NO bonds in my taxable account, really?

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MikeT
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NO bonds in my taxable account, really?

Post by MikeT »

Vanguard Advisors suggesting this 80/20 allocation: (I'm 48, my spouse 52, household AGI: $135,000). We have a taxable retirement account and tax advantaged 401k/Roth/IRA's.

VTSAX Vanguard Total Stock Market Index Fund Admiral Shares 48%
VTIAX Vanguard Total International Stock Index Fund Admiral Shares 32%

VFSTX Vanguard Short Term Investment Grade Fund Admiral Shares 3%
VBTLX Vanguard Total Bond Market Index Fund Admiral Shares 7%

VFIDX Vanguard Intermediate-Term Investment-Grade Fund Investor Shares 4%
VTABX Vanguard Total International Bond Fund Index Admiral Shares 6%

They suggested putting ALL THE BONDS in the retirement accounts which resulted in my taxable account being 100% stock and my retirement account being only 62% stock!!!! I'm concerned my retirement account won't grow enough.

QUESTION: Is this approach putting a bad drag on my retirement accounts? I do realize this is being done to be tax efficient in the taxable account.

All thoughts very much appreciated,
Thanks in advance!
Mike
Last edited by MikeT on Mon Jul 11, 2016 5:48 pm, edited 1 time in total.
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Phineas J. Whoopee
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Re: NO bonds in my taxable account, really?

Post by Phineas J. Whoopee »

You have one portfolio.

The more tax-efficient it is, and taxation is the distinction between tax-advantaged retirement accounts and taxable, the more of your gains you get to keep.

I don't know enough to offer an opinion on your own portfolio, but yes, to the extent you have enough space in tax-advantaged accounts for all the fixed income in your, one, retirement portfolio, it's a good place for them.

PJW
Erwin007
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Re: NO bonds in my taxable account, really?

Post by Erwin007 »

Someone smarter than I will come along and give a more detailed answer, but what is your taxable account for, if not retirement?

The best way to look at it is to consider your whole portfolio as one account, and worry about your overall asset allocation in the whole portfolio, and then adjust holdings as needed for tax efficiency across your various accounts.
livesoft
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Re: NO bonds in my taxable account, really?

Post by livesoft »

MikeT wrote:QUESTION: Is this approach putting a bad drag on my retirement accounts? I do realize this is being done to be tax efficient in the taxable account.
I do the same thing. This is not putting a drag on your retirement accounts, but is putting less drag on your taxable accounts.

Let me ask you a simple question: Which had a higher return so far in 2016: VBTLX or VTSAX or VTIAX?
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delamer
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Re: NO bonds in my taxable account, really?

Post by delamer »

It isn't clear from your initial post if the money in your taxable accounts is intended for retirement or not.
retiredjg
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Re: NO bonds in my taxable account, really?

Post by retiredjg »

If you were to ask for portfolio suggestions here at Bogleheads, many (most?) of us (but not all of us) would suggest that all the bonds be held in the tax=advantaged accounts if all of the money is for long term investment.
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MikeT
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Re: NO bonds in my taxable account, really?

Post by MikeT »

Thanks for all the super-quick responses, WOW! This is an active forum!!

I just edited my question to make it clear that the taxable accounts are for retirement.

I guess I'm just surprised: I always thought the 'growing tax-free-ness' of the IRA's would be HUGE. Without any mathematical justification,I just figured it would have been best to have a high stock allocation in the IRA's .

However, this thread helped me put a finger on why I was uncomfortable with 100% stock in the taxable account: If anything really unexpected happened, I could access those funds without the 10% penalty in retirements.

I think I need to carve out a separate medium term non retirement taxable account and in that I can have a more conservative allocation.

THANK YOU EVERYONE!

It's really amazing how the responses helped me identify what was making me uncomfortable!

-MIke
mhalley
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Re: NO bonds in my taxable account, really?

Post by mhalley »

I don't know if VPAS is flexible in their recommendations or not. Maybe you could call them and say, hey, I would prefer to be 70/30 in taxable, can you work with that? I wanted to have some bonds in taxable myself. And of course see whether munis would be better than regular bonds.

