Municipal Bonds in Tax Advantaged Account

[aj485]

@davidBHMTPA

My thinking is that it wouldn’t make sense to buy a Muni in a tax advantaged account if the bond is purchased at or near par value; however, it may make sense to buy a deep discounted Muni in a tax advantaged account to avoid the ordinary income taxation from the gains resulting from the discount.

Well, it depends on what type of ‘tax-advantaged account’ you are talking about. Buying it in a Roth account - yes, if you meet the requirements for qualified distributions, you will avoid any taxes on the distribution. But buying it in a Traditional account would mean that all distributions are taxed at ordinary income rates, so you (or your heirs) would eventually pay ordinary income taxes on not only the discount, but the original purchase price.

@davidBHMTPA

Why buy a Muni with a 2% coupon in a tax advantaged account but oh wait that 3.5% of the YTM (since buying at a discount) will not be taxed as ordinary income.

Again, only in a Roth account.

@davidBHMTPA

Anybody have any thoughts or suggestions to share?

I generally try to put my expected highest return investments into Roth accounts. Since munis, even when purchased at a discount, are generally not expected to have a high return when compared to most other investments, this strategy wouldn’t meet my criteria.

AJ