Good Bond Fund For Someone in 15% Tax Bracket?

[pghpens]

Emergency funds: Six Months of Expenses
Debt: None
Tax Filing Status: Single
Tax Rate: 15% Federal, 3% State
State of Residence: PA
Age: 24
Desired Asset allocation: 90% stocks / 10% bonds
Desired International allocation: 35% of stock

Current retirement assets

Roth IRA at Vanguard- $18000
100% Vanguard Target Retirement Fund 2055 (Maxed out for 2015, have $5500 in MMA ready to invest on Jan 1, 2016)

401(k)- $1000
100% American Funds New Perspective

I am seeking advice as to which Vanguard Bond Fund would serve me best for an investing time horizon of around 3-5 years. This money likely would be used to fund a downpayment for a house. I currently have this money saved in a Saving account with Ally at 1% and would like to earn a little more on this money. I also have taxable investments of around $10,000 in VTSMX, but this is down a few hundred dollars since I invested it and I'd like to wait for the market to rebound before I sell it.

I was thinking for someone in my tax bracket Vanguard Intermediate Term Bond Index would be a good choice. However, I also considered the PA Long-Term Bond Index b/c of the additional tax benefit of the 3.07% state tax rate.

Thank you.

[lack_ey]

The intermediate-term fund is a little on the long side for duration (6.5 years) if you're using it in 3-5 years, though if you're fine with the risk then sure.

Total bond has less credit and term risk with less corporates and lower duration (5.7 years), but still you may want something shorter term. If playing it safe you want to keep duration less than the remaining time before you spend the money. It's not a requirement but better if you want to minimize bad surprises.

However, the short-term fund has an SEC yield of only 1.2%, not really worth the risk over the savings account. You could be a bit fancy and instead use 50% short-term corporates and 50% the savings account or similar. Or use a CD.

The muni bond fund is definitely riskier and not worth it in that tax bracket.

In general I would suggest not anchoring investment expectations to past portfolio values like with the total market (VTSMX) investment you made. The value right now is the market's opinion on what the underlying securities are worth now. Whatever you paid for them doesn't matter. The sub-$10,000 you have now is what you have. Don't make decisions based on what the number used to be. Imagine you had say $9,600 or whatever it is in cash now and no stocks in taxable. Would you place a buy order for VTSMX today and hold it in hopes it reaches $10,000 later, if it ever does in the next year or two or who knows when? (Actually, if the amount used to be greater, then that means you get a very small tax break for selling out now.)

[House Blend]

I am seeking advice as to which Vanguard Bond Fund would serve me best for an investing time horizon of around 3-5 years. This money likely would be used to fund a downpayment for a house. I currently have this money saved in a Saving account with Ally at 1% and would like to earn a little more on this money.

Use one or more CDs with a maturity of 3-5 years.

Tax exempt bonds are not a good buy in your bracket. They may return more, but more return comes with more risk. They only need to be priced so as to be attractive for those in the highest tax brackets. (And even in the highest brackets, probably Limited Term Tax Exempt, not Intermediate, would be more appropriate for this time horizon.)

I also have taxable investments of around $10,000 in VTSMX, but this is down a few hundred dollars since I invested it and I'd like to wait for the market to rebound before I sell it.

Make up your mind whether you want to use that $10K as fodder for the downpayment. If you do, then make up your mind whether you want some of your downpayment savings to be exposed to equity risk. If so, then let it ride. (At least you are more fairly compensated with equity risk than you are with the risks of tax-exempt bonds.) If you do want to use it as downpayment fodder but without the equity risk, then sell now and avoid the behavioral trap of holding on to losers. As a bonus, you will be able to use the loss to reduce your income tax bill. Free money.

I think many Bogleheads would not want to expose a house downpayment fund to equity risk for < 5 years. Others would. It depends on how essential home ownership is for you.

[pghpens]

I am seeking advice as to which Vanguard Bond Fund would serve me best for an investing time horizon of around 3-5 years. This money likely would be used to fund a downpayment for a house. I currently have this money saved in a Saving account with Ally at 1% and would like to earn a little more on this money.

Use one or more CDs with a maturity of 3-5 years.

Tax exempt bonds are not a good buy in your bracket. They may return more, but more return comes with more risk. They only need to be priced so as to be attractive for those in the highest tax brackets. (And even in the highest brackets, probably Limited Term Tax Exempt, not Intermediate, would be more appropriate for this time horizon.)

I also have taxable investments of around $10,000 in VTSMX, but this is down a few hundred dollars since I invested it and I'd like to wait for the market to Make up your mind whether you want to use that $10K as fodder for the downpayment. If you do, then make up your mind whether you want some of your downpayment savings to be exposed to equity risk. If so, then let it ride. (At least you are more fairly compensated with equity risk than you are with the risks of tax-exempt bonds.) If you do want to use it as downpayment fodder but without the equity risk, then sell now and avoid the behavioral trap of holding on to losers. As a bonus, you will be able to use the loss to reduce your income tax bill. Free money.
rebound before I sell it.

