Muni Bonds in a Taxable Account

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heanbean
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Muni Bonds in a Taxable Account

Post by heanbean » Wed Apr 05, 2017 11:28 am

I've been a lurker here for a while - and I've read through both (amazing) Boglehead books - but this is my first thread / post.

My wife and I are both in our early thirties. We have a pretty solid strategy for retirement, following many of the principles laid out on here.

I recently opened up a taxable account that is a 65%/20%/15% blend of VTI, VXUS and MUB (iShares Muni Bond). Is that a smart strategy, or should I forego the MUB shares and focus on stocks, given my age?

Thanks in advance!!

bloom2708
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Re: Muni Bonds in a Taxable Account

Post by bloom2708 » Wed Apr 05, 2017 12:05 pm

Best to look at your portfolio as a whole. Can you place bonds in tax-deferred space? I see nothing wrong with your taxable account but do not have the whole picture.

We have Int-Term Tax-Exempt bonds in taxable. In the 25% or higher tax bracket, it comes out pretty even with taxable bonds in tax-sheltered accounts.
"We are here not to please but to provoke thoughtfulness" Unknown Boglehead

heanbean
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Re: Muni Bonds in a Taxable Account

Post by heanbean » Wed Apr 05, 2017 12:23 pm

bloom2708 wrote:Best to look at your portfolio as a whole. Can you place bonds in tax-deferred space? I see nothing wrong with your taxable account but do not have the whole picture.

We have Int-Term Tax-Exempt bonds in taxable. In the 25% or higher tax bracket, it comes out pretty even with taxable bonds in tax-sheltered accounts.


Thanks for the response. I do have bonds in the tax-deferred space as well (not Municipal Bonds) at about the same percentages (85% stocks / 15% bonds).

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Dale_G
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Re: Muni Bonds in a Taxable Account

Post by Dale_G » Wed Apr 05, 2017 2:28 pm

Hi heanbean.

I think it is fine to hold some muni's in taxable as a fairly stable substitute for an emergency fund. I realize that RMD time seems to be w-a-a-a-y in the future for you, but if you expect equities to outperform bonds over that period, you are likely to be in a better tax situation by holding equities in your taxable accounts - and holding whatever bonds are needed for your asset allocation in 401k's or IRA's. If it is a question of holding muni's in taxable or non-muni bonds in a Roth, there is more reason for argument.

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retiredjg
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Re: Muni Bonds in a Taxable Account

Post by retiredjg » Wed Apr 05, 2017 2:48 pm

heanbean wrote:I recently opened up a taxable account that is a 65%/20%/15% blend of VTI, VXUS and MUB (iShares Muni Bond). Is that a smart strategy, or should I forego the MUB shares and focus on stocks, given my age?

Lots of possible questions here, most of which are unrelated.

If you are asking if a person your age should only hold stocks, I don't think so but some people do. If you are asking about holding bonds in taxable, that is a different question. If you are asking if whatever bonds you hold in taxable should be muni bonds, that is another question entirely. And then there is the question about what the taxable account is for. It is possible that holding 100% bonds in that account is more appropriate.

So you are going to get a lot of different answers and they will probably be very contradictory. I'm not sure how helpful that will be for you.:D

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baw703916
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Re: Muni Bonds in a Taxable Account

Post by baw703916 » Wed Apr 05, 2017 2:55 pm

I think it's fine to have some tax-exempt bonds in taxable. This proved very useful for me a couple years ago, as I was moving and figured out that given the real estate market in Seattle, I was best served by putting together a cash offer on a house here. Having muni funds that I could cash in without realizing huge capital gains was very handy!

I do wonder whether the Vanguard muni funds would be preferable to MUB, particularly if you are able to invest at least $50K and can get the Admiral shares (for most of them the limit is higher than the normal $10K because the muni funds are "active"). For bonds in general (including munis), the ETF structure doesn't have as obvious an advantage in terms of tax efficiency as it does for equities, and also for munis liquidity tends to be a big issue, so MUB has a lot less holdings than most of the Vanguard funds. Also, with the Vanguard funds, you have more choice regarding the duration (and term risk), and portfolio quality of the bond portfolio, whereas with MUB you have to take what they have.

Is you taxable account at Vanguard? Or can you buy Vanguard funds w/o a high purchase fee?
Last edited by baw703916 on Thu Apr 06, 2017 11:32 am, edited 1 time in total.
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heanbean
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Re: Muni Bonds in a Taxable Account

Post by heanbean » Wed Apr 05, 2017 3:12 pm

All, I appreciate the responses. I will do a bit of research on your suggestions and come back if I have further questions. As retiredjg said, I may be asking too many questions in one topic.

But this follow up question is probably most important: if I have the risk tolerance to have a 85% / 15% split in stocks vs. bonds, should I carry that split across all of my platforms?

I have 6-12 months expenses in savings and am maxing available tax advantaged accounts (at the 85/15 split), but only started a taxable account (options house, by the way) recently.

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Re: Muni Bonds in a Taxable Account

Post by retiredjg » Wed Apr 05, 2017 3:47 pm

heanbean wrote:But this follow up question is probably most important: if I have the risk tolerance to have a 85% / 15% split in stocks vs. bonds, should I carry that split across all of my platforms?

It is not that easy. There are many right answers to that.