From the wiki:
The advantages for holding bonds in a taxable account include:

Bonds have a lower expected return than stocks, and hence sometimes a lower tax cost.
Switching placement when necessary does not incur a large capital gains tax. If you hold stocks in a taxable account instead, large built-up unrealized capital gains makes it very difficult to switch even if switching would otherwise be beneficial.
Nominal treasury bonds, TIPS, and in-state muni bonds are not subject to the state income tax.
The effective tax rate on muni bonds is usually much lower than the highest marginal tax rate on ordinary income.
Interest from muni bonds is not included in Adjusted Gross Income (AGI), which determines eligibility for many income tax deductions and credits, whereas dividends and capital gains are included in AGI.



Wci take on it:

http://whitecoatinvestor.com/asset-loca ... n-taxable/
RobertB
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Re: NO bonds in my taxable account, really?

Post by RobertB »

MikeT wrote:Thanks for all the super-quick responses, WOW! This is an active forum!!

I just edited my question to make it clear that the taxable accounts are for retirement.

I guess I'm just surprised: I always thought the 'growing tax-free-ness' of the IRA's would be HUGE. Without any mathematical justification,I just figured it would have been best to have a high stock allocation in the IRA's .

However, this thread helped me put a finger on why I was uncomfortable with 100% stock in the taxable account: If anything really unexpected happened, I could access those funds without the 10% penalty in retirements.

I think I need to carve out a separate medium term non retirement taxable account and in that I can have a more conservative allocation.

THANK YOU EVERYONE!

It's really amazing how the responses helped me identify what was making me uncomfortable!

-MIke
Why not use the allocation suggested by Vanguard and then, if you need to pull some money out of the equities in your taxable portfolio, just move some money out of bonds into stocks in your tax-free accounts? That should get you to the same place, although you might have to recognize some gain on the equities you sell in the taxable account.
printer86
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Re: NO bonds in my taxable account, really?

Post by printer86 »

We are VPAS clients. We have our IRAs, my 401k and a taxable account at Vanguard. Any money that we send to our tax deferred or taxable accounts at Vanguard is for our retirement needs and not to be touched during my working years.

The Vanguard taxable account is 100% invested in their total stock market fund(VTSAX). Any bonds in our portfolio are housed in our IRA's and 401k.

That being said, we do have several other taxable accounts outside of Vanguard. One houses my ESPP and another houses about a dozen stocks that I bought during the 2008-9 meltdown. These additional accounts, plus my saving accounts, are where I would pull funds during my work years if needed.

My AA at Vanguard is 80/20. However, when you factor in my savings and the other accounts, my AA is closer to 75/15/10. I am in my early 50's too.
Xpe
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Re: NO bonds in my taxable account, really?

Post by Xpe »

MikeT wrote:I guess I'm just surprised: I always thought the 'growing tax-free-ness' of the IRA's would be HUGE. Without any mathematical justification,I just figured it would have been best to have a high stock allocation in the IRA's .

However, this thread helped me put a finger on why I was uncomfortable with 100% stock in the taxable account: If anything really unexpected happened, I could access those funds without the 10% penalty in retirements.
Yeah, I've never been able to get behind putting bonds in tax-deferred accounts, especially roth. I think I ran the numbers a while back, but im 100% stock atm so I'll run them again when I'm a bit older and want to hold bonds. (I'm 30, will reevaluate AA at 35)
bloom2708
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Re: NO bonds in my taxable account, really?

Post by bloom2708 »

How about putting the Intermediate-Term Tax-Exempt bond index (VWITX/VWIUX) in your taxable account?

If you are from CA or NY, they have their own version of Tax-Exempt bonds which would/could also get you exempt from state tax.

Our taxable account (lower amount) ends up being a bit heavier on bonds (50/50) and our tax-sheltered accounts are closer to 65/35 for an overall 60/40 mix.

I like having the tax-exempt bond fund in taxable because my frequent new contributions can be targeted toward our goal asset allocation of 60/40. Plus it is a good fund with steady returns at this point.
"We are here to provoke thoughtfulness, not agree with you." Unknown Boglehead
BHUser27
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Re: NO bonds in my taxable account, really?

Post by BHUser27 »

MikeT wrote: They suggested putting ALL THE BONDS in the retirement accounts which resulted in my taxable account being 100% stock and my retirement account being only 62% stock!!!! I'm concerned my retirement account won't grow enough.

