Portfolio critique, bond options for taxable at Schwab, in CA?

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NorCalGaal
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Portfolio critique, bond options for taxable at Schwab, in CA?

Post by NorCalGaal »

Mr. NorCal and I would very much appreciate an overall critique of our portfolio, with specific suggestions for appropriate fixed income/bond funds for our Schwab taxable account. We are close to running out of tax-advantaged space for the first time, and would like to increase bonds to bring our AA from 65/35 to 60/40.

We are on a steep learning curve relative to the many highly knowledgeable veterans on this board. We have read the Bond Basics and Tax-Efficient Fund Placement pages and do our best homework. At this point we self-manage with strategic board and professional input. As such, we would prefer to keep things simple and buy and hold as long there isn’t a distinct disadvantage to doing so.

We are in CA, which we know brings a different element to the tax efficiency picture. Our tax bracket is 25% Fed/9.3% State, which according to various threads seems to be a generally accepted break even point for Muni vs. Total bond.

Given this information, and our complete portfolio below, would you suggest taxable or tax-exempt bonds in our taxable account at Schwab, and which? If taxable, Schwab’s Aggregate Bond Index (SWAGX), or something different? Thank you for your time!

Emergency Fund: $27k in Schwab High Yield Savings, equivalent to about 7 months of expenses. Interested in the multi-tiered option.
Debt: None
Tax Filing Status: MFJ. No kids/dependents.
Tax Rate: 25% Fed, 9.3% State
State of Residence: CA
Age: Mr. 54, Mrs. 49. Hoping to retire early in about 7 years or so, depending on whether we strive for a conservative “live on interest only” strategy or include Social Security projections and consider tapping principle.
Desired AA: 60/40. Currently 65/35. Projecting 64/36 at year’s end if no bonds in taxable.
Desired International allocation: 10-20% (at 10% now)
Current Portfolio Size (excluding Emergency Fund): $475k

Taxable account @ Schwab (24% of portfolio)
57% Schwab Total Stock Market Index (SWTSX) ER 0.03%
43% Schwab International Index Fund (SWISX) ER 0.06%

His 401k @ Dimensional Fund Advisors
(18% of portfolio)
81% DFA US Core Equity 1 (DFEOX) ER 0.19%.
19% DFA Investment Grade Bond (DFAPX) ER 0.22%

His Roth IRA @ Vanguard
(31% of portfolio)
56% Vanguard Total Stock Market Index Fund Admiral (VTSAX) ER 0.04%
44% Vanguard Intermediate-Term Bond Index Fund Admiral (VBILX) ER 0.07%

His traditional IRA @ Vanguard
(1% of portfolio)
100% Vanguard Intermediate-Term Bond Index Investor (VBIIX) ER 0.15%

Her Roth IRA @ Vanguard
(17% of portfolio)
55% Vanguard Total Stock Market Index Fund Admiral (VTSAX) ER 0.04%
45% Vanguard Intermediate-Term Bond Index Admiral (VBILX) ER 0.07%

Her traditional IRA @ Vanguard (5% of portfolio)
100% Vanguard Intermediate-Term Bond Index Admiral (VBILX) ER 0.07%

His HSA (family) @ TD Ameritrade (4% of portfolio)
100% Vanguard Intermediate-Term Bond Index Fund ETF (BIV) ER 0.07%

Contributions for 2017
$29,464 total to His 401k ($24k plus $5,464 employer match). Contributions and match are across 26 pay periods with no way to frontload. As of now we have $15,700 left to contribute and all of it will go to DFA Investment Grade Bond (DFAPX).

$6,500 to His Roth IRA. Per His income no tIRA deduction. Fully funded in January, 100% to VBILX.
$5,500 to Her Roth IRA. Per His income no tIRA deduction. Fully funded in January, 100% to VBILX.

$6,750 to HSA ($4,750 His contribution, $2,000 employer). His contribution is made in January. $500 employer contribution is made April, July, Sept, Dec. We have $1,500 left to contribute and 100% total will be in Vanguard Intermediate-Term Bond Index Fund ETF (BIV).

