- Use the services of a municipal securities dealer, such as a broker-dealer or a bank department. A private client broker is a broker who primarily deals with individual investors at a full-service broker-dealer, though they may also be referred to as “financial consultant” or “financial adviser.” The investor must make an explicit order to buy or sell securities in a brokerage account, and purchases and sells of municipal bonds through a broker-dealer must be preceded by a discussion with the investor.
When selling municipal securities, broker-dealers, like all other forms of investment alternatives, have particular responsibilities to investors. For example, when an investor buys or sells a municipal security, a broker-dealer must provide all material information about the investment to the investor and must give a fair and reasonable price. Full-service When broker-dealers buy or sell bonds for investors, they charge a fee. Broker-dealers that act “as principal” (that is, facilitate trades through their own inventory) charge a “mark-up” when selling bonds to investors and a “mark-down” when buying bonds from investors. The fee is called a “commission” when broker-dealers act “as agent” (that is, when they help identify a buyer or seller who deals directly with the investor). The MSRB pamphlet contains useful information on mark-ups and mark-downs, as well as other fees that brokers may charge.
- Engage the services of an investment adviser who can identify and trade bonds based on your specific or broad instructions. A registered investment adviser (RIA) manages accounts and acquires and sells securities in line with an investor’s agreed-upon plan without requiring individual consent for each transaction. When you engage an RIA, you should receive written paperwork that specifies both your account’s investment policy and the RIA’s investment procedure. To get a better price, RIAs frequently bundle purchases for multiple clients by trading in larger blocks. Account holders are frequently charged a management fee by RIAs. Some advisers price differently based on the interest rate environment and the interest profits that come with it.
- A self-managed account allows you to trade straight online. Another alternative for investors who wish to purchase and sell muni bonds on their own is to use a self-managed account, commonly known as “direct online trading,” which allows them to do so without the help of a private client broker or RIA. This is a broker-dealer account that charges commissions, mark-ups, and markdowns just like a full-service brokerage account. The firm has the same responsibilities to investors as any other broker-dealer, but it may perform them in a different way. For example, disclosure regarding a certain bond could be done only through electronic means, with no interaction with a private client broker. A self-managed account necessitates that the investor comprehend the benefits and drawbacks of each transaction.
- Purchase or sell municipal bond mutual fund shares. Another approach to engage in the municipal bond market is to purchase shares in a mutual fund that invests in muni bonds. Municipal bond mutual funds, which invest entirely or partially in municipal bonds, can be a good method to diversify your portfolio. While municipal bond funds can provide built-in diversification, you do not own the bonds directly. Instead, you hold a piece of the fund’s stock. This is significant because interest rate fluctuations have a different impact on municipal bond mutual fund owners than they do on direct municipal bond owners. Many investors who purchase individual municipal bonds aim to retain them until they mature, despite the fact that bond market values fluctuate between purchase and maturity. Mutual fund managers, on the other hand, are aiming for a stable or rising share price. If rising interest rates cause the market value of bonds in a mutual fund’s portfolio to drop, some of those bonds will be sold at a loss to avoid additional losses and pay for share withdrawals. You are subject to potential swings in the mutual fund’s value as a mutual fund stakeholder.
- Purchase or sell municipal bond exchange-traded funds (ETF). ETFs are a hybrid of mutual funds and traditional equities. The majority of municipal bond ETFs are structured to track an index. The share price of a municipal bond ETF can fluctuate from the ETF’s underlying net asset value (NAV) because it trades like a stock. This can add a layer of volatility to the price of a municipal bond ETF that a municipal bond mutual fund does not have. When an investor buys or sells shares of a municipal bond ETF, the transaction takes place over the exchange between investors (buyers and sellers). When an investor buys or sells shares in a municipal bond mutual fund, on the other hand, the transaction is handled directly by the mutual fund company. Municipal bond ETFs trade like stocks during market hours. A single purchase or sale of municipal bond mutual funds is permitted per day.
Expenses for mutual funds and ETFs include sales commissions, deferred sales commissions, and a variety of shareholder and running fees. FINRA’s Fund Analyzer allows you to compare fund fees and expenses.
Regardless of how you participate in the municipal bond market, the MSRB advises that you think about your investment needs and get written information from your financial professional regarding how fees are charged and which costs apply to your account before investing in a muni bond.
Are municipal bonds in New Jersey tax-free?
