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Advice about bond funds in a taxable account

Posted: Thu Jul 20, 2017 5:59 pm
by imahtob
Like many, I've been reading this forum for a while, time to jump in with my questions.

I've ~500k USD to invest in a taxable account. Have already opened one at Vanguard, and started moving money into it. We are mid-40s, married filing jointly in the high-tax bracket, and don't expect to use this money for 15+ years. We live in AZ. We are new to US, and don't have space in any tax-advantaged accounts.

Was originally planning to split 60 stocks / 40 bonds with the following choices:

20% in VTSAX - Total US stock market
20% in VTIAX - Total Int'l
20% in VSIAX - Small-cap value
40% in VBTLX - Total bond market

Then I started reading up some of the conversations about the tax-exempt funds, such as:
VWIUX - intermediate tax-exempt
VWLUX - long tax-exempt
VTEAX - tax-exempt bond index fund

So, now I'm confused about which bond fund to go with! VWIUX and VWLUX seem very similar, VTEAX also has a 1% purchase fee! Would be great to get some ideas from this group.

Any comments about my choice of the stock market funds?

Re: Advice about bond funds in a taxable account

Posted: Thu Jul 20, 2017 6:57 pm
by PFInterest
VWIUX. Done.

Re: Advice about bond funds in a taxable account

Posted: Thu Jul 20, 2017 7:16 pm
by imahtob
PFInterest wrote:VWIUX. Done.
That was easy :-) but, why?

Re: Advice about bond funds in a taxable account

Posted: Thu Jul 20, 2017 7:19 pm
by grabiner
What is your tax bracket? Vanguard doesn't offer an AZ fund, so I would recommend munis in a 28% or higher tax bracket, and it's probably close to break-even in a 25% bracket if you aren't in some phase-out such as the child tax credit.

Intermediate-Term Tax-Exempt is the standard Boglehead recommendation. It serves the same role as Total Bond Market, and the yield implies that it has comparable risk. If you prefer the index fund, use the ETF class VTEB instead.

Re: Advice about bond funds in a taxable account

Posted: Thu Jul 20, 2017 7:25 pm
by Cyclesafe
If you are in a high tax bracket (TB), say 33% (but don't forget NIIT etc) you can calculate the equivalent "taxable return" of a tax exempt bond/fund by dividing its return by (1-TB). In AZ you may also be able to adjust this formula by the percentage of AZ obligations held by a national tax exempt muni like VWIUX/VWLUX. You'll have to check AZ (can't do it in CA). It is likely to your advantage to go with these muni's rather than total bond fund.

Once you decide that a muni fund is better for you, the choice between VWIUX and VWLUX depends primarily upon your desired duration. In theory, the former will hold its value better than the latter if/when interest rates rise, but if price to market in the interim doesn't bother you and your horizon is long enough, the return on the latter will likely be higher. The consensus here is that VWIUX gives the better tradeoff. I never considered VTEAX because of the purchase fee, but I recall a past thread discussing its possible benefits vs VWIUX.

You seem to be heavy in SCV as small cap is already represented at market capitalization proportions in VTSAX. Personally, I'd back off a little.

Re: Advice about bond funds in a taxable account

Posted: Thu Jul 20, 2017 7:30 pm
by imahtob
grabiner wrote:What is your tax bracket? Vanguard doesn't offer an AZ fund, so I would recommend munis in a 28% or higher tax bracket, and it's probably close to break-even in a 25% bracket if you aren't in some phase-out such as the child tax credit.
We are in the high-tax bracket (39.6%). I also noticed no AZ fund.
grabiner wrote:Intermediate-Term Tax-Exempt is the standard Boglehead recommendation. It serves the same role as Total Bond Market, and the yield implies that it has comparable risk. If you prefer the index fund, use the ETF class VTEB instead.
I've no reason to prefer the index fund, it just came up during my searches for tax-exempt funds at Vanguard. It also has a purchase fee, so not a preference at all. Sounds like I should just go with VWIUX. Thanks.

Re: Advice about bond funds in a taxable account

Posted: Thu Jul 20, 2017 7:39 pm
by Kennyt7
buy 500k of individual munis from your state

Re: Advice about bond funds in a taxable account

Posted: Thu Jul 20, 2017 8:48 pm
by imahtob
Cyclesafe wrote:If you are in a high tax bracket (TB), say 33% (but don't forget NIIT etc) you can calculate the equivalent "taxable return" of a tax exempt bond/fund by dividing its return by (1-TB). In AZ you may also be able to adjust this formula by the percentage of AZ obligations held by a national tax exempt muni like VWIUX/VWLUX. You'll have to check AZ (can't do it in CA). It is likely to your advantage to go with these muni's rather than total bond fund.

Once you decide that a muni fund is better for you, the choice between VWIUX and VWLUX depends primarily upon your desired duration. In theory, the former will hold its value better than the latter if/when interest rates rise, but if price to market in the interim doesn't bother you and your horizon is long enough, the return on the latter will likely be higher. The consensus here is that VWIUX gives the better tradeoff. I never considered VTEAX because of the purchase fee, but I recall a past thread discussing its possible benefits vs VWIUX.
Based on the comments so far VWIUX seems to be the choice. I'll go with that.
Cyclesafe wrote:You seem to be heavy in SCV as small cap is already represented at market capitalization proportions in VTSAX. Personally, I'd back off a little.
What split would you suggest? I was trying to be a bit aggressive with the SCV.

Re: Advice about bond funds in a taxable account

Posted: Thu Jul 20, 2017 9:32 pm
by Cyclesafe
imahtob wrote:What split would you suggest? I was trying to be a bit aggressive with the SCV.
See concurrent thread...
viewtopic.php?f=10&t=223852

Re: Advice about bond funds in a taxable account

Posted: Thu Jul 20, 2017 9:51 pm
by arthurdawg
imahtob wrote:
Cyclesafe wrote:If you are in a high tax bracket (TB), say 33% (but don't forget NIIT etc) you can calculate the equivalent "taxable return" of a tax exempt bond/fund by dividing its return by (1-TB). In AZ you may also be able to adjust this formula by the percentage of AZ obligations held by a national tax exempt muni like VWIUX/VWLUX. You'll have to check AZ (can't do it in CA). It is likely to your advantage to go with these muni's rather than total bond fund.

Once you decide that a muni fund is better for you, the choice between VWIUX and VWLUX depends primarily upon your desired duration. In theory, the former will hold its value better than the latter if/when interest rates rise, but if price to market in the interim doesn't bother you and your horizon is long enough, the return on the latter will likely be higher. The consensus here is that VWIUX gives the better tradeoff. I never considered VTEAX because of the purchase fee, but I recall a past thread discussing its possible benefits vs VWIUX.
Based on the comments so far VWIUX seems to be the choice. I'll go with that.
Cyclesafe wrote:You seem to be heavy in SCV as small cap is already represented at market capitalization proportions in VTSAX. Personally, I'd back off a little.
What split would you suggest? I was trying to be a bit aggressive with the SCV.

I'd use a portfolio model and look at the breakdown.

I use FTSE funds (started back when Total Internstional was a fund of funds) so it is a little different... not sure how much small international is in Total International.

For my stock portifolio I use:

40% TSM
30% FTSE Large Cap International
15% Small Cap Value
15% FTSE Small Cap International

And I use Intermediate Term Tax Exempt.

I'm often a bit lower on the Small Caps frankly. Maybe 10% at times. Not sure it adds anything but complexity.