Bond diversification for high tax brackets?

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dspencer
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Joined: Wed Jul 06, 2016 11:29 am

Bond diversification for high tax brackets?

Post by dspencer »

Due to the after tax returns, most of my bonds are in tax exempt municipal bond funds (mostly VWIUX). Vanguard's Portfolio Watch tool recommends putting 20-50% in international bonds. I do have a small holding of VWOB (emerging market gov bonds). Despite higher yield, I still believe the after-tax yield will be lower and the credit quality is probably inferior to the municipal bond funds. Other funds, such as BNDX, have lower yields even before taxes are considered. Does it make sense to have other bond holdings strictly for diversification purposes?
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retiredjg
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Re: Bond diversification for high tax brackets?

Post by retiredjg »

If you want to hold your bonds in taxable, they should be tax-exempt if you are in a higher tax bracket. What makes sense to me is holding your bonds, or at least a good portion, in a tax-advantaged account such as a rollover IRA or a 401k. Most any broad intermediate term fund will do.

Are there any tax-exempt international bond funds/ETFs available at a reasonable cost? If not, I'd skip holding international bonds or put them where they belong - anywhere but taxable.

If all your bonds are tax-exempt, you are not very diversified in my opinion....but that is not really what you asked.
Topic Author
dspencer
Posts: 225
Joined: Wed Jul 06, 2016 11:29 am

Re: Bond diversification for high tax brackets?

Post by dspencer »

retiredjg wrote: Tue May 29, 2018 4:44 pm If you want to hold your bonds in taxable, they should be tax-exempt if you are in a higher tax bracket. What makes sense to me is holding your bonds, or at least a good portion, in a tax-advantaged account such as a rollover IRA or a 401k. Most any broad intermediate term fund will do.

Are there any tax-exempt international bond funds/ETFs available at a reasonable cost? If not, I'd skip holding international bonds or put them where they belong - anywhere but taxable.

If all your bonds are tax-exempt, you are not very diversified in my opinion....but that is not really what you asked.
For better or worse, I have taken the route of allocating each account individually instead of treating all my accounts as one big portfolio. The two main reasons are: 1. conflicting views about whether bonds should be in tax-advantaged (because they generate income) or taxable (because in the long run they have lower returns). 2. the relative size of my accounts would mean that my 401k and Roth IRA would be 100% bonds.

I do hold taxable bonds (US Corporate) in my tax-advantaged accounts but again, because of the size discrepancies they are a very small portion of my overall holdings. I guess if I think it's important to add international bonds I could do so in those accounts and if I really wanted to I could increase my bond allocation in them as well.

Thanks for the feedback.
e5116
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Re: Bond diversification for high tax brackets?

Post by e5116 »

I personally wouldn't want munis to make up the majority of my bond holdings, but also wouldn't be overly worried about them being a sizable chunk. I also wouldn't go out of my way to hold international bonds, but having some US treasuries and corporate bonds in addition to the munis would be advisable in my opinion.
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retiredjg
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Re: Bond diversification for high tax brackets?

Post by retiredjg »

dspencer wrote: Wed May 30, 2018 8:00 am For better or worse, I have taken the route of allocating each account individually instead of treating all my accounts as one big portfolio. The two main reasons are: 1. conflicting views about whether bonds should be in tax-advantaged (because they generate income) or taxable (because in the long run they have lower returns). 2. the relative size of my accounts would mean that my 401k and Roth IRA would be 100% bonds.

I do hold taxable bonds (US Corporate) in my tax-advantaged accounts but again, because of the size discrepancies they are a very small portion of my overall holdings. I guess if I think it's important to add international bonds I could do so in those accounts and if I really wanted to I could increase my bond allocation in them as well.

Thanks for the feedback.
In your situation, I'd suggest that you back off equal allocation a little, but that does not mean you have to go all the way because that would not suit you.

But you could hold mostly stocks in taxable with some accompanying bonds. And you could hold mostly bonds in the 401k with some accompanying stocks. And maybe half and half (or whatever) in the Roth IRA.

I'm not opposed to international bonds, but I would not add them if it makes the portfolio less flexible. I just don't think the presence of international bonds is required. And I sure would not put them in a taxable account if I were in a higher tax bracket.

Good luck!
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