investing in something (bonds) that the nouveaux investors (conservative
pension plans, IRA owners, etc.) were not expecting. Vinik invested in the
bonds for appreciation, not income, as was permitted by the prospectus. The
customers changed, not so much the fund.

Cf Stansky, who really did change the fund into a plodding elephant.

Funds changing character because of asset growth is much more of a problem
for small/mid cap funds. Other than SmallCap World, I'm not sure if
American Funds even has a fund that would take a big hit from bloat. (M*
begs to differ, and wants to see American Funds close some of their funds.)
http://advisor.morningstar.com/artic...sp?docId=12473

- quote -

As above, less of a problem for team-managed funds.

- quote -

Cf. Contrafund. Heavily bloated, but hardly a closet index fund. Is there
a tendency to approach the market? Yes. Must the fund become a closet
indexer? No. Something to keep an eye on.

- quote -

Absolutely. I own a fund (not Fidelity) where the long time (a couple of
decades) manager retired, and the fund had the courtesy to notify investors
in the middle of the year that because of management changes, they would
likely see a huge distribution at the end of the year. But one tends to see
such massive portfolio changes with complete management changes - something
you won't have with American Funds.

- quote -

Tad, while I agree with you that each and every problem you detailed is a
possibility, and there are certain fund families in particular I would be
wary of for this reason (you do a good job of naming some of them below), I
respectfully disagree that (aside from bloat) they are very likely to happen
at American Funds.

- quote -

Mark Freeland
BnetOnewsX[at]sbcglobal.net

ChiSaver wrote:
- quote -


I mentioned this because you have some unique needs, really -- you are
picking funds that you would like to hold for a very long time -- at
least 10+ years, perhaps 20+ years. The current managers at American
Funds may be long retired (or deceased) while you're still holding the
funds. The company may be owned by someone else, the funds may have
changed strategy, etc etc. Who knows? I can say with some confidence
that it's not likely to be the #1 fund family 15 years from now, simply
because the "top fund family" is in a constant state of flux. It wasn't
really on the radar not all that long ago.

I mentioned Magellan as a case study for that -- I'm sure it's been
written up somewhere and some googling should turn up something (I don't
know of any one place). I'll run through what I see as some phases to
the fund because I think it highlights the main issues with actively
managed funds.

The earliest (which is when I owned the fund) was in the Peter Lynch
era, when it was a small-company fund. Those were the really big
earnings years but the problem was, it gradually grew too big to be a
small-company fund for a bunch of reasons.

[problem one: good performance draws assets, and the managers need to
invest an ever-increasing pool of money, requiring more "ideas" or ideas
that can absorb a lot of cash]

[problem two: style drift...FMAGX moved gradually away from small-caps
as the asset size made small-caps too difficult to buy]

Google MAGELLAN STYLE DRIFT for articles on this.

Some time after Peter Lynch retired a guy named Vinik took over. He made
a bad call on bonds and as a result Magellan lagged the market, which is
something Magellan owners weren't used to. So the fund lost some assets
and Vinik got the boot, even though he's a really smart guy and his
picks for all we know would have paid off if they'd given him more than
7 weeks to pan out (he went off to manage money very successfully
elsewhere). Google VINIK MAGELLAN for this.

[problem three: inevitable management changes, loss of continuity]

[problem four: loss of assets due to short-term underperformance]

Over the years since, the fund got REALLY big and arguably, the Law of
Large Numbers dictated that it was going to end up looking like the
market. LoLN says that as a sample size increases the median and the
average converge. In this context the "sample size" here is "how many
stocks does Magellan need to hold?," and that number becomes "a LOT!!"
when tens of billions sit in the fund. The result is that eventually a
large fund looks like the market it's investing in, simply because it
holds so many stocks that it acts, in effect, as a proxy for the market.
Imagine a room with 500 people and you're putting together a basketball
team. If you can pick 20 people you'll have a tall team. If you have to
pick 300 your team is going to be pretty close to average height yes?