Total contributions to tax advantaged accounts for 2017: $48,214 (our contributions $40,750).

Total contributions to taxable for 2017: $36k-37k approx. annually to taxable. Funds are allocated to SWTSX or SWISX depending on AA. We maintain our AA by adding funds vs. rebalancing. Projecting about $9k left to contribute for the remainder of the year.

Available Funds

Funds available in his 401k
DFA US Core Equity 1 (DFEOX)
DFA Investment Grade Bond (DFAPX)
DFA One-Year Fixed Income (DFIHX)
DFA Real Estate Securities (DFREX)
DFA Short Duration Real Return Portfolio (DFAIX)
DFA US Small Cap Value (DFSVX)
DFA World Ex US Core Equity (DFWIX)
Vanguard Prime Money Market (VMMXX)
All other options are Blended DFA Target Date Funds

Low fee funds available in Taxable:
All appropriate Schwab funds

Low fee funds available in HSA:
All appropriate TD Ameritrade funds
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in_reality
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Re: Portfolio critique, bond options for taxable at Schwab, in CA?

Post by in_reality »

NorCalGaal wrote:Mr. NorCal and I would very much appreciate an overall critique of our portfolio, with specific suggestions for appropriate fixed income/bond funds for our Schwab taxable account. We are close to running out of tax-advantaged space for the first time, and would like to increase bonds to bring our AA from 65/35 to 60/40.

We are on a steep learning curve relative to the many highly knowledgeable veterans on this board. We have read the Bond Basics and Tax-Efficient Fund Placement pages and do our best homework. At this point we self-manage with strategic board and professional input. As such, we would prefer to keep things simple and buy and hold as long there isn’t a distinct disadvantage to doing so.

We are in CA, which we know brings a different element to the tax efficiency picture. Our tax bracket is 25% Fed/9.3% State, which according to various threads seems to be a generally accepted break even point for Muni vs. Total bond.

Given this information, and our complete portfolio below, would you suggest taxable or tax-exempt bonds in our taxable account at Schwab, and which? If taxable, Schwab’s Aggregate Bond Index (SWAGX), or something different? Thank you for your time!

Emergency Fund: $27k in Schwab High Yield Savings, equivalent to about 7 months of expenses. Interested in the multi-tiered option.
Debt: None
Tax Filing Status: MFJ. No kids/dependents.
Tax Rate: 25% Fed, 9.3% State
State of Residence: CA
Age: Mr. 54, Mrs. 49. Hoping to retire early in about 7 years or so, depending on whether we strive for a conservative “live on interest only” strategy or include Social Security projections and consider tapping principle.
Desired AA: 60/40. Currently 65/35. Projecting 64/36 at year’s end if no bonds in taxable.
Desired International allocation: 10-20% (at 10% now)
Current Portfolio Size (excluding Emergency Fund): $475k

Taxable account @ Schwab (24% of portfolio)
57% Schwab Total Stock Market Index (SWTSX) ER 0.03%
43% Schwab International Index Fund (SWISX) ER 0.06%

His 401k @ Dimensional Fund Advisors
(18% of portfolio)
81% DFA US Core Equity 1 (DFEOX) ER 0.19%.
19% DFA Investment Grade Bond (DFAPX) ER 0.22%

His Roth IRA @ Vanguard
(31% of portfolio)
56% Vanguard Total Stock Market Index Fund Admiral (VTSAX) ER 0.04%
44% Vanguard Intermediate-Term Bond Index Fund Admiral (VBILX) ER 0.07%

His traditional IRA @ Vanguard
(1% of portfolio)
100% Vanguard Intermediate-Term Bond Index Investor (VBIIX) ER 0.15%

Her Roth IRA @ Vanguard
(17% of portfolio)
55% Vanguard Total Stock Market Index Fund Admiral (VTSAX) ER 0.04%
45% Vanguard Intermediate-Term Bond Index Admiral (VBILX) ER 0.07%

Her traditional IRA @ Vanguard (5% of portfolio)
100% Vanguard Intermediate-Term Bond Index Admiral (VBILX) ER 0.07%

His HSA (family) @ TD Ameritrade (4% of portfolio)
100% Vanguard Intermediate-Term Bond Index Fund ETF (BIV) ER 0.07%

Contributions for 2017
$29,464 total to His 401k ($24k plus $5,464 employer match). Contributions and match are across 26 pay periods with no way to frontload. As of now we have $15,700 left to contribute and all of it will go to DFA Investment Grade Bond (DFAPX).

