Keep All Bonds in Advantaged or Take Advantage of Value?

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Keep All Bonds in Advantaged or Take Advantage of Value?

Postby Phenomenal Growth » Thu May 09, 2013 9:23 am

First time poster...

30 yrs old, been 100% in equities since I started investing (4 years ago), and have built up a nice balance ($260k) between 401k ($80k), Roth IRA ($25k), and taxable ($155k). Everything in Vanguard.

Due to several years of high bonuses, I feel like my risk tolerance (and need to take risk) has decreased slightly so I want to move to an 80/20 allocation. My 401k offers the Vanguard Total Bond Market fund and the Value funds for Large, Mid, and Small cap stocks. Currently, the entire 401k balance is split between those 3 Value funds (with a small/mid tilt), with all of my other accounts holding a mix of Total Stock Market, Total International Stock Market, and International Small (VSS).

I've been debating whether to take all of my bond exposure in the 401k via the Total Bond fund or whether to spread some (or all) to my taxable account via Intermediate Tax Exempt. The reason for the debate is that I like the Value tilt and understand that there are tax advantages to holding Value funds in tax-advantaged space (though I don't know how much of one). Assuming I want to maintain a Value tilt in equities, any thoughts or considerations I should take into account in deciding whether to allocate bonds (Total/Tax-Exempt) between tax-advantaged and taxable (and correspondingly, Value funds as well)? Does the state tax on the Tax-Exempt make this a no-brainer?

Thanks for your time.
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Re: Keep All Bonds in Advantaged or Take Advantage of Value?

Postby grabiner » Thu May 09, 2013 11:09 pm

Value funds have higher dividend yields than blend funds, which is why they benefit more from tax deferral. With current yields, it's probably better to hold munis in taxable and value funds in tax-deferred than the other way around; you can change later if bond yields rise.

If you hold bonds in your taxable account, you should start with I-Bonds, as the interest is tax-deferred even in the taxable account. Beyond that, you would use a national muni fund, or a fund for your state if Vanguard offers one.
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Re: Keep All Bonds in Advantaged or Take Advantage of Value?

Postby DaveS » Thu May 09, 2013 11:09 pm

I don't know your state, mine does not have an income tax so I can do national muni bonds which are more diversified than single state. The thing I noticed about your post is you said you have three value funds. Most who tilt to value don't bother with having a mid cap value fund. The theory being that they perform in between small value and large value and thus add little to a portfolio. Do away with the mid value fund and you might think if you have enough space for bonds in tax free. Dave
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Re: Keep All Bonds in Advantaged or Take Advantage of Value?

Postby grabiner » Thu May 09, 2013 11:27 pm

DaveS wrote:IThe thing I noticed about your post is you said you have three value funds. Most who tilt to value don't bother with having a mid cap value fund. The theory being that they perform in between small value and large value and thus add little to a portfolio. Do away with the mid value fund and you might think if you have enough space for bonds in tax free.


Dropping the mid-cap value fund won't free up space; presumably, the OP wants a given amount of value exposure, so if he drops the mid-cap fund, he would replace it with more of the other funds.

However, Vanguard's large-cap indexes include mid-caps, so the mid-cap value fund is not necessary unless you want to overweight mid-caps. (The pure large-cap indexes are the ones Vanguard calls Mega-Cap.)
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Re: Keep All Bonds in Advantaged or Take Advantage of Value?

Postby ofcmetz » Sat May 11, 2013 11:06 pm

I like the idea of purchasing I bonds and then a muni fund for the rest. Leaves you free for the value tilt in tax advantaged.
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Re: Keep All Bonds in Advantaged or Take Advantage of Value?

Postby abuss368 » Sun May 12, 2013 10:51 pm

What about inflation bonds? They have tax benefits too such as no state and local taxes.
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