[problem five: large funds become "closet indexers"]
Google: CLOSET INDEX FUND MAGELLAN AMERICAN FUNDS

Now people caught on that it was a closet index fund and the management
said "we're going to clean up the portfolio and shift strategy a bit."
In the process, as well as to meet redemptions (selling stock to raise
cash for people redeeming their shares), the fund sold a lot of their
old, high-pent-up-gain holdings, and because of the tax laws applicable
to mutual funds, 2006 shareholders received a whopping dividend earlier
this year, equal to almost 20% of NAV. And it's not as if FMAGX has had
zero dividend payouts over all these years. Pull up the Magellan quote
on Yahoo and look at that NAV dip back in May 2006 - that was the
distribution. Imagine that was a $200,000 holding which isn't
far-fetched for a long-term investor using this (or GFA?) as a core
large-cap holding...you just got $40k in taxable income, for doing
nothing, and maybe that's a $10k tax bill and some AMT on other income.

[problem six: when everyone heads for the door, or when the manager
shuffles the portfolio, you are hit with uncontrollable tax events]

So bring this back to you and American Funds. I'm not saying these kinds
of scenarios are a certainty, but they're very likely to happen at some
point. The management may be stellar and costs low but the problems
above are endemic to managed mutual funds. And they have these
especially strong, negative effects in taxable accounts. A high-income
taxable investor wants to hold funds for in indefinite period of years
and not trigger, say, a $25,000 tax bill some year when you switch
holdings, or when the fund rejiggers its portfolio, should American
Funds goes the way of Magellan or Janus or New Dimensions or Kaufmann or
20th Century Giftrust or any of the dozens of "top funds" that gradually
became below-average. A cynical view perhaps but a lot of these issues
go away when you stick with passively managed mutual funds for
longer-term taxable accounts.

-Tad

This is exactly why I came this group. Thanks for all the suggestions.
A couple more questions:

- quote -

Do you have a good link/source describing the Magellan situation? I am
aware that it grew too large to sustain itself, somthing I am worried
about a few of American Funds, but I don't know the specifics. For
now, I find that American Funds management and their strategy to
investing is one of the better groups out there.

- quote -

How do muni's work? What is a good source to read up on the
benefits/drawbacks to this type of investment? With the rule of not
investing in what you don't understand, I have stayed away from these
for the time being. I was aware that the ultra-wealthy use them as a
tax shield, but didn't know how they could help the average investor.

Thanks again.


======================================= MODERATOR'S COMMENT:
Thank you for trimming the previous post.

Mark Bole wrote:
- quote -

Thanks, Mark, I was wrong on this one. Your suggestion, above, is the
right one.
JOE

ChiSaver wrote:

- quote -


I had a reply, didn't get posted on google, reposting...

a summary of interpretations from above:
35k from cash 10k+money market 25k, increasing by 6k per year
125k in taxable mutual funds, adding 36k per year
60k in tax deferred IRA, Roth and Annuity
180k in 401k, contributing 15k each annually/ 30k per year.

I think your primary focus should be 3 fold- cash, retirement and
taxes.

1) you have 35k in cash accounts. This amount should be about 6 months
spending/ expenses (mortgage, utilities, monthly bills). Maybe 35k
represents this now, but if not, I would increase this portion of
portfolio until the 6 month expense guideline is met.

2) Investments for retirement

The 125k in taxable accounts and adding 36k per year to this would lead
to ~1.6 million in 20 years (assuming 8% return).

The 180k in 401k is probably worth ~ 2.2 million in 25 years. This
will probably be primary source of income in retirement. 4% withdraw
rate suggests around an income of 87k from this pool of money.

The 60k in IRA/ Annuity could be worth ~410k if it grows at 8% for 25
years.

If I add up 4% of the 401k, IRA's and taxable accounts in 20 years, I
show an income of ~170k in retirement, which will be taxed at various
levels (ordinary income from IRA, 401k and annuity, long term cap gain
rates from taxable account and no taxes from Roth IRA)

3) Find a way to lower the taxes you pay
300k in income, you save ~ 25% for retirement. This is excellent.
This does not even include the savings for kids college. You also have
a house.

Municipal bonds might be a way to lower taxes paid. Consider this as
supplement to cash reserve (once it hits 6 months of expenses).
Increasing 529 plan contributions would also decrease current tax
liability.
It might be worth consulting a tax professional to help you find other
ways to reduce taxes.