$6,500 to His Roth IRA. Per His income no tIRA deduction. Fully funded in January, 100% to VBILX.
$5,500 to Her Roth IRA. Per His income no tIRA deduction. Fully funded in January, 100% to VBILX.

$6,750 to HSA ($4,750 His contribution, $2,000 employer). His contribution is made in January. $500 employer contribution is made April, July, Sept, Dec. We have $1,500 left to contribute and 100% total will be in Vanguard Intermediate-Term Bond Index Fund ETF (BIV).

Total contributions to tax advantaged accounts for 2017: $48,214 (our contributions $40,750).

Total contributions to taxable for 2017: $36k-37k approx. annually to taxable. Funds are allocated to SWTSX or SWISX depending on AA. We maintain our AA by adding funds vs. rebalancing. Projecting about $9k left to contribute for the remainder of the year.

Available Funds

Funds available in his 401k
DFA US Core Equity 1 (DFEOX)
DFA Investment Grade Bond (DFAPX)
DFA One-Year Fixed Income (DFIHX)
DFA Real Estate Securities (DFREX)
DFA Short Duration Real Return Portfolio (DFAIX)
DFA US Small Cap Value (DFSVX)
DFA World Ex US Core Equity (DFWIX)
Vanguard Prime Money Market (VMMXX)
All other options are Blended DFA Target Date Funds

Low fee funds available in Taxable:
All appropriate Schwab funds

Low fee funds available in HSA:
All appropriate TD Ameritrade funds
His 401k @ Dimensional Fund Advisors and His & Her Roth IRAs @ Vanguard all have equities that you could hold in taxable instead [and use that space for bonds in tax sheltered].

SWCAX (Schwab CA Tax-Free Bond) 0.49% ER would seem a possibility too.

I'd probably want to keep some stocks in the Roths so would probably figure out how swapping DFA US Core Equity 1 (DFEOX) in the 401k to DFAPX would be. It's a lot of corporate though (58% or about 15% more than VBILX or VBIIX). Then just hold more SWTSX in taxable.

If that's too much corporate, perhaps switching Vanguard Total Stock Market Index in His Roth to VBILX would work. Alternatively, you could switch DFA US Core Equity 1 (DFEOX) in the 401k to DFAPX (which would increase your corporate exposure) and then switch one of your VBILX or VBIIX holdings to a treasury fund.

I'm not real up on CA muni risks so don't know how safe they are relative to other states.
gtwhitegold
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Joined: Fri Sep 21, 2012 1:55 pm

Re: Portfolio critique, bond options for taxable at Schwab, in CA?

Post by gtwhitegold »

I agree with In_reality. It doesn't look like you're trying to capture a size or value premium with your portfolio, so access to DFA funds probably isn't a big deal. Thus, use your tax advantaged space to hold your bonds as much as possible. Start with your traditional IRA and 401k accounts.

I would also keep my bond holdings at the same average credit quality as total bond market or higher. Bond duration should be at the same as total bond market or lower. You can check this by using Morningstar.com's Portfolio X-ray tool.

Below are the links to the Bogleheads.Org Wiki page on tax efficient asset placement and Morningstar.com's Portfolio X-ray tool.

https://www.bogleheads.org/wiki/Tax-eff ... _placement

http://portfolio.morningstar.com/RtPort ... =0.7055475
retiredjg
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Re: Portfolio critique, bond options for taxable at Schwab, in CA?

