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Municipal Bonds - tax exempt breakeven vs Money Market (Iran Conflict)
Posted on 4/7/26 at 11:26 am
Posted on 4/7/26 at 11:26 am
Recently retired (HIGHLY recommend!)
Plan was to place retirement ‘lump sum’ (non qualified stuff) into muni’s and live off of for next 3-5 years (depending on when trigger pension).
Why?
Tax exempt ‘growth’ to enable RMD reduction plan:
1. Live off lump sum until it runs dry
2. Muni tax exempt growth leaves more tax table room for significant 3 conversions
3. commensurately convert from tax deferred to Roth
Enter reality! Iran conflict arises bringing with it significant inflation risk and impact to bond markets, even US national muni’s.
Now recalculating tax exempt breakeven with money markets given inflation risk to muni’s.
Questions:
1. if you had 3yr window, how do you view muni market and inflation risk to said strategy? Money market alternative make sense?
2. Do you play it year to year? Year 1 money market but years 2-3 munis may still make sense?
As always, appreciate board’s insights.
Plan was to place retirement ‘lump sum’ (non qualified stuff) into muni’s and live off of for next 3-5 years (depending on when trigger pension).
Why?
Tax exempt ‘growth’ to enable RMD reduction plan:
1. Live off lump sum until it runs dry
2. Muni tax exempt growth leaves more tax table room for significant 3 conversions
3. commensurately convert from tax deferred to Roth
Enter reality! Iran conflict arises bringing with it significant inflation risk and impact to bond markets, even US national muni’s.
Now recalculating tax exempt breakeven with money markets given inflation risk to muni’s.
Questions:
1. if you had 3yr window, how do you view muni market and inflation risk to said strategy? Money market alternative make sense?
2. Do you play it year to year? Year 1 money market but years 2-3 munis may still make sense?
As always, appreciate board’s insights.
1
Posted on 4/7/26 at 8:40 pm to Everyday Is Saturday
This is very confusing and you might want to edit.
You have a lump sum that is non-qualified, so you mean a severance or early retirement payment? If it’s non-qualified why would you live off of it until it runs dry? You’ll be in a low tax bracket. Convert portions of IRA to Roth.
What do you mean by a 3 year window?
Why are you comping money market and the muni market?
Muni’s are great if you’re in a high tax bracket. But if you’re retired and in a low bracket focus on Roth conversions, not spending a taxable account for the next 3 years.
Again, not trying to be rude just trying to understand all of the variables.
You have a lump sum that is non-qualified, so you mean a severance or early retirement payment? If it’s non-qualified why would you live off of it until it runs dry? You’ll be in a low tax bracket. Convert portions of IRA to Roth.
What do you mean by a 3 year window?
Why are you comping money market and the muni market?
Muni’s are great if you’re in a high tax bracket. But if you’re retired and in a low bracket focus on Roth conversions, not spending a taxable account for the next 3 years.
Again, not trying to be rude just trying to understand all of the variables.
Posted on 4/8/26 at 9:34 am to TX_Tiger23
quote:
Again, not trying to be rude just trying to understand all of the variables.
Cool and thanks for response!
Huge tax bomb awaits 1st RMD in 20years.
To mitigate, Going to use NQ lump sum to live off of at near zero taxes next 3 years. Commensurately, will convert tax deferred to Roth (Aggressively) during these 1st early retirement years. Why? Tax tables are free and clear, due to munis, to accommodate Roth conversions. Also, set up tax efficient taxable accounts so tax tables are freed up for this.
Highest leverage years to reduce RMD tax bomb is now.
Muni’s (for tax exempt) is the plan for these NQ lump sum. However, inflation risk and negative impact on muni’s has me rethinking this. Now thinking Money Market. Why? Tax exempt Muni vs taxable divs from Money Market breakevens got closer as muni’s hit by inflation risk.
Thoughts on muni bonds and said inflation risk over next 3 years is the question. To muni or not to muni…?
This post was edited on 4/8/26 at 9:43 am
Posted on 4/8/26 at 6:01 pm to Everyday Is Saturday
You can do short term muni’s to avoid too much interest rate risk just like you’re talking with a taxable money market. You can even do tax free money market. But with short term bonds and money market you’re subject to interest rate cuts by the Fed.
You can build out a muni bond ladder or a muni bond ETF ladder with bullet maturities to reduce interest rate risk.
But I do agree with being aggressive with conversions now to avoid an unpredictable tax burden from RMDs in the future. Especially since it sounds like you’re young enough where IRMAA will be irrelevant for a while.
And be cognizant of the 5yr rule if you’re under 59.5 with the conversions.
But basically I think the question is not so much to use muni’s or not but how much interest (inflation) risk you want to take. You can use taxable or tax free’s depending on the bracket you’re in. There are some great short term bond ETFs from PIMCO, Fidelity etc. And they have both muni and taxable ones. Not quite as safe as money market but you’ll get more yield too.
Hope this helps.
You can build out a muni bond ladder or a muni bond ETF ladder with bullet maturities to reduce interest rate risk.
But I do agree with being aggressive with conversions now to avoid an unpredictable tax burden from RMDs in the future. Especially since it sounds like you’re young enough where IRMAA will be irrelevant for a while.
And be cognizant of the 5yr rule if you’re under 59.5 with the conversions.
But basically I think the question is not so much to use muni’s or not but how much interest (inflation) risk you want to take. You can use taxable or tax free’s depending on the bracket you’re in. There are some great short term bond ETFs from PIMCO, Fidelity etc. And they have both muni and taxable ones. Not quite as safe as money market but you’ll get more yield too.
Hope this helps.
Posted on 4/8/26 at 7:23 pm to TX_Tiger23
Very helpful, thank you.
I’m 10yrs (8yrs incl 2yr tax yrs b4) to IRMAA. No concerns (yet) for this RMD reduction strategy.
All things similar to today’s tax tables, projected tax bomb at RMDs:
RMD + Pension + SS (+ potential inheritance of tax deferred money) = tax table and IRMAA stratosphere …awaits.
Good problem to have, I suppose. Mitigating that as much as possible is the play.
Thanks for your valuable inputs!
quote:
Young enough to/ IRMAA
I’m 10yrs (8yrs incl 2yr tax yrs b4) to IRMAA. No concerns (yet) for this RMD reduction strategy.
quote:
I do agree with being aggressive with conversions now to avoid an unpredictable tax burden from RMDs in the future.
All things similar to today’s tax tables, projected tax bomb at RMDs:
RMD + Pension + SS (+ potential inheritance of tax deferred money) = tax table and IRMAA stratosphere …awaits.
Good problem to have, I suppose. Mitigating that as much as possible is the play.
Thanks for your valuable inputs!
This post was edited on 4/8/26 at 7:49 pm
Posted on 4/8/26 at 10:03 pm to Everyday Is Saturday
Can also be charitable…in 2026 $111k of RMD can go to non profits and avoid taxes for you. Meaning I don’t know what amount it will be when you hit RMD age but it’ll be high.
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