QUESTION: Is this approach putting a bad drag on my retirement accounts? I do realize this is being done to be tax efficient in the taxable account.
Mike -
Before I address your question about bonds in taxable, I have a question or two.
From your wording above, it seems as if you may not consider your "taxable account" as being part of your retirement savings.
Is this true?
What goal(s) do you have for the money you are saving in your taxable account only?

FWIW - I have 100% bonds in my 401(k) account, a balanced fund in our Roth IRAs and mostly stocks in our taxable account, BUT I consider all these accounts as one portfolio whose sole purpose is future retirement income.
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MikeT
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Re: NO bonds in my taxable account, really?

Post by MikeT »

BHUser27, I'm so glad I posted this question and so many kind folks have offered contributions.

It has forced me to confront that at some level, in the back of my mind, I view my taxable account as a super-emergency fund, even though I keep saying its my retirement account.

What I really need to do is come up with something better than a 1% capital one 360 money market account for intermediate needs (e.g. 3-5 years out).

I did post a separate thread about maybe keeping twice the desired value of an emergency fund invested but everyone seemed to hate that idea, and insist that if you need it in less than 5 years, it must be in cash, CD's money market.

Hmm.
rbaldini
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Re: NO bonds in my taxable account, really?

Post by rbaldini »

The math I've seen suggests two competing effects:
(1) bond returns are taxed at a higher rate than stock returns; one should therefore put these in the tax-advantaged account
(2) stocks have higher expected future returns; one should therefore put these in the tax-advantaged account, so that a greater amount of gain is hidden from the tax man
So I believe it can go either way. I don't know what the right answer is.

One thing to remember, though, is that if you need to use some of the taxable account for short- or medium-term expenses, then going 100% stock risks having less to draw from at that time. An example: I plan to buy a house within the next year or so. The 20% downpayment will likely be drawn from my taxable account, which holds a mix of stock and bonds. I want to make sure there is enough money in that account when the purchase happens, so I keep a fairly high proportion of bonds in there (well, about 30%) to make sure I have "enough" if a "big drop" happens in stock prices (basically, I keep enough bonds to make sure I still have 20% of the home price target I want even, if there is an annual 35% decrease in stock prices. spreadsheet calculates ~30% bonds). As such, I keep fewer bonds in tax-advantaged accounts. If I had 100% stock in my taxable account, there's a good change I wouldn't have enough for our future down payment.
retiredjg
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Re: NO bonds in my taxable account, really?

Post by retiredjg »

MikeT wrote:It has forced me to confront that at some level, in the back of my mind, I view my taxable account as a super-emergency fund, even though I keep saying its my retirement account.

What I really need to do is come up with something better than a 1% capital one 360 money market account for intermediate needs (e.g. 3-5 years out).
See if you can wrap your brain around this. If it feels right to you, it might work for you.

https://www.bogleheads.org/wiki/Placing ... ed_account
Chadnudj
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Re: NO bonds in my taxable account, really?

Post by Chadnudj »

MikeT wrote: They suggested putting ALL THE BONDS in the retirement accounts which resulted in my taxable account being 100% stock and my retirement account being only 62% stock!!!! I'm concerned my retirement account won't grow enough.

QUESTION: Is this approach putting a bad drag on my retirement accounts? I do realize this is being done to be tax efficient in the taxable account.

All thoughts very much appreciated,
Thanks in advance!
Mike
This does raise an interesting question -- does the "bonds in tax-advantaged/no-bonds in taxable" advise work when your taxable account may serve multiple purposes/non-retirement purposes?

I'm investing in a taxable account, for instance (not much yet -- paying down debt/getting to max out retirement accounts, but still putting something in there now and then). Now, certainly, one goal is to have this be large enough to help with retirement/financial independence, particularly if I find a way to retire before 59.5......but that's not to say that's the ONLY goal.

I might want to use some to pay for college for my kids. Or buy a house (we have a place now, with no immediate plans to move, so no need to do a safer account or anything). Or use some in an emergency to help my mom/family if needed. Or if it gets big enough let the dividends pay for a fun family vacation.

If we have unknown goals for a taxable account, does it make sense to keep no bonds there?
delamer
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Re: NO bonds in my taxable account, really?