The main issues for investors considering municipal bond funds were explored in a previous post. National Muni Bond ETFs are a low-cost and straightforward approach to participate in municipal bonds. When municipal bond closed-end funds (CEFs) are trading at an especially substantial discount to their portfolios’ net asset values, they can be a more appealing way to invest in the area. This essay, written exclusively for New Jersey taxpayers, compares the most appealing New Jersey municipal bond mutual funds and CEFs against national ETFs and CEFs.
Income Taxes in New Jersey
Municipal bond interest is not taxed at the federal level.
Furthermore, interest on municipal bonds issued by municipalities within their own state, including bonds issued by the state, is generally exempt from taxation.
New Jersey levies a 6.37 percent tax on income between $75,000 and $500,000, and an 8.97 percent tax on income exceeding $500,000.
For NJ investors, the goal of this article is to examine the relative attractiveness of national muni bond funds and NJ muni bond funds.
The yields on the NJ-specific muni funds have been grossed up by 6.37 percent to make fair comparisons.
New Jersey Municipal Bond Mutual Fund is a mutual fund that invests in municipal bonds in New Jersey.
The Vanguard New Jersey Long-Term Tax-Exempt Fund (VNJTX) is a mutual fund that invests in municipal bonds issued by the state of New Jersey.
It is actively managed, yet it stays extremely close to the Bloomberg Barclays NJ Muni Fund Index, which is its benchmark index.
It has a relatively low cost-to-income ratio.
17% of the total
VNTJX had a 3.41 percent yield as of May 31, 2019.
When the yield is increased by 6.37 percent, the adjusted yield is 3.64 percent.
The fund has a 5.1-year duration.
This is our best NJ muni mutual fund because it is managed almost like an index fund, captures the NJ muni market well, and has an extremely low expense ratio relative to competing products.
Municipal Closed-End Fund of New Jersey
The BlackRock MuniHoldings New Jersey Quality Fund is now our favorite municipal bond fund in New Jersey (MUJ).
The following are some of the reasons why we appreciate it:
- Our proprietary CEF return forecasting methodology predicts a high expected residual return.
ETFs that invest in municipal bonds on a national level. We include two very large and liquid low-cost national municipal bond exchange-traded funds (ETFs) that we have highlighted in previous articles for comparison purposes: iShares National Muni Bond ETF (MUB) and Vanguard Tax-Exempt Bond ETF (VTEB). Both are index funds that are passively managed and track the same benchmark index, the S&P National AMT-Free Municipal Bond Index, therefore their features and holdings are very similar. We also include the iShares iBonds Sep 2020 Term Muni Bond ETF (IBMI) to reflect the short end of the national muni market in order to define the muni yield curve.
The National Muni CEF is a non-profit organization dedicated to improving public transportation in
In addition, we include AllianceBernstein National Municipal Income Fund, our current favorite national muni CEF, for comparison purposes (AFB).
AFB, like most national muni CEFs, has a substantially longer duration than VTEB and MUB, the two key national ETFs.
NAV Discount at MUJ.
MUJ’s NAV was $15.82 on May 31, 2019, and its price was $13.92, thus it was trading at a 12.0% discount to NAV(/15.82).
For a price of $13.92, that’s a value of $15.82.
That NAV’s worth is unquestionably strong.
The portfolio of AFB is neither subjective nor difficult to value.
It is made up of municipal bonds that are traded on the open market.
Even if the NAV discount never goes away, the investor benefits from the whole $15.82’s economic value and ability to generate cash flow.
The dividend rate would have been 3.98 percent (.0525 x 12 / 15.82) instead of 4.53 percent if AFB had traded at its NAV of $15.82 on May 31, 2019.
That’s a.55 percent increase in yield just for buying on the cheap!
NAV Discount is a value factor.
We are unable to discuss all of our unique factors in detail.
However, we’ll take a closer look at the one we think is most important: the NAV Discount.
Purchasing a CEF at a discount to its portfolio’s NAV is clearly a value strategy.
According to our research, the NAV discount factor is the most powerful CEF selection factor we have.
One of our study tests for this factor is depicted in the graph below.
We start our experiment at the end of 2012, when FactSet first made NAV data available.
We create a “Top 5” portfolio of the five CEFs with the greatest NAV discounts at the conclusion of each month.
Each carries a 20% weight.
We calculate the portfolio’s monthly residual return, then re-select and rebalance the “Top 5” portfolio at the end of the following month, and so on.
Similarly, we create a “Bottom 5” portfolio of the five CEFs with the smallest, or most negative, NAV discounts at the end of each month, re-selecting and rebalancing monthly.