Post by retiredjg »

I agree you are approaching the time to put bonds into your taxable account. You can avoid that a little longer, if you want to, by simply selling most of the stocks in His 401k and buying bonds. This will increase your overall bond allocation by about 10% which is actually more than you want. So that might give you more time than you thought.

I would keep some stocks in that account for rebalancing purposes.

One of our posters here, grabiner, suggests for California people in the 25% bracket to use half short term tax-exempt bond and half intermediate term CA tax exempt bond in taxable for the best results. But I think he specifically means the Vanguard funds. The Schwab CA fund mentioned already seems pretty high priced in comparison and I don't know what else Schwab has to offer in that area. You might search grabiner's posts for his specific recommendation on bonds in taxable in the 25% bracket, just in case I remembered it wrong.

I too would keep at least some stocks -about the percentage you have - in the Roth IRAs. While I don't believe that bonds don't belong in Roth IRA, I don't really like to see a Roth IRA filled completely with bonds when it can be avoided.

Overall, your portfolio looks good and you seem to be headed in the right direction. You are saving quite a bit of money, especially for people in a high tax and high COL state.
ofckrupke
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Joined: Mon Jan 10, 2011 2:26 pm

Re: Portfolio critique, bond options for taxable at Schwab, in CA?

Post by ofckrupke »

NorCalGaal wrote: Given this information, and our complete portfolio below, would you suggest taxable or tax-exempt bonds in our taxable account at Schwab, and which? If taxable, Schwab’s Aggregate Bond Index (SWAGX), or something different?
Your best choices in muni funds at Schwab would probably be Ishares CA-specific CMF (0.25%) or Vanguard national VTEB (0.09%). It is not worth the high management costs of the tax-exempt mutual funds offered there without transaction fee, when it costs only $5 to buy a lower cost, quality ETF that you plan to hold for a long time.

In your bracket, at Schwab, I would probably choose instead to use house brand ETFs short-term treasury SCHO or intermediate-term treasury SCHR (both 0.06%). These will be CA tax exempt, and being less risky than a TBM fund will generate lower yield, reducing the total (transaction + ER + tax) cost of holding bonds in taxable. The weight in treasuries can be counterbalanced by holding a corporate-overweight bond fund in tax-advantaged; notably the position in VBILX in His Roth is probably over $50k so could be exchanged for Admiral shares in the actively-managed but low cost intermediate-term investment-grade VFIDX (0.10%). VFIDX now yields ~0.2% more than VBILX with a lower duration and only modestly riskier portfolio (much of the risk-bump would be counterbalanced by the treasuries in taxable), so that would mitigate the lower after-tax yield of the treasuries in taxable.
Yeah, it's more complicated than just adding SWAGX, but adding SWAGX is more complicated than growing the DFA bond fund in his 401k and adding to existing SWTSX and SWISX to cover the reduction in the DFA core equity fund....the path of least resistance in your situation if there isn't an undisclosed point of mental resistance to such.

You may have noticed the preference for ETFs in Schwab taxable. Reasoning is: I expect even indexed Schwab mutual funds to throw off more capital gain distributions than their ETF counterparts. So although I would not pay a tax cost to exchange the existing SWTSX and SWISX holdings, I would buy ETFs SCHB and SCHF (SWISX is a developed-markets-only fund) going forward, and if the opportunity ever arose I would TLH those mutual funds into ETF counterparts. Note: if lacking a high-yielding account at a bank, at Schwab any accumulation pool for next round-lot purchase from the preferred ETF menu should be kept in SWAGX or SWSBX in preference to a Schwab money market fund...the expense ratios on the latter, whether taxable or tax-exempt, are egregiously high with direct effect on yield...it's just a bad place to hold cash or near-cash, period.
wickywack
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Re: Portfolio critique, bond options for taxable at Schwab, in CA?