Post by delamer »

Chadnudj wrote:
MikeT wrote: They suggested putting ALL THE BONDS in the retirement accounts which resulted in my taxable account being 100% stock and my retirement account being only 62% stock!!!! I'm concerned my retirement account won't grow enough.

QUESTION: Is this approach putting a bad drag on my retirement accounts? I do realize this is being done to be tax efficient in the taxable account.

All thoughts very much appreciated,
Thanks in advance!
Mike
This does raise an interesting question -- does the "bonds in tax-advantaged/no-bonds in taxable" advise work when your taxable account may serve multiple purposes/non-retirement purposes?

I'm investing in a taxable account, for instance (not much yet -- paying down debt/getting to max out retirement accounts, but still putting something in there now and then). Now, certainly, one goal is to have this be large enough to help with retirement/financial independence, particularly if I find a way to retire before 59.5......but that's not to say that's the ONLY goal.

I might want to use some to pay for college for my kids. Or buy a house (we have a place now, with no immediate plans to move, so no need to do a safer account or anything). Or use some in an emergency to help my mom/family if needed. Or if it gets big enough let the dividends pay for a fun family vacation.

If we have unknown goals for a taxable account, does it make sense to keep no bonds there?
Some people on this forum look at all money as fungible, and so just do what they need to to minimize taxes across all accounts. My perspective is that some of our assets are designated for specific purposes, and I invest toward that goal accordingly. With an unknown goal, I would keep some bonds/cash.
BHUser27
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Re: NO bonds in my taxable account, really?

Post by BHUser27 »

MikeT wrote:BHUser27, I'm so glad I posted this question and so many kind folks have offered contributions.

It has forced me to confront that at some level, in the back of my mind, I view my taxable account as a super-emergency fund, even though I keep saying its my retirement account.

What I really need to do is come up with something better than a 1% capital one 360 money market account for intermediate needs (e.g. 3-5 years out).

I did post a separate thread about maybe keeping twice the desired value of an emergency fund invested but everyone seemed to hate that idea, and insist that if you need it in less than 5 years, it must be in cash, CD's money market.

Hmm.
Yep. I have 5-ish years of emergency cash in a 1% Ally savings account. Having this in place is what finally allowed me to get comfortable treating my taxable and tax advantaged accounts as one single retirement portfolio. The only remaining challenge is rebalancing to maintain asset allocation - not done easily between 401(k) and VG taxable accounts. I hold a little bit of VWITX in taxable to aid in rebalancing.
Chadnudj
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Re: NO bonds in my taxable account, really?

Post by Chadnudj »

delamer wrote: Some people on this forum look at all money as fungible, and so just do what they need to to minimize taxes across all accounts. My perspective is that some of our assets are designated for specific purposes, and I invest toward that goal accordingly. With an unknown goal, I would keep some bonds/cash.
For what it's worth, that's where I fall on the spectrum/question as well....although right now my taxable account is all stocks, which makes sense given its small size at this point (plus some cash at CapOne in excess of what we need as an emergency fund).
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celia
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Re: NO bonds in my taxable account, really?

Post by celia »

rbaldini wrote:The math I've seen suggests two competing effects:
(1) bond returns are taxed at a higher rate than stock returns; one should therefore put these in the tax-advantaged account <--tIRA
(2) stocks have higher expected future returns; one should therefore put these in the tax-advantaged account, so that a greater amount of gain is hidden from the tax man <-- Roth
So I believe it can go either way. I don't know what the right answer is.
Check out this wiki page on how to decide WHERE each fund should go:
https://www.bogleheads.org/wiki/Tax-eff ... _placement

OP, I notice you also have international funds. If they pay foreign taxes, they should be held in taxable for that you can get the credit on your taxes for having paid some taxes to another country. It would also have been clearer if you marked which funds are recommended for each account.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
BigJohn
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Re: NO bonds in my taxable account, really?

Post by BigJohn »

I'll give a bit of a contrarian view as I held bonds in both taxable and tax deferred accounts (using VG Int Term Tax-Exempt in taxable). I did this for a couple of reasons. During accumulation phase I liked the flexibility of have both asset classes in tax exempt to facilitate rebalancing without tax consequences. I also liked have some more stable bond assets in taxable that I could access in the event my emergency funds were depleted. This may or may not apply to everyone depending on the relative size of the accounts and your AA. It's also true that I could have done rebalancing by adjusting new contributions. However as you get closer to retirement and account balances get larger, the leverage of new contributions is smaller and makes this more difficult.