I think many Bogleheads would not want to expose a house downpayment fund to equity risk for < 5 years. Others would. It depends on how essential home ownership is for you.

Yeah I was thinking about the mental accounting/ behavioral aspects of this. I invested this 10K back in March since it was just sitting in a bank account and I didn't really know what to do with it. I regret doing that and wish I would have picked a safer fund now that I have a clearer goal now of what I want to do with the money (Downpayment). However, I have been putting all additional savings simply into an Ally Savings account since then and I don't think the 10K is essential to the downpayment fund and I'll be ok even if I don't sell it. I'm OK letting it ride for now.

It seems like for my goals, it may be better just to stick with the ally account and not mess around with the bonds for my time horizon.

[Kevin M]

I would put it into a CD. A good 5-year CD purchased directly from a bank ("direct CD") earns 2.25%, with an early withdrawal penalty of six months of interest. There is a slight chance that an early withdrawal will be disallowed, so if you think you absolutely might need the money in three years, go with a 3-year CD instead. Otherwise, you'll probably do about as well if not better doing an early withdrawal from the 5-year CD after three years, then if you hold longer, you make more: CD Early Withdrawal Penalty Calculator.

However, there currently is a 3-year CD special deal available that pays 3.04% APY, with a minimum of $10K and maximum of $100K. Northwest FCU Has Limited Time, Top Rate 3-Year Add-On CD. This would probably be perfect for you. I am going to investigate this further right now!

Kevin

[Kevin M]

However, there currently is a 3-year CD special deal available that pays 3.04% APY, with a minimum of $10K and maximum of $100K. Northwest FCU Has Limited Time, Top Rate 3-Year Add-On CD. This would probably be perfect for you. I am going to investigate this further right now!

Since posting this about 45 minutes ago, I completed the online application to join the CU and open the 3-year CD, with an initial deposit of $15K (max allowed by ACH transfer). The initial deposit limit was perfect, as that's how much I have easily available today. I plan to add more when another CD matures in a couple of weeks.

This is really perfect for you, pghpens. You can put the $10K you have into it now, and then add more as it becomes available, which is very unusual for a CD. The rate of 3.04% is much better than you can do on any other safe investment, except perhaps a reward checking account or stable value fund. A 3-year Treasury is yielding less than 1%, so this is a huge premium over a comparable short-term bond (no credit risk), and is even significantly higher than the SEC yield of something like Vanguard Total Bond Market index fund of 2.2%.

Early withdrawals are explicitly allowed, but the early withdrawal penalty is the lesser of earned interest or one year of interest, so best to plan on holding for three years, but you can get your money out earlier if you need it.

Alternatively, you can earn 3% on up to $15K a reward checking account with complete liquidity, but you need to make 10 purchases per month using the debit card, and meet a couple of other requirements. It's a good deal, but the CD requires no work at all to earn the great rate.

Kevin

[NewEyeDoc]

Great find on the 3+% CD! Unfortunately my employer isn't listed on the eligibility membership. Is there a way around this?

[dollarsaver]

Would love to know how I can become a member of the CU with not being a member of any organizations.

[Toons]

3-5 years
Vangurd Short Term Investment Grade.

[jpelder]

Would love to know how I can become a member of the CU with not being a member of any organizations.

Looks like you can pay $10 and join the "Financial Awareness Network" to be eligible to join the CU. Check under #1 of Availability

[dollarsaver]

Thanks. A good deal. Better than the PenFed CD we bought back in 2013. A good way to diversify.

[RCL]

I wonder if that is $10 each year for 3 years?

[ogd]

I was thinking for someone in my tax bracket Vanguard Intermediate Term Bond Index would be a good choice. However, I also considered the PA Long-Term Bond Index b/c of the additional tax benefit of the 3.07% state tax rate.

You should not use munis in your tax bracket. They are priced by taxpayers in high brackets and you'd be getting a bad deal; if they look attractive even at 15% it's only because of risk you're not appropriately measuring.

A taxable bond fund is better; but even better are bank CDs. The one proposed above is outstanding. Even the CDs at 2.25% / 5 years that we've been used to for a while are still better than market bonds.

I also have taxable investments of around $10,000 in VTSMX, but this is down a few hundred dollars since I invested it and I'd like to wait for the market to rebound before I sell it.

I will echo the others -- you should do what you want to do with this money now, without waiting for anything. You'll get a tax loss deduction as a bonus.

[Kevin M]

I wonder if that is $10 each year for 3 years?

No, it is a one-time fee. I posted about it in more detail in a blog post yesterday, and linked to the blog post in this forum post, Northwest FCU 3-year 3.04% Add-On CD - Bogleheads. There is more discussion about the details in that BH thread.

Kevin