California Fixed Income Playbook + Sunshine

By Paul Rubillo ·

California Fixed Income Playbook + Sunshine

After spending 9 years living in San Diego, I can tell you the brochure doesn’t lie. It’s a great place and maybe one day, the wife and I will get back there again in some capacity. For now, life is happening, and being back east is where we need to be. I keep thinking about all the sunshine and Beach Boys music on every radio channel (lol, maybe not, but maybe someone who lived there in the 60’s and 70’s may confirm it was all Beach Boys radi

I wanted to explore what the game plan would be for a $200K income (married and filing jointly) household in California from a fixed income allocation perspective. None of this financial advice, but education and something to talk about with your personal advisor.  At $200K, the federal taxable income comes in around $167,800 after the standard deduction, which puts you in the 22% federal bracket. Your taxable income comes out to roughly $189,000, landing in the 9.3% state bracket. So your marginal rate is roughly 22% federal plus 9.3% state, about 31%. Interestingly enough, this is high enough for munis to play a positive role, but you're not in the 32%+/35%+ federal brackets where munis become an obvious slam dunk over corporate bonds.

Splitting the 40% bond sleeve by type

A reasonable starting split for someone in this bracket, assuming a moderate-risk, income-focused approach:

  • 40-50% California municipal bonds or muni funds: the core tax-advantaged piece, since CA munis are exempt from both federal and CA state tax for a CA resident
  • 25-35% Treasuries and Treasury funds/TIPS: for safety and liquidity; exempt from CA state tax though still federally taxable
  • 20-30% Investment-grade corporates: for extra yield, sized to fit tax-advantaged accounts where the interest isn't taxed annually

At TreasuryBonds.com, we feature a lot of bond assets to research. Here’s a fun little screenshot of California-based companies, with Treasuries mixed in:

At the 22% bracket level, in-state munis' taxable-equivalent yield often, but not always, beats similar-quality corporates and Treasuries, and CA munis skip both layers of tax. California-only muni-bond exposure is less diversified than a national muni fund, and CA's finances carry their own risks. A blend of California-specific and national munis is a common way to balance the two.

By the way, California has a lot of muni–bonds to pick from:

Where each type belongs, by account

  • Muni bonds: taxable brokerage account. Munis' tax break only helps you in a taxable account. Put them in a Roth or traditional IRA and you waste the exemption, since IRA growth is already tax-deferred or tax-free.
  • Corporate bonds: traditional 401(k)/IRA. Corporate interest is fully taxable at your ordinary rate. Sheltering it in a traditional account defers that tax until withdrawal, ideally in retirement when your bracket may be lower.
  • Treasuries: traditional 401(k)/IRA, or taxable if you need the state exemption now. Treasury interest is federally taxable but CA-exempt. Held in a taxable account, that state exemption is real money each year. Held in a traditional account, you defer federal tax on it, but you also give up the annual state exemption, since there's no state tax due on withdrawal from these accounts either. Many people default to Treasuries in tax-deferred accounts and save the muni exemption for taxable dollars.
  • Roth IRA: save for your highest-return, most tax-inefficient assets, not munis. Since Roth withdrawals are already tax-free, low-yielding munis add little extra benefit there. It's more often used for stocks or corporates with high expected growth, though for the bond sleeve specifically, corporates can work here too if your traditional accounts are already full of them.

Fill your tax-deferred accounts (traditional 401(k)/IRA) with the most heavily taxed instruments first, corporates and Treasuries, and use your taxable brokerage account for munis, where the tax break actually applies. If your taxable account isn't large enough to hold the full muni allocation, spill the rest of the bond sleeve into taxable Treasuries or corporates rather than mismatching muni location into a tax-advantaged account.

For all you entrepreneurs that have a SEP-IRA, Corporate bonds are the best fit here. Their interest is fully taxable at ordinary rates, so deferring that tax inside a SEP is where you get the most value.

Treasuries work well too. You defer the federal tax, though you give up the annual California state exemption Treasuries would offer if held in a taxable account, since SEP withdrawals aren't state-tax-free either.

Skip munis in the SEP. The tax exemption on muni interest only matters in a taxable account. Put munis in a SEP and you've traded a permanently tax-free income stream for one that becomes fully taxable on withdrawal, which defeats the point.

One last thing to think about as you start to make more money: at $200K income, you're not yet subject to the 3.8% Net Investment Income Tax, which kicks in at $250K for joint filers. If and when that happens, then it’s a new playbook. We’ll talk about that in a different article. But for now, soak up the sun and get the California Fixed Income playbook rocking!