I came to appreciate this approach more as I neared retirement and began planning the transition from accumulation to spending. My plan is to live off my taxable account for ~12 years until I claim SS at age 70 and RMDs start. I'll also use it to pay taxes on my Roth conversions. I'd frankly be very uncomfortable having these near term $$ in 100% stocks due to sequence of return risk. Yes, I could have adjusted my AA in taxable as I neared retirement but that would have triggered a large LTCG event.

What did this strategy cost me? I think the tax consequences were minimal since I used tax-exempt bonds. I did increased my risk a bit by using tax-exempt bonds vs something like TBM in tax-deferred. However, I viewed this risk as small and acceptable given the quality and duration of the VG fund. I'm sure some will disagree but as I sit here about 2 years into retirement I frankly wouldn't change a thing I did.
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Re: NO bonds in my taxable account, really?

Post by whodidntante »

It's good advice. The reason is to take advantage of favorable taxation of stocks versus bonds.
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Hector
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Re: NO bonds in my taxable account, really?

Post by Hector »

Chadnudj wrote:
MikeT wrote: They suggested putting ALL THE BONDS in the retirement accounts which resulted in my taxable account being 100% stock and my retirement account being only 62% stock!!!! I'm concerned my retirement account won't grow enough.

QUESTION: Is this approach putting a bad drag on my retirement accounts? I do realize this is being done to be tax efficient in the taxable account.

All thoughts very much appreciated,
Thanks in advance!
Mike
This does raise an interesting question -- does the "bonds in tax-advantaged/no-bonds in taxable" advise work when your taxable account may serve multiple purposes/non-retirement purposes?

I'm investing in a taxable account, for instance (not much yet -- paying down debt/getting to max out retirement accounts, but still putting something in there now and then). Now, certainly, one goal is to have this be large enough to help with retirement/financial independence, particularly if I find a way to retire before 59.5......but that's not to say that's the ONLY goal.

I might want to use some to pay for college for my kids. Or buy a house (we have a place now, with no immediate plans to move, so no need to do a safer account or anything). Or use some in an emergency to help my mom/family if needed. Or if it gets big enough let the dividends pay for a fun family vacation.

If we have unknown goals for a taxable account, does it make sense to keep no bonds there?
If stocks are down and you need money and want to withdraw from selling bond,
-sell bond in retirement account worth money needed
-sell stock in non-retirement account to use money (same amount as above)
-buy stock in retirement account (same amount as above)
mega317
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Re: NO bonds in my taxable account, really?

Post by mega317 »

^ Yep. Just need to be sure you'll have enough in the taxable account, after the stock downturn to meet your goal.
https://www.bogleheads.org/forum/viewtopic.php?t=6212
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Re: NO bonds in my taxable account, really?

Post by abuss368 »

Put bonds in your taxable account.
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raven15
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Re: NO bonds in my taxable account, really?

Post by raven15 »

I have read in both The Finance Buff and The White Coat Investor that bonds go in taxable. They had some math to back it up, but I don't remember whether their assumptions matched all investing circumstances or which ones. I have not seen math to justify bonds in tax sheltered.

I do not view tax sheltered accounts as "fungible". The absolute amount of money available without penalty is important. I keep a small amount of long term treasury bonds (seperate trading of registered interest and principle) in my IRA for rebalancing. When I get around to safe bonds they will be treasuries or CD's in taxable to save for large intermediate term expenses and to provide a deep secondary "emergency fund". Eventually I will also add a small amount of I-bonds for deep safety of long term savings.
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retiredjg
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Re: NO bonds in my taxable account, really?

Post by retiredjg »

Chadnudj wrote:This does raise an interesting question -- does the "bonds in tax-advantaged/no-bonds in taxable" advise work when your taxable account may serve multiple purposes/non-retirement purposes?

I'm investing in a taxable account, for instance (not much yet -- paying down debt/getting to max out retirement accounts, but still putting something in there now and then). Now, certainly, one goal is to have this be large enough to help with retirement/financial independence, particularly if I find a way to retire before 59.5......but that's not to say that's the ONLY goal.