If all your money is for retirement, you can split it by each account or not. Many people would not put bonds in taxable because they are not tax efficient - they'd hold all the bonds in a 401k or IRA. Others like to have 80/15 split for each account, but this can result in higher portfolio costs. It all depends on your situation. Things like what you have available in your work plan might matter a lot.

I have 6-12 months expenses in savings and am maxing available tax advantaged accounts (at the 85/15 split), but only started a taxable account (options house, by the way) recently.

If "options house" means saving for a down payment, a high stock allocation is probably not appropriate unless the house is at least 10 or 15 years away.

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Re: Muni Bonds in a Taxable Account

Post by heanbean » Wed Apr 05, 2017 3:52 pm

retiredjg wrote:If "options house" means saving for a down payment, a high stock allocation is probably not appropriate unless the house is at least 10 or 15 years away.


I'm sorry. Optionshouse.com is the online brokerage account (like etrade, scottrade, etc)

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House Blend
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Re: Muni Bonds in a Taxable Account

Post by House Blend » Wed Apr 05, 2017 4:06 pm

heanbean wrote:But this follow up question is probably most important: if I have the risk tolerance to have a 85% / 15% split in stocks vs. bonds, should I carry that split across all of my platforms?

As a matter of principle, no.

Best to take maximum advantage of what each account can offer (that extends to both tax treatment and fund availablity), and aim to keep the overall AA within range of targets.

And there is a cost associated with maintaining X%/Y% across all accounts: rebalancing can trigger capital gains taxes. (And there is extra hassle if you have, say, 6 accounts.)

So in my mind there is a big difference between maintaining exactly X%/Y% in your taxable account vs. having some bonds in taxable and no targeted bond percentage for that account.

That said, a minority here do like to maintain X%/Y% in every account, the theory being that you don't get distressed when one account is doing much worse than another.

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Re: Muni Bonds in a Taxable Account

Post by retiredjg » Wed Apr 05, 2017 4:29 pm

heanbean wrote:I'm sorry. Optionshouse.com is the online brokerage account (like etrade, scottrade, etc)

Learn something every day! :happy

If you really want some reliable answers to your questions, it is best to post your situation in the format that we use for this. It's some work but most people learn something by doing it. See the link at the bottom of this message for how to do that.

The other option is to narrow down your questions so they reflect your specific circumstance and ask (as best you can) one thing at a time.

heanbean
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Re: Muni Bonds in a Taxable Account

Post by heanbean » Wed Apr 05, 2017 4:31 pm

House Blend wrote:
heanbean wrote:But this follow up question is probably most important: if I have the risk tolerance to have a 85% / 15% split in stocks vs. bonds, should I carry that split across all of my platforms?

As a matter of principle, no.

Best to take maximum advantage of what each account can offer (that extends to both tax treatment and fund availablity), and aim to keep the overall AA within range of targets.

And there is a cost associated with maintaining X%/Y% across all accounts: rebalancing can trigger capital gains taxes. (And there is extra hassle if you have, say, 6 accounts.)

So in my mind there is a big difference between maintaining exactly X%/Y% in your taxable account vs. having some bonds in taxable and no targeted bond percentage for that account.

That said, a minority here do like to maintain X%/Y% in every account, the theory being that you don't get distressed when one account is doing much worse than another.


Very helpful, thank you. I should have started posting in here years ago!

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Re: Muni Bonds in a Taxable Account

Post by grabiner » Wed Apr 05, 2017 9:23 pm

heanbean wrote:I recently opened up a taxable account that is a 65%/20%/15% blend of VTI, VXUS and MUB (iShares Muni Bond). Is that a smart strategy, or should I forego the MUB shares and focus on stocks, given my age?


Look at your portfolio as a whole. 65%/20%/15% is a very reasonable asset allocation for a young investor; I normally recommend 60%/20%/20%. However, depending on your tax situation and 401(k) options, you are probably better off holding all your fixed income in your taxable account, or all in your tax-deferred account. (For example, if you work for the US government, the TSP G fund is better than anything you can get at retail, so you should hold all your bonds there. If the only low-cost option in your 401(k) is an S&P 500 index, you should hold that fund and hold your bonds and foreign stocks in other accounts.)
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Kevin M
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Re: Muni Bonds in a Taxable Account

Post by Kevin M » Wed Apr 05, 2017 9:40 pm

retiredjg wrote:Many people would not put bonds in taxable because they are not tax efficient - they'd hold all the bonds in a 401k or IRA.

And to make matters worse, some forum members make a case that it can be better to hold bonds in taxable!

Forum member tfb published this blog post on the topic in 2012: Tax Efficiency: Relative or Absolute?. Then another forum member followed up with this blog post:
Rethinking Bonds In Taxable | The White Coat Investor, and later stated it even more emphatically: Asset Location - Bonds Go In Taxable! | The White Coat Investor.

My conclusion is that with current low bond yields, it doesn't matter that much. I personally hold all stocks except REITs in taxable, but hold fixed income in both (my fixed income allocation is to large to all fit in tax-advantaged accounts).

Kevin
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Re: Muni Bonds in a Taxable Account

Post by abuss368 » Wed Apr 05, 2017 11:03 pm

I think you have an excellent investment portfolio. In terms of the asset allocation everyone is different. The allocation would be based on an investors goals, timeframe, and tolerance for risk.

I personally invest in the Vanguard Intermediate Term Tax Exempt Bond fund. I think it is fine to place bonds in all accounts. This certainly helped during the financial crisis.
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