Which Vanguard bond fund for a taxable account?

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sublimisdeus
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Joined: Sun Sep 28, 2008 6:55 am

Which Vanguard bond fund for a taxable account?

Post by sublimisdeus »

I am considering a bond fund for my taxable account at Vanguard. My rationale is that we may seek to cash out some of these funds in 5+ years and I want to maintain a moderate risk profile for this account.

For a taxable account, does a bond index, tax-exempt, or tax-managed make the most sense? We seek to minimize our taxes annually.

Some funds I'm considering are:

Vanguard Total Bond Market Index
Vanguard Tax-Exempt Bond Index
Vanguard Tax-Managed Balanced Fund
Vanguard Intermediate-Term Tax-Exempt Fund
..or perhaps something else?

It seems that Bogleheads generally recommend to keep bond funds in tax-deferred accounts. Is it better to ignore the fact that it is a taxable account, just keep bond funds in tax-deferred accounts, tax efficient stock index funds in a taxable account, and consider them both as part of my overall portfolio irregardless of time horizon? (time horizons: 5+ years for taxable account, vs. long-term 20+ years in tax-deferred retirement accounts)

I welcome any suggestions you might offer.

My original post with background is here: viewtopic.php?f=1&t=244817.
mega317
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Joined: Tue Apr 19, 2016 10:55 am

Re: Which Vanguard bond fund for a taxable account?

Post by mega317 »

What's your 2018 marginal tax rate?

It's usually best to consider your portfolio as a whole.

But if you have short-term goals for your taxable money, your plan needs to include the possibility that stocks could drop by half (or more!) when you need the money.

I have posted my situation before. I have much of my taxable money in tax-efficient stock index funds. But I have some financial goals in the next few years that I expect will cost roughly half of my current taxable account, maybe more. So I have some muni bonds to avoid a 50% drop in taxable. These are included in my overall asset allocation.
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grabiner
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Re: Which Vanguard bond fund for a taxable account?

Post by grabiner »

Tax-Managed Balanced is not suitable for a five-year time horizon; it is half stock.
sublimisdeus wrote: Thu Mar 22, 2018 5:06 pm It seems that Bogleheads generally recommend to keep bond funds in tax-deferred accounts. Is it better to ignore the fact that it is a taxable account, just keep bond funds in tax-deferred accounts, tax efficient stock index funds in a taxable account, and consider them both as part of my overall portfolio irregardless of time horizon?
This depends on whether you can make the sale from your taxable account if the market crashes; see Placing cash needs in a tax-advantaged account on the wiki. If your taxable account is twice the size of your taxable needs, you can keep it in stock, and if you need to spend bonds, you can sell stock in the taxable account (even if the market is down) and move an equal amount from bonds to stock in the tax-deferred account. If your taxable account is not twice the size of your taxable needs, you should keep it in bonds.

Use I-Bonds first, for up to $10,000 per year, because they are exempt from state tax, and the gain is tax-deferred until you cash them in.

After that, since you were in the 28% bracket (probably 24% now), either taxable or tax-exempt funds are reasonable for your taxable account. Tax-Exempt Bond Index is a bit riskier than Intermediate-Term Tax-Exempt, but it can be bought less expensively for less than $50K, as you can buy the ETF. Intermediate-Term Tax-Exempt, while it is not an index, behaves like one; it is low-cost, does not make any strong bets on one sector of the market, and tracks its benchmark very well.
Wiki David Grabiner
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