Post by wickywack »

This is Schwab's list of recommended bond ETFs. Note that a number are commission free:

http://www.schwab.com/public/schwab/inv ... =undefined

The treasury ETFs look excellent (state tax exempt). The national muni ones (fed tax exempt) look reasonable. A mix of that (instead of a CA muni) may be worth considering depending on how the math works out for you.
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Kevin M
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Re: Portfolio critique, bond options for taxable at Schwab, in CA?

Post by Kevin M »

With accounts already at Vanguard, why taxable at Schwab? Vanguard has the broadest lineup of low-cost bond mutual funds, which is one reason I prefer them over Schwab or Fidelity, although I used to have accounts at the former and still have accounts at the latter (but much, much more at VG).

I am a CA resident in about the same tax brackets as you--but as a retiree, maybe a little lower for state, and right on the border of 25% for federal (by design by tweaking Roth conversions). I hold some fixed income in the Vanguard CA intermediate-term and long-term funds, but far, far more in CDs purchased directly from banks and credit unions, in both taxable and tax-advantaged accounts. I also hold some intermediate-term investment-grade bonds in tax-advantaged accounts.

Following the grabiner theory that muni bonds are priced to be competitive with taxable bonds at the 25% marginal rate, I'd think that the same would hold for CA muni bonds at the 9.3% marginal rate, but maybe it's a little lower. Given this, I probably shouldn't own CA munis, but this helps give me a little more space for Roth conversions (still not much though), and I just don't worry too much about getting the tax efficiency exactly right. Also, muni bonds are exposed to different credit risk factors than corporate bonds, and of course Treasuries have no credit risk, so I don't mind the additional diversity in risk-factor exposure.

If we assume risk/return parity at the 25% federal marginal tax rate, then the CDs I've bought are superior to any other bonds on a risk-adjusted basis, even in a taxable account, since my yield premium is more than 100 basis points compared to Treasuries of same maturities (e.g., if 5-year Treasury yield was 1.5%, I bought a 5-year CD at 2.5%). It's hard if not impossible to overcome this large yield premium, even at higher tax rates. However, CDs may not be the right approach for you.

Kevin
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grabiner
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Re: Portfolio critique, bond options for taxable at Schwab, in CA?

Post by grabiner »

NorCalGaal wrote:His HSA (family) @ TD Ameritrade (4% of portfolio)
100% Vanguard Intermediate-Term Bond Index Fund ETF (BIV) ER 0.07%
You live in CA, which taxes HSAs, so you might want to switch this for a TIPS or Treasury ETF which is exempt from CA taxation, and hold more non-Treasury bonds in your other accounts.

And if you do hold munis, it's probably worth the cost of holding Vanguard CA Long-Term Tax-Exempt to get the tax exemption, making transactions at most once a year since this fund is transaction-fee at Schwab.
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NorCalGaal
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Re: Portfolio critique, bond options for taxable at Schwab, in CA?

Post by NorCalGaal »

in_reality, gtwhitegold, retiredjg, ofckrupke, wickywack, Kevin M, and grabiner:

Thank you very much for your time. Please accept our apologies for the delayed response. We've actually been reading (and re-reading) your posts since they went up. As mentioned in the OP, we are still on a pretty steep learning curve. We've had to look up terms and do background research to get the various concepts you've presented. Bonds and taxes are daunting in equal measure. But we're indefatigable types and are committed to learning this stuff.

Our goal is to strike a reasonable balance between optimization and simplicity, which we realize are not necessarily mutually exclusive (i.e., index). But when it comes to tax efficient placement across multiple accounts, clearly there are tradeoffs. You've each put forth some very useful ideas and concepts that we will need to weigh as we pursue this balance: consider swapping some stocks for bonds in the 401k; look at holding ETFs in taxable for bonds and in place of equity mutual funds; look into munis and CDs; consider switching to TIPS or Treasury ETF in the HSA and hold more non-Treasury in the other accounts; and in general start paying attention to weights, percentages, credit risk/quality and duration in bond/fixed income holdings.

We'll be busy. As we dig in, we hope you won't mind if we round back with specific questions.

Thank you again for your time.
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billthecat
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Re: Portfolio critique, bond options for taxable at Schwab, in CA?