I might want to use some to pay for college for my kids. Or buy a house (we have a place now, with no immediate plans to move, so no need to do a safer account or anything). Or use some in an emergency to help my mom/family if needed. Or if it gets big enough let the dividends pay for a fun family vacation.

If we have unknown goals for a taxable account, does it make sense to keep no bonds there?
It makes sense if your portfolio and your taxable account are large enough. If your portfolio (and particularly your taxable account) is not large enough, then your goals must be very flexible. College goals are usually not flexible by 5 or 6 years. A new house goal may not be flexible by 5 or 6 years.

Here's an example using just 2 accounts for simplicity. $400k portfolio at 75/25

Taxable
$100,000 in stocks

IRA
$200,000 in stocks
$100,000 in bonds

If you need $25k for college and the market is just chugging along, sell $25k in stocks in taxable for college. Readjust your portfolio to 75/25 by selling bonds in IRA to buy stocks. No big deal. Having no bonds in taxable didn't hurt you at all.

Let's say a market crash hit that portfolio and the taxable account is now just $50k (and the IRA is also smaller). This portfolio and this taxable account are still large enough to handle the $25k withdrawal from taxable for college.

Second example.

Taxable
$25k stocks

IRA
$375k stock
$100k bonds

This is also a $400k portfolio at 75/25. During a normal market, you can take the $25k from taxable for college and adjust back to 75/25 in the IRA. But this portfolio will not accommodate taking $25k from taxable during a crash because there won't be $25k there. IN a case like this, with college coming up, I'd have all that $25k in taxable in short term bonds and CDs or money market. And if the overall portfolio is relatively small, I would not even include that $25k in my stock to bond ratio. I'd segregate it.
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Re: NO bonds in my taxable account, really?

Post by patrick »

Performing a simple comparison of, say, $100K in stocks in taxable and $100K in bonds in a Roth IRA versus $100K of stocks in a Roth IRA and $100K of bonds in taxable has a problem -- if held to retirement each dollar initially in the Roth IRA turns out to be worth more than a dollar in taxable due to the ability to grow further without losing anything to taxes. The portfolio with stocks in the IRA has a higher stock allocation after adjusting for the tax consequences (exactly how much the adjustment should be may not be completely clear, but it shouldn't be zero unless you are confident of zero taxes ever on the taxable account).

That said, taxable fixed income probably is a good idea now. For one thing, the low yields these days mean that the taxes paid are very low. For another, there are some non-market fixed income assets that you can only get in taxable -- US savings bonds, high yield checking accounts, or prepaid-car-linked savings accounts.
jayhawkerbeef
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Re: NO bonds in my taxable account, really?

Post by jayhawkerbeef »

Actually I'm reverting back to a no bonds in taxable portfolio, just had to convince myself. That said, try whatever you're comfortable with and then can always change if necessary.
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Re: NO bonds in my taxable account, really?

Post by Dale_G »

For the record, I have muni bonds in taxable, but only because my Traditional IRA is already 100% bonds. I am so glad I kept equities out of my 401k (now in an IRA anyway) and Traditional IRA to the extent possible given my target allocation.

The reason - taxes. If I had loaded my Traditional IRA with equities and put bonds into taxable. The pretax value of all accounts would remain the same, but the after tax value would be reduced. My RMDs would probably be about 3 times higher than they are now. With equities in the traditional IRA, I would have ended up paying about twice my current tax burden.

Folks who are "really grown up", and care about family wealth, the benefit of stepped up basis on appreciated equities in the taxable account can be significant.

Dale
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Re: NO bonds in my taxable account, really?

Post by grabiner »

raven15 wrote:I have read in both The Finance Buff and The White Coat Investor that bonds go in taxable. They had some math to back it up, but I don't remember whether their assumptions matched all investing circumstances or which ones. I have not seen math to justify bonds in tax sheltered.
The math depends on the amount of each account lost to taxes, and thus on bond yields, and whether you can avoid state tax on municipal bonds.

In a 15% tax bracket, stocks in taxable are clearly better because the tax cost is essentially zero; most dividends are qualified and long-term capital gains will not be taxed.

