bond alternatives in a taxable account

Have a question about your personal investments? No matter how simple or complex, you can ask it here.

bond alternatives in a taxable account

Postby edt » Mon Jan 28, 2013 7:55 pm

Putting bonds into a 401k account makes a lot of sense because of the taxation implication.

What alternatives are there for a regular taxable account that would have a similar risk/reward profile without the tax implications for someone in the higher tax bracket? Munis seem too volatile.

In my situation, I have 150K I would like to invest, but don't want to commit it to a retirement account because I am likely to upgrade my house due to a growing family within 2-3 years. Vanguard Total Bond Market ETF would be perfect if it was more tax efficient (a 10% capital hit in another 2008 meltdown is acceptable to me but not a 50% demolition like there were in stocks since I need it in the medium term).

Anyone have some good advice?
edt
 
Posts: 2
Joined: Mon Jan 28, 2013 1:04 pm

Re: bond alternatives in a taxable account

Postby grabiner » Mon Jan 28, 2013 8:56 pm

edt wrote:Putting bonds into a 401k account makes a lot of sense because of the taxation implication.

What alternatives are there for a regular taxable account that would have a similar risk/reward profile without the tax implications for someone in the higher tax bracket? Munis seem too volatile.


Munis are not inherently any more volatile than other bonds; you can decide how much risk you want to take with your munis, by using short-term or long-term funds. If you plan to spend the money in 2-3 years, then Limited-Term Tax-Exempt is a natural choice.

Another alternative is I-Bonds; there is a limit of $10,000 per year, and they cannot be redeemed in the first year after purchase, with a small penalty if redeemed within five years. I-Bonds are exempt from state tax, and the federal tax is deferred until you redeem them so if you have I-Bonds which you don't need to spend, they can grow tax-deferred for 30 years.
David Grabiner
User avatar
grabiner
Advisory Board
 
Posts: 12993
Joined: Wed Feb 21, 2007 12:58 am
Location: Columbia, MD

Re: bond alternatives in a taxable account

Postby DaveS » Mon Jan 28, 2013 11:16 pm

Like the man said, you don't want your duration to be longer than the period till you need the money, thus the Vanguard limited term tax exempt is a good choice. If you want to hold your nose and pay some taxes Vanguard Short Term Investment Grade has about the same duration, but higher yield. You won't make a lot of money with any short term bond fund, but the money will be there when you want it. Dave
DaveS
 
Posts: 1308
Joined: Fri Jun 15, 2007 10:42 am
Location: Reno, NV

Re: bond alternatives in a taxable account

Postby dratkinson » Tue Jan 29, 2013 3:59 am

edt wrote:Putting bonds into a 401k account makes a lot of sense because of the taxation implication.

What alternatives are there for a regular taxable account that would have a similar risk/reward profile without the tax implications for someone in the higher tax bracket? Munis seem too volatile.

In my situation, I have 150K I would like to invest, but don't want to commit it to a retirement account because I am likely to upgrade my house due to a growing family within 2-3 years. Vanguard Total Bond Market ETF would be perfect if it was more tax efficient (a 10% capital hit in another 2008 meltdown is acceptable to me but not a 50% demolition like there were in stocks since I need it in the medium term).

Anyone have some good advice?


(1) I'm against the idea of taking any money out of any retirement account until needed for retirement purposes because it's too hard to get money into such an account. (Mine may be a minority position.)

(2) If the TBM ETF is acceptable to you in a taxable account, then consider a bank CD. You will lose the principle volatility. But you will be exposed to the high-tax-bracket hit. If principle protection is your greatest concern, this is a good choice.

(3) *If tax efficiency is your greatest concern, I'd use a ST tax-exempt bond fund. But the price volatility returns. You could lose ~1% in principle over 2 years assuming a 1% increase in the federal lending rate over that time frame. (No, I don't have any idea how likely that is to happen.)

    *If you are subject to the AMT (alternative minimum tax), the TE-interest becomes taxable. But luckily, there will be little of it. :)
d.r.a, not dr.a.
User avatar
dratkinson
 
Posts: 2411
Joined: Thu Jul 26, 2007 7:23 pm
Location: Centennial CO

Re: bond alternatives in a taxable account

Postby Bob's not my name » Tue Jan 29, 2013 7:15 am

dratkinson wrote:If you are subject to the AMT (alternative minimum tax), the TE-interest becomes taxable.
The Vanguard national muni funds don't invest in bonds subject to AMT (as a matter of practice, not policy, if I recall correctly), with the exception of the High Yield Tax Exempt Fund.
Bob's not my name
 
Posts: 6883
Joined: Sun Nov 15, 2009 10:24 am

Re: bond alternatives in a taxable account

Postby dratkinson » Tue Jan 29, 2013 2:33 pm

Bob's not my name wrote:
dratkinson wrote:If you are subject to the AMT (alternative minimum tax), the TE-interest becomes taxable.
The Vanguard national muni funds don't invest in bonds subject to AMT (as a matter of practice, not policy, if I recall correctly), with the exception of the High Yield Tax Exempt Fund.


I knew that. Got ahead of myself. :oops:

(4) Tax-exempt MMkt fund. Principle almost guaranteed not to break the buck. Interest (very little) fed tax exempt. Vanguad's does contain an AMT exposure. (<=20% if memory serves.)
d.r.a, not dr.a.
User avatar
dratkinson
 
Posts: 2411
Joined: Thu Jul 26, 2007 7:23 pm
Location: Centennial CO

Re: bond alternatives in a taxable account

Postby brisni » Tue Jan 29, 2013 4:33 pm

If you are concerned about volitility, why not a 2 or 3 year CD? Yes, you will pay income taxes, but if you shop around you can
get an interest rate to compensate. Check out www.depositaccounts.com for best rates.

Another idea: if you currently have a mortgage you can prepay principal.

- Brian
User avatar
brisni
 
Posts: 94
Joined: Mon Mar 12, 2007 1:45 pm
Location: Austin, TX

Re: bond alternatives in a taxable account

Postby edt » Wed Jan 30, 2013 3:18 pm

Thanks all for some of the great ideas and opinions everyone - I have learned a lot. I am leaning towards the tax exempt funds, it looks like it will meet my requirements of risk/reward for a medium time frame.
edt
 
Posts: 2
Joined: Mon Jan 28, 2013 1:04 pm


Return to Investing - Help with Personal Investments

Who is online

Users browsing this forum: Bing [Bot], BL, Bob, emoore, Just_For_Jenna, Minot, ruralavalon, Strevlac, Trevor, trueblueky, Yahoo [Bot] and 77 guests