Bonds for high income individuals in taxable account

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masonstone
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Bonds for high income individuals in taxable account

Post by masonstone » Sun Jul 29, 2018 12:32 pm

Do having bonds in a taxable account make sense for individuals with a high income? Let’s assume that ASsett Allocation goals can only be achieved placing bonds in taxable accounts due to high income and savings.
Last edited by masonstone on Sun Jul 29, 2018 1:03 pm, edited 1 time in total.

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TomatoTomahto
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Re: Bonds for high income individuals in taxable account

Post by TomatoTomahto » Sun Jul 29, 2018 12:36 pm

Short answer: not if you can avoid it.

We have essentially all of our fixed income assets in 401ks. The funny side effect is that Fidelity, custodian of our 401ks, tells us that we’re too conservative. Vanguard, custodian of our taxable and Roth, every now and then reaches out to advise us to diversify out of 100% stocks.
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retiredjg
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Re: Bonds for high income individuals in taxable account

Post by retiredjg » Sun Jul 29, 2018 12:38 pm

If you need to have bonds in taxable to achieve your stock to bond ratio, it certainly makes sense. Or if the money is for a short term goal, it certainly makes sense. Otherwise, I usually suggest holding all your bonds in a 401k or IRA if possible.

When interest rates were very low, there was a group who thought that tax-exempt bonds in taxable produced more return particularly for people in a high tax state. I'm interested in hearing what those folks think now that interest rates are no longer rock bottom.

I think you will be getting very conflicting opinions on this question. :happy.

sksbog
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Re: Bonds for high income individuals in taxable account

Post by sksbog » Sun Jul 29, 2018 12:46 pm

I have bonds in addition to 401k/IRa.

In taxable account I have vanguard intermediate term tax exempt, reinvest option. This is to achieve my 3 fund portfolio of taxable account.

I also do, buy series I Treasury bonds. They have generous tax free spent policy if you spend on education or healthcare.

jdb
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Re: Bonds for high income individuals in taxable account

Post by jdb » Sun Jul 29, 2018 1:11 pm

Certainly works for me to meet investment allocation in taxable accounts. Have Vanguard long term TE, intermediate term TE and short term TE in 1:1:2 ratio. We enjoy the tax free income. Good luck.

livesoft
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Re: Bonds for high income individuals in taxable account

Post by livesoft » Sun Jul 29, 2018 1:28 pm

Tax-exempt muni bond funds exist for exactly the situation where high income individuals need to have bonds in a taxable account in order to achieve their desired asset allocation.
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masonstone
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Re: Bonds for high income individuals in taxable account

Post by masonstone » Sun Jul 29, 2018 2:11 pm

livesoft wrote:
Sun Jul 29, 2018 1:28 pm
Tax-exempt muni bond funds exist for exactly the situation where high income individuals need to have bonds in a taxable account in order to achieve their desired asset allocation.
What if you’re in a state with no income tax?

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Sandtrap
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Re: Bonds for high income individuals in taxable account

Post by Sandtrap » Sun Jul 29, 2018 2:12 pm

I have no taxable space. High income.
Thus.
Blend of Total Bond and Tax - Exempt Bond.

j

livesoft
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Re: Bonds for high income individuals in taxable account

Post by livesoft » Sun Jul 29, 2018 2:12 pm

I don't see that no-state-income-tax changes anything that I wrote.
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masonstone
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Re: Bonds for high income individuals in taxable account

Post by masonstone » Sun Jul 29, 2018 2:16 pm

livesoft wrote:
Sun Jul 29, 2018 2:12 pm
I don't see that no-state-income-tax changes anything that I wrote.
What tax exempt bond funds does vanguard offer?

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Re: Bonds for high income individuals in taxable account

Post by livesoft » Sun Jul 29, 2018 2:34 pm

^Check it out: Vanguard.com !!
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masonstone
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Re: Bonds for high income individuals in taxable account

Post by masonstone » Sun Jul 29, 2018 2:37 pm

Sandtrap wrote:
Sun Jul 29, 2018 2:12 pm
I have no taxable space. High income.
Thus.
Blend of Total Bond and Tax - Exempt Bond.

j
Why do you use a blend as opposed to one or the other

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Sandtrap
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Re: Bonds for high income individuals in taxable account

Post by Sandtrap » Sun Jul 29, 2018 2:48 pm

masonstone wrote:
Sun Jul 29, 2018 2:37 pm
Sandtrap wrote:
Sun Jul 29, 2018 2:12 pm
I have no taxable space. High income.
Thus.
Blend of Total Bond and Tax - Exempt Bond.

