bond fund recs for taxable acct

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CHLR15
Posts: 6
Joined: Sun Jan 11, 2015 6:24 pm

bond fund recs for taxable acct

Post by CHLR15 »

Hi everyone,

I would greatly appreciate recommendations for bond fund options for a taxable acct in my personal situation. Hopefully I have provided enough info for clarity.

We are following a relatively basic 3 fund portfolio approach using Vanguard Funds for the Roth and Taxable portions of our savings and TSP funds for the rest of the tax-deferred accounts. We need a bond fund in taxable to open up more space and I’m struggling a bit about what would be an appropriate choice. This fund will be used mainly for rebalancing to our target AA with new contributions instead of moving already invested money around. We also want to move towards holding a portion of our bond allocation in taxable accts.

It seems a municipal bond fund would be the most appropriate option, but I wanted some input from folks with a bit more experience. Also, we prefer Vanguard funds if all other variables are equal. But I have found some state specific (Arizona) muni funds from other companies (Fidelity etc) and wondered if one of these would be better from a tax standpoint than current Vanguard options.

His age: 36
Her age: 35
Stage of residence: AZ
Federal Tax rate: 33%
State tax rate: 4.54%
Tax Filing Status: MFJ
Emergency Funds: 6mo
Debt: none
Desired Asset allocation: 75% stocks / 25% bonds
Desired Internation allocation: 20% of stocks

-we are solidly in our current tax brackets so I don’t think the extra income from the bond fund should push us into a higher bracket if that would change recommendations. But I’ll check with specific numbers once I have narrowed the options down options a bit.

Thanks in advance.
PFInterest
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Joined: Sun Jan 08, 2017 12:25 pm

Re: bond fund recs for taxable acct

Post by PFInterest »

VWIUX.
mega317
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Re: bond fund recs for taxable acct

Post by mega317 »

CHLR15 wrote: Sat Aug 26, 2017 3:21 pm We need a bond fund in taxable to open up more space
I'm not sure what this means. It sounds like you need more space for bonds since your TSP and Roth are already 100% bonds and you want more. But at 75/25 that seems unlikely. Why not rebalance by increasing bonds in tax-advantaged?
Without other info, VWIUX is likely the correct answer.
https://www.bogleheads.org/forum/viewtopic.php?t=6212
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grabiner
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Re: bond fund recs for taxable acct

Post by grabiner »

Since you have the TSP, you have a strong preference for holding bonds there, rather than taxable. Therefore, it makes more sense to hold your entire bond allocation in the TSP G fund, making it a total 25% of your portfolio; your Roth IRA and taxable account can be all stock.

Arizona also allows a foreign tax credit, which makes international index funds in a taxable account particularly attractive; they are usually effectively exempt from state tax. Therefore, Total International is likely the best fund for your taxable account if you use a three-fund portfolio.

If you do need to hold munis, it isn't worth using an AZ muni fund; it costs more in extra expenses than it saves in taxes compared with one of Vanguard's national muni funds.
Wiki David Grabiner
Topic Author
CHLR15
Posts: 6
Joined: Sun Jan 11, 2015 6:24 pm

Re: bond fund recs for taxable acct

Post by CHLR15 »

Thanks for the help and recommendations. A little clarification that I should have included initially. After reading some of the discussions on this board and the whitecoatinvestor site regarding placing bonds in taxable vs tax deferred, we are moving toward holding a portion of our bond allocation in taxable. This will start as a relatively small amt of our overall bond holdings.

Grabiner, Thanks for the added info about AZ's foreign tax credit. I'll be sure to look into this further. Currently all of our Total International is held in the I-fund within the TSP. One other question though. Could you clarify why you recommend holding my TSP bond holdings in the G Fund and not the F Fund.

thanks again to everyone.
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grabiner
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Re: bond fund recs for taxable acct

Post by grabiner »

CHLR15 wrote: Mon Aug 28, 2017 10:12 pm Thanks for the help and recommendations. A little clarification that I should have included initially. After reading some of the discussions on this board and the whitecoatinvestor site regarding placing bonds in taxable vs tax deferred, we are moving toward holding a portion of our bond allocation in taxable. This will start as a relatively small amt of our overall bond holdings.

Grabiner, Thanks for the added info about AZ's foreign tax credit. I'll be sure to look into this further. Currently all of our Total International is held in the I-fund within the TSP. One other question though. Could you clarify why you recommend holding my TSP bond holdings in the G Fund and not the F Fund.
Normally, there is a trade-off between risk and return; higher-yielding bonds have more risk, because bond traders demand higher yields to compensate. But the G fund, which is not available at retail, is an exception. It has the yield of an intermediate-term fund, with zero risk because the bonds mature daily.

This is also relevant to the White Coat Investor's advice. If all else is equal, you may have a tax reason to prefer bonds in taxable and stocks in tax-deferred, or vice versa. But for you, all else is not equal, because your tax-deferred account has better bond options than stock options, and because your taxable account has a state tax advantage for international stocks.

(Independent of the tax issues, I prefer Total International to the TSP I fund, because Total International is a better-diversified index; it includes small-cap stocks and emerging markets.)
Wiki David Grabiner
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