In higher tax brackets, my rule of thumb is that munis are priced to break even at a 25% tax rate. Thus, if munis yield 1.5%, you are effectively paying 0.5% by holding munis in taxable rather than corporate bonds of equal risk in tax-deferred. If your taxable account has a 2% yield and you pay no state tax, you pay 0.3% tax on the stock, and will also lose more to capital-gains tax unless you are in the 15% tax bracket when you sell. That makes for a close decision. If you also pay CA or NY state tax, that raises the tax cost of stocks, but not the tax cost of CA or NY munis, so it makes sense to hold those munis in your taxable account. Likewise, if you are in a very high tax bracket any pay 18.8% (including Medicare surtax) or 23.8% (in the top tax bracket) on your munis, bonds in taxable are better.

But the main reason this discussion exists at all is that muni yields are so low that the effective tax cost of using munis is also low. If muni yields go back up to 3% or more, then stocks in taxable accounts have a clearer advantage. (But if you decided to put bonds in taxable accounts because of today's low yields, you can switch when yields rise; you will have a capital loss on your muni funds as a result of the rising rates.)
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Re: NO bonds in my taxable account, really?

Post by abuss368 »

What sometimes gets lost in the shuffle is broadly speaking (and forgetting numbers for a moment) tax rates and the tax code is constantly changing. There are many different strategies but our Boglehead philosophy is the same. Who is to say any one of us has abetter approach than another. No one will know in advance.

That said, our strategy is "equal location" and not "asset location" as Rick Ferri has recommended. We sleep well and this has worked very well. Our tax bill is low and we have peace of mind and a cash flow stream from dividends that is building to one day help finance retirement.

There are many roads to Rome.
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Re: NO bonds in my taxable account, really?

Post by abuss368 »

That said our "bond fund" in tax advantage is Total Bond and Intermediate Tax Exempt in taxable. I am considering a simple Total Bond in all and forgetting about it. With 2/3 Treasuries (there is a tax benefit) and much better diversification (10 bond markets or more rather than only one with munis), who knows!
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Re: NO bonds in my taxable account, really?

Post by sambb »

bonds in tax deferred resulted in worse return for me than other options, I think the wiki has tons of disclaimers. It is not for everyone.
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Re: NO bonds in my taxable account, really?

Post by abuss368 »

sambb wrote:bonds in tax deferred resulted in worse return for me than other options, I think the wiki has tons of disclaimers. It is not for everyone.
That is interesting. Can you explain in more detail?
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"The Asset-Location Decision Revisited"

Post by Taylor Larimore »

MikeT:

Professor William Reichenstein and colleagues have written several academic papers about fund location for maximum tax-efficiency. This is a 2013 Study:

The Asset Location Decision Revisited

Conclusion: Except in rare cases, investors should hold stocks in taxable accounts and bonds in retirement accounts.

Best wishes.
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Re: NO bonds in my taxable account, really?

Post by AlohaJoe »

sambb wrote:bonds in tax deferred resulted in worse return for me than other options, I think the wiki has tons of disclaimers. It is not for everyone.
The paper that Taylor links to below argues that these kind of comparisons (which is what White Coat Investor also posted recently) are "doing it wrong" :wink: because they're not adjusting for risk. So bonds in taxable have higher returns because the portfolio has more risk.

Image

Even if they disagree what about what the proper asset location is, most papers agree that proper asset location is worth about 20-30 basis points (i.e. $2,000 a year on a $1,000,000 portfolio). Those papers were all written several years ago when interest rates were much higher. Joe Tomlinson recently ran the number in the current environment.

Image

He concludes
The current interest‐rate environment dramatically reduces the value added from optimizing asset location, particularly at higher risk‐aversion levels where the overall asset allocations are tilted heavily toward bonds.  

It's questionable whether it's worth paying a lot of attention to (and paying fees for) asset location, although particular client characteristics, such as tax bracket, might affect that assessment
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Re: NO bonds in my taxable account, really?

Post by MikeT »

First, let me offer my profound thanks and appreciation for all of the responses to my question. Wow!

I now have a better understanding of the WHY behind the bonds in tax advantaged accounts, which is so much better than just doing it because I read it somewhere.

You folks ROCK!

-Mike
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