Model in general.
Within the national closed-end muni fund universe, we offer test results for our overall return predicting model.
This covers the effects of all the components we use to forecast residual return, as well as the effects of systematic return factors, such as distribution yield.
The blue line is the monthly rebalanced cumulative log of total return (not residual return) of an equal-weighted portfolio of the five single-state muni CEFs with the best total return forecasts.
Since 2012, the average log of total return per year has been 9.0 percent.
The orange line does the same thing as the blue line, except it invests in the five stocks with the lowest (or most negative) total return estimates.
The return on that investment was -8.7%.
The green line depicts the strategy’s long-to-short implementation.
It has an annual return of 17.6 percent.
On both the long and short sides, the results have been robust and constant.
CEFs are superior.
From a yield/risk perspective, we’ve already seen that the NJ mutual fund, VNJTX, outperforms the basic national muni ETFs, VTEB/MUB.
A comparison of their overall return/risk tradeoffs is shown in the graph below.
The two CEFs are preferable to the ETF alternatives in that they are presently substantially above the muni yield curve, thanks to our exclusive CEF alpha forecasts.
The option you choose is determined on the interest rate outlook.
This graph differs slightly from the yield/risk tradeoffs graph above.
In our alpha model, AFB has a very high total return forecast.
The total return prediction for MUJ isn’t quite as optimistic.
Furthermore, MUJ has a very long duration.
Bottom line:AFB is a more appealing muni fund than MUJ, and it is our preferred muni fund for New Jersey residents (despite the fact that it is a nationwide fund rather than a New Jersey-specific fund) who are ready to take on the interest rate risk.
Investors who expect interest rates will rise in the future may pick the VNJTX NJ municipal mutual fund.
How much cash do I require to purchase municipal bonds?
Municipal bonds are different from corporate bonds in that the interest they pay is taxed differently, and they have lower default rates. Municipal bonds have lower yields than comparable corporate bonds because of this. Furthermore, municipal bonds often require a $5,000 minimum investment, whereas corporate bonds begin at $1,000.
In short, munis and corporate bonds have different risk-reward profiles. If you want to take on less risk, municipal bonds are the way to go; if you want greater yields but are willing to take on more risk, corporate bonds are the way to go.
In 2021, are municipal bonds a decent investment?
- Municipal bond interest is tax-free in the United States, however there may be state or local taxes, or both.
- Be aware that if you receive Social Security, your bond interest will be recognized as income when determining your Social Security taxable amount. This could result in you owing more money.
- Municipal bond interest rates are often lower than corporate bond interest rates. You must decide which deal offers the best genuine return.
- On the bright side, compared to practically any other investment, highly-rated municipal bonds are often relatively safe. The default rate is quite low.
- Interest rate risk exists with any bond. You’ll be stuck with a bad performer if your money is locked up for 10 or 20 years and interest rates climb.
Is it possible to buy bonds without using a broker?
- Because bonds differ from stocks, most investors should include a percentage of their portfolio in bonds as a diversifier.
- Bonds are debt-like fixed-income securities that make bondholders creditors.
- Many brokers now allow clients to buy individual bonds online, while it may be quicker to buy a bond-focused mutual fund or exchange-traded fund (ETF).
- Without the use of a broker, government bonds can be acquired directly via government-sponsored websites.
- Residents of certain municipalities may be able to earn tax-free income through municipal bonds.
Is it necessary to disclose revenue from out-of-state municipal bonds in New Jersey?
NJ does not always have the authority to pick which types of income are eligible for exemptions.
NJ is compelled by federal law to exempt US government interest from income taxes. This tax benefit also applies to mutual funds and exchange-traded funds (ETFs) that invest in government bonds in the United States.
Municipal bonds issued by the state of New Jersey and its municipalities are tax-free in the state of New Jersey. Interest on bonds issued by other states and local governments, on the other hand, is subject to NJ income taxes.
Carryovers of capital losses are not allowed in New Jersey. What is the significance of this? Consider the following scenario: you have a $100,000 unused capital loss from a previous year and a $100,000 capital gain this year. The federal government would enable the loss and gain from carryovers to cancel each other out. The wasted capital loss from last year would be ignored by NJ, and the $100,000 gain from this year would be liable to NJ income tax.
We’ve developed a new supplemental tax statement that breaks down US Government interest and in-state vs. out-of-state municipal bond interest to make tax time even easier for our investors.