Post by billthecat »

ofckrupke wrote:
NorCalGaal wrote: Given this information, and our complete portfolio below, would you suggest taxable or tax-exempt bonds in our taxable account at Schwab, and which? If taxable, Schwab’s Aggregate Bond Index (SWAGX), or something different?
Your best choices in muni funds at Schwab would probably be Ishares CA-specific CMF (0.25%) or Vanguard national VTEB (0.09%). It is not worth the high management costs of the tax-exempt mutual funds offered there without transaction fee, when it costs only $5 to buy a lower cost, quality ETF that you plan to hold for a long time.

In your bracket, at Schwab, I would probably choose instead to use house brand ETFs short-term treasury SCHO or intermediate-term treasury SCHR (both 0.06%). These will be CA tax exempt, and being less risky than a TBM fund will generate lower yield, reducing the total (transaction + ER + tax) cost of holding bonds in taxable. The weight in treasuries can be counterbalanced by holding a corporate-overweight bond fund in tax-advantaged; notably the position in VBILX in His Roth is probably over $50k so could be exchanged for Admiral shares in the actively-managed but low cost intermediate-term investment-grade VFIDX (0.10%). VFIDX now yields ~0.2% more than VBILX with a lower duration and only modestly riskier portfolio (much of the risk-bump would be counterbalanced by the treasuries in taxable), so that would mitigate the lower after-tax yield of the treasuries in taxable.
Yeah, it's more complicated than just adding SWAGX, but adding SWAGX is more complicated than growing the DFA bond fund in his 401k and adding to existing SWTSX and SWISX to cover the reduction in the DFA core equity fund....the path of least resistance in your situation if there isn't an undisclosed point of mental resistance to such.

You may have noticed the preference for ETFs in Schwab taxable. Reasoning is: I expect even indexed Schwab mutual funds to throw off more capital gain distributions than their ETF counterparts. So although I would not pay a tax cost to exchange the existing SWTSX and SWISX holdings, I would buy ETFs SCHB and SCHF (SWISX is a developed-markets-only fund) going forward, and if the opportunity ever arose I would TLH those mutual funds into ETF counterparts. Note: if lacking a high-yielding account at a bank, at Schwab any accumulation pool for next round-lot purchase from the preferred ETF menu should be kept in SWAGX or SWSBX in preference to a Schwab money market fund...the expense ratios on the latter, whether taxable or tax-exempt, are egregiously high with direct effect on yield...it's just a bad place to hold cash or near-cash, period.
What's your view of PWZ, PowerShares California AMT-Free Municipal Bond Portfolio (ER 0.28%)?
We cannot direct the winds but we can adjust our sails.
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in_reality
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Re: Portfolio critique, bond options for taxable at Schwab, in CA?

Post by in_reality »

NorCalGaal wrote:in_reality, gtwhitegold, retiredjg, ofckrupke, wickywack, Kevin M, and grabiner:

Thank you very much for your time. Please accept our apologies for the delayed response. We've actually been reading (and re-reading) your posts since they went up. As mentioned in the OP, we are still on a pretty steep learning curve. We've had to look up terms and do background research to get the various concepts you've presented. Bonds and taxes are daunting in equal measure. But we're indefatigable types and are committed to learning this stuff.

Our goal is to strike a reasonable balance between optimization and simplicity, which we realize are not necessarily mutually exclusive (i.e., index). But when it comes to tax efficient placement across multiple accounts, clearly there are tradeoffs. You've each put forth some very useful ideas and concepts that we will need to weigh as we pursue this balance: consider swapping some stocks for bonds in the 401k; look at holding ETFs in taxable for bonds and in place of equity mutual funds; look into munis and CDs; consider switching to TIPS or Treasury ETF in the HSA and hold more non-Treasury in the other accounts; and in general start paying attention to weights, percentages, credit risk/quality and duration in bond/fixed income holdings.

We'll be busy. As we dig in, we hope you won't mind if we round back with specific questions.