j
Why do you use a blend as opposed to one or the other
Only the percentage of Tax Exempt that allows me to not push into the next tax bracket.
j

masonstone
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Re: Bonds for high income individuals in taxable account

Post by masonstone » Sun Jul 29, 2018 3:10 pm

livesoft wrote:
Sun Jul 29, 2018 2:34 pm
^Check it out: Vanguard.com !!
Lol which funds are recommended?

retiredjg
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Re: Bonds for high income individuals in taxable account

Post by retiredjg » Mon Jul 30, 2018 1:56 pm

Sandtrap wrote:
Sun Jul 29, 2018 2:12 pm
I have no taxable space. High income.
Thus.
Blend of Total Bond and Tax - Exempt Bond.

j
I think you meant to say you have no tax-advantaged space, didn't you?

retiredjg
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Re: Bonds for high income individuals in taxable account

Post by retiredjg » Mon Jul 30, 2018 2:05 pm

masonstone wrote:
Sun Jul 29, 2018 2:11 pm
livesoft wrote:
Sun Jul 29, 2018 1:28 pm
Tax-exempt muni bond funds exist for exactly the situation where high income individuals need to have bonds in a taxable account in order to achieve their desired asset allocation.
What if you’re in a state with no income tax?
Vanguard has several "national" (not associated with any one state) tax-exempt bond funds. You do not pay federal income tax on the dividends these funds pay. That income might, however, be added to your AGI for other purposes (such as your IRMAA MAGI if you are Medicare age).

For general purposes, I'd pick the Intermediate Term Tax Exempt Fund. For a short term goal, I might use the Short Term Tax-Exempt Fund. They probably have a long term fund, but I would not recommend that as longer term funds are riskier.

Go to Vanguard and look at the list of their mutual funds. They are listed by type of fund so look for "tax-exempt bond funds" or something like that.

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Sandtrap
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Re: Bonds for high income individuals in taxable account

Post by Sandtrap » Mon Jul 30, 2018 3:17 pm

retiredjg wrote:
Mon Jul 30, 2018 1:56 pm
Sandtrap wrote:
Sun Jul 29, 2018 2:12 pm
I have no taxable space. High income.
Thus.
Blend of Total Bond and Tax - Exempt Bond.

j
I think you meant to say you have no tax-advantaged space, didn't you?
Yes. That has to be right.
Certainly a senior "brain fart". . again.
Because I have no clue what is "no taxable space" except someplace in my garage. :shock:
j

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grabiner
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Re: Bonds for high income individuals in taxable account

Post by grabiner » Mon Jul 30, 2018 10:01 pm

masonstone wrote:
Sun Jul 29, 2018 12:32 pm
Do having bonds in a taxable account make sense for individuals with a high income? Let’s assume that ASsett Allocation goals can only be achieved placing bonds in taxable accounts due to high income and savings.
There are two separate issues.

If your asset allocation (as determined by risk tolerance) says that you should hold more bonds than the size of your tax-deferred accounts, then of course you should hold bonds in your taxable account. Even if you pay a bit more in taxes than necessary (or pay to avoid taxes by holding lower-yielding munis), you need to control your risk level.

If you have the choice between holding bonds in taxable or tax-deferred accounts, which is better depends on your tax-deferred options, and your tax rates. If you have an unusually good fixed-income fund in your tax-deferred account (TSP G fund, TIAA Traditional Annuity), then you should hold fixed income there regardless of your tax rate. Conversely, if your 401(k) has a low-cost S&P 500 index and a high-cost bond fund, you should hold stocks there and hold bonds in either your IRA or your taxable account.

If the bond and stock options in your tax-deferred account are comparable, then at current yields, it's probably better to hold bonds in tax-deferred in a moderate tax bracket, but in a taxable account in the top tax bracket, particularly if you are in a high-tax state. In a moderate tax bracket, you pay 15% tax on qualified dividends if you hold stock in your taxable account, and 0% on munis. In the top bracket, you pay 23.8% tax on qualified dividends, and still 0% on munis, which makes munis more attractive. And if you can use a low-cost muni fund for your state instead of paying 9% state tax, then you pay 32.8% tax on qualified dividends, 0% on in-state munis, and 9% on out-of-state munis if you choose to hold some of those for diversification.
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prudent
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Re: Bonds for high income individuals in taxable account

Post by prudent » Tue Jul 31, 2018 1:03 pm

Topic moved to Investing - Help with Personal Investments.

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