Here are some fun tax facts to tell your fellow New Jerseyans.
- Unprepared food, such as a whole bagel, is not taxed in New Jersey, but one that has been toasted for you is. This fee is unavoidable for me as a frequent user of poppy seed bagels slathered in cream cheese.
- Pumpkins used for sustenance are not taxed in New Jersey, but pumpkins used for decoration are.
- NJ didn’t have income taxes until 1976, when it enacted a personal income tax with only two brackets: 2% on the first $20,000 of income and 2.5 percent on all other income.
- You’ll probably never guess what I’m thinking about as I ride the PATH train across the Hudson River to the Betterment headquarters. Okay, you’re right–I’m constantly considering how taxes might affect my current circumstances. As I previously stated, interest on bonds issued outside of New Jersey is normally taxed in New Jersey. What about the Port Authority of New York and New Jersey’s bonds? For residents of both New York and New Jersey, there is no state or municipal tax on interest generated from their bonds.
How can I avoid paying capital gains tax in New Jersey?
The 1031 exchange is one of the most popular methods for avoiding capital gains taxes. This is a tax code that permits you to put the earnings from the sale of one investment property towards the acquisition of another “property of “like-kind” “A real property that you have held for productive use in a trade for business or as an investment qualifies as a “like-kind” property. You can avoid both capital gains and depreciation recapture taxes by doing so. With 1031 exchanges, there are tight time constraints, therefore we recommend speaking with a professional.
Are American Savings Bonds taxed in New Jersey?
Certain sources of income are exempt from New Jersey taxation and should not be mentioned on your New Jersey tax return. A partial list of such objects is shown below.
- State of New Jersey-provided temporary disability benefits (including family leave insurance benefits) or third-party sick pay;
- Refunds of income taxes (from New Jersey, the federal government, and other jurisdictions), including payments of the Earned Income Tax Credit;
- Contributions to and payouts from Archer MSAs that are tax-exempt under federal law;
- Aid from a charitable institution, whether monetary or in the form of property;
- Some of the advantages of certain cafeteria plans given by employers (but not salary reduction or premiumconversion plans). TB-39 Technical Bulletin;
- Benefits received from various commuter transportation benefit plans supplied by employers (but not salaryreduction plans). TB-24R Technical Bulletin;
- Earnings on qualified state tuition program payouts, such as the New Jersey Better Educational Savings Trust program (NJBEST) accounts;
- Earnings on qualifying distributions from 529A Achieving a Better Life Experience program (ABLE)accounts in approved states;
The following sources of income are not taxed in New Jersey. If you submit a resident return, however, you must disclose the total amount of nontaxable interest on your return’s “Tax exempt interest” line:
- A percentage of a Qualified Investment Funds payout in New Jersey; and
- Interest and capital gains from the State of New Jersey or any of its political subdivisions’ liabilities, as well as direct federal obligations like US Savings Bonds and US Treasury Bills, Bonds, and Notes.
Exempt Obligations, Tax Topic Bulletin GIT-5, contains more information on exempt obligations.
Is it wise to invest in municipal bonds in 2022?
The municipal market enters 2022 with a strong credit foundation and a favorable technical environment. However, the rate of credit improvement is expected to decelerate in 2022, and weaker demand and greater bond supply are more likely in 2022 than in 2021.
Low default rates, an upward ratings bias, substantial revenue growth, extensive federal backing, and recovering pension funds characterize the credit market. The credit issues presented by the Omicron version are doable. However, given emerging risks such as climate change, inflation, labor shortages, disruptions in public schools, a more entrenched remote work culture, and a return to a less reliable federal funding environment, the favorable credit environment could deteriorate later in the year, especially if Republicans retake the House or Senate in the November 2022 midterm elections.
In terms of market technicals, the year 2021 was marked by robust municipal bond fund inflows (demand) and limited supply growth. In 2021, strong inflows combined with a restricted supply of tax-exempt bonds resulted in historically low ratios and narrow credit spreads.
In 2022, we don’t expect any notable changes in ratios or spreads. Higher tax rates are still being debated in Congress, and the increased money supply is unlikely to grow significantly. If the Federal Reserve (Fed) raises rates as expected, issuers continue to see value in tax-exempt refundings and taxable advance refundings, and the market endures bouts of outflows and weak demand, periods of somewhat reduced demand and greater supply are possible. In short maturities, we prefer assuming a little more credit risk and opportunistic buying if ratios or spreads widen.