Thank you again for your time.
Thanks for the follow up. It's nice to hear back and we'll look forward to hearing from you again!
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grabiner
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Re: Portfolio critique, bond options for taxable at Schwab, in CA?

Post by grabiner »

billthecat wrote:What's your view of PWZ, PowerShares California AMT-Free Municipal Bond Portfolio (ER 0.28%)?
Checking the charts at Morningstar, it looks to be a bit riskier than Vanguard's funds, with larger drops in 2008 (which it then made up), and has no better returns. In recent years, it has tracked Vanguard Long-Term Tax-Exempt almost perfectly. Thus, I would prefer the Vanguard fund for an investment large enough to make the expense ratio difference make up for any fees. (For example, if you are investing $50K, Vanguard Admiral shares have 0.09% expenses, which is saving you $95 per year plus any trading costs for buying and selling the ETF.)
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NorCalGaal
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Re: Portfolio critique, bond options for taxable at Schwab, in CA?

Post by NorCalGaal »

grabiner wrote:
NorCalGaal wrote:His HSA (family) @ TD Ameritrade (4% of portfolio)
100% Vanguard Intermediate-Term Bond Index Fund ETF (BIV) ER 0.07%
You live in CA, which taxes HSAs, so you might want to switch this for a TIPS or Treasury ETF which is exempt from CA taxation, and hold more non-Treasury bonds in your other accounts.

And if you do hold munis, it's probably worth the cost of holding Vanguard CA Long-Term Tax-Exempt to get the tax exemption, making transactions at most once a year since this fund is transaction-fee at Schwab.
Thank you for taking the time to offer HSA advice, grabiner. Based on our HSA-related searches on the board, we see that you do this quite often! :happy A follow up question, if you don't mind:

At the moment, we have our TD Ameritrade BIV-only HSA set to reinvest dividends. Last year our ordinary dividends, short term capital gains, and long term gain distributions, in total, came to $284. Based on our 9.3% CA tax bracket, $284 X .093% = $26. We originally went with BIV in the HSA so we could get into Vanguard's Intermediate-Term Bond Index Fund, and went with the ETF version since it's a no-fee trade and we're holding the fund in a state-taxable account. We appreciate that intricacies exist in ETFs vis a vis mutual funds, and given our learning curve it's quite possible we are missing something. If not, though, we question whether this amount of taxable income is worth a switch to a TIPS or Treasury ETF for the tax exemption alone. Would you be willing to offer feedback? Thanks again for your time!
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grabiner
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Re: Portfolio critique, bond options for taxable at Schwab, in CA?

Post by grabiner »

NorCalGaal wrote:At the moment, we have our TD Ameritrade BIV-only HSA set to reinvest dividends. Last year our ordinary dividends, short term capital gains, and long term gain distributions, in total, came to $284. Based on our 9.3% CA tax bracket, $284 X .093% = $26. We originally went with BIV in the HSA so we could get into Vanguard's Intermediate-Term Bond Index Fund, and went with the ETF version since it's a no-fee trade and we're holding the fund in a state-taxable account. We appreciate that intricacies exist in ETFs vis a vis mutual funds, and given our learning curve it's quite possible we are missing something. If not, though, we question whether this amount of taxable income is worth a switch to a TIPS or Treasury ETF for the tax exemption alone.
Switching makes sense, assuming that the replacement fund fits your needs (for example, if you can hold more corporate bonds in your IRA to make up for holding Treasuries in your HSA, or if you want TIPS anyway).

The $284 capital gain is likely to be distributed at some time, either as dividends (bonds with capital gains have a higher coupon payment than the market rate) or as capital gains (if the fund sells the intermediate-term bonds with capital gains when they become short-term); therefore, you aren't losing much by selling. And any cost from switching is a one-time cost, while the gain is permanent. If you have a $10,000 balance, the current yield on BIV means that you are receiving $253 in dividends, and based on 2016 US Government Obligations Information for Vanguard funds, $155 of that is taxable in CA.
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