Bond-like Option for Taxable Portion of Portfolio?
- FrugalInvestor
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- Joined: Thu Nov 06, 2008 11:20 pm
Bond-like Option for Taxable Portion of Portfolio?
To maintain my desired AA I end up owning a bond fund within my taxable account. 100% of my IRA is in bonds. For obvious tax reasons I'd prefer to not have bonds in my taxable account.
Is there any other vehicle I could use that would be a good bond surrogate but without the tax consequences? I've always assumed that the answer would be 'no' but thought it might be worth asking.
Is there any other vehicle I could use that would be a good bond surrogate but without the tax consequences? I've always assumed that the answer would be 'no' but thought it might be worth asking.
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- Posts: 11647
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See this link for tax efficient placement of funds.
http://www.bogleheads.org/wiki/index.ph ... _Placement
http://www.bogleheads.org/wiki/index.ph ... _Placement
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Yes, you want to look at municipal bonds. Vanguard has several good muni bond funds. Depending on which state you live in, you may be able to find one which is also exempt from state income taxes.
"Ah ha! Once again, the conservative, sandwich-heavy portfolio pays off for the hungry investor!" - Dr. Zoidberg
- FrugalInvestor
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- Joined: Thu Nov 06, 2008 11:20 pm
Yes, I should look at that a little more closely. I live in a state with no income tax so the advantage for me is not as great.INDUBITABLY wrote:Yes, you want to look at municipal bonds. Vanguard has several good muni bond funds. Depending on which state you live in, you may be able to find one which is also exempt from state income taxes.
- FrugalInvestor
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- Joined: Thu Nov 06, 2008 11:20 pm
No question about that. But being retired and in a relatively low tax bracket (usually 15%) I doubt the tax savings would make up for the reduced rates on muni's.Karamatsu wrote:Oh, but wouldn't that be the perfect scenario? With no federal tax on the muni bonds, and no state income tax anyway, you'd earn interest tax-free, wouldn't you?
Re: Bond-like Option for Taxable Portion of Portfolio?
Well I don't know, but maybe options are an option, or a balanced fund that uses options instead of bonds. I'm only mentioning this because the other day I noticed that Bridgeway has a balanced fund that operates like this, and it seems to touch upon your question. I'm guessing that a reason they do this might be because it's more tax efficient that way. And I'm curious as well.mikem wrote:To maintain my desired AA I end up owning a bond fund within my taxable account. 100% of my IRA is in bonds. For obvious tax reasons I'd prefer to not have bonds in my taxable account.
Is there any other vehicle I could use that would be a good bond surrogate but without the tax consequences? I've always assumed that the answer would be 'no' but thought it might be worth asking.
Best regards, Tet
mikem,
You may want to consider I Bonds with no risk to the principal and no taxes until you cash them.
http://www.treasurydirect.gov/indiv/res ... nsider.htm
You may want to consider I Bonds with no risk to the principal and no taxes until you cash them.
http://www.treasurydirect.gov/indiv/res ... nsider.htm
I second the I-bond suggestion. You can invest 5k per person electronically through treasurydirect and another 5k in paper if you go to a bank and ask to buy I series savings bond. You don't pay taxes until you cash them in and they are good for up to 30 years. Interest is exempt from state/local taxes, and can be totally tax free if redeemed to fund a "higher education".
You should have TIPS and short treasuries in your tax deferred accounts as well. Once you run out of room there, you're still better off with I bonds in a taxable due to credit risk. If you still need more bonds after you
Vanguard has some OK muni funds, but the yields aren't that great and over the long term, it may barely or not at all keep up with inflation. If, past your I-bond purchases you have at least 100,000 dollars to invest in fixed income (total, not just per year), you might be advised to buy individual munis in a taxable account from a decent broker.
Unlike stocks, with bonds the little guy that buys in lots as small as 5-10 bonds (1000 dollars each bond) actually gets a better price. The big hitters that buy 50, 100, 1000 bonds at a time drive up the price due to increased demands, so you actually not only save management fees, but you get the bonds at a lower price if you buy them in small batches and establish a ladder. Larry Swedroe recommended Stoever & Glass which I have started to use, it is pretty good. They have some great educational materials:
http://www.stoeverglass.com/
Read through these documents too, they are very good:
http://www.stoeverglass.com/free-education.htm
You should have TIPS and short treasuries in your tax deferred accounts as well. Once you run out of room there, you're still better off with I bonds in a taxable due to credit risk. If you still need more bonds after you
Vanguard has some OK muni funds, but the yields aren't that great and over the long term, it may barely or not at all keep up with inflation. If, past your I-bond purchases you have at least 100,000 dollars to invest in fixed income (total, not just per year), you might be advised to buy individual munis in a taxable account from a decent broker.
Unlike stocks, with bonds the little guy that buys in lots as small as 5-10 bonds (1000 dollars each bond) actually gets a better price. The big hitters that buy 50, 100, 1000 bonds at a time drive up the price due to increased demands, so you actually not only save management fees, but you get the bonds at a lower price if you buy them in small batches and establish a ladder. Larry Swedroe recommended Stoever & Glass which I have started to use, it is pretty good. They have some great educational materials:
http://www.stoeverglass.com/
Read through these documents too, they are very good:
http://www.stoeverglass.com/free-education.htm