Bonds in Taxable Account

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son.of.a.lummox
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Joined: Fri Sep 21, 2018 1:35 pm

Bonds in Taxable Account

Post by son.of.a.lummox » Fri Sep 21, 2018 2:38 pm

Hey Everybody,
I'm new to investing and certainly appreciate the wealth of information I've been able to collect from this forum. I'm looking to open both a ROTH IRA and an individual brokerage account through Vanguard and have a question regarding bonds in my brokerage account.

I'm a fan of tax-efficient asset location but given the total amount I'm looking to invest and annual ROTH contribution limits, it looks like I'll be holding bonds in my brokerage account until my ROTH has a chance to catch up. I recently read Rick Ferri's All About Asset Allocation and he provides an equation for determining whether municipal bonds are a better choice than taxable bonds in a taxable account: "To compare the yield on the taxable bonds to that of the tax-free bonds, simply multiply the taxable yield by your tax rate and subtract the result from that yield."

My question is should I be looking at the TTM yield or SEC yield of a bond fund when making this calculation?

Thanks in advance for everybody's help.

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White Coat Investor
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Joined: Fri Mar 02, 2007 9:11 pm
Location: Greatest Snow On Earth

Re: Bonds in Taxable Account

Post by White Coat Investor » Fri Sep 21, 2018 2:51 pm

Great question. I use the SEC yield. If that's wrong I haven't yet heard a cogent explanation of why.

A reasonable rule of thumb, however, is that if you're in the top 2 or 3 brackets you should use a muni fund. If you're in the bottom 2 or 3 brackets are you really able to save enough to have much of a taxable account anyway? There's probably a way to get that money into a retirement account.

If it is so close that the SEC yield gives you a different answer than the yield to maturity, it probably doesn't matter much what you use.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

bloom2708
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Re: Bonds in Taxable Account

Post by bloom2708 » Fri Sep 21, 2018 3:22 pm

Do you have a 401k/403b? You only mention taxable/brokerage and Roth.

If you have a 401k/403b, but all bonds there. Leave Roth and Taxable with Total US and/or Total International.

If no 401k/403b/TSP, then Int-Term Tax-Exempt is reasonable in taxable for 22/24 and higher top brackets.
"We are not here to please, but to provoke thoughtfulness." --Unknown Boglehead

pspice78
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Joined: Fri Jun 15, 2018 8:06 am

Re: Bonds in Taxable Account

Post by pspice78 » Fri Sep 21, 2018 3:28 pm

White Coat Investor wrote:
Fri Sep 21, 2018 2:51 pm


A reasonable rule of thumb, however, is that if you're in the top 2 or 3 brackets you should use a muni fund. If you're in the bottom 2 or 3 brackets are you really able to save enough to have much of a taxable account anyway? There's probably a way to get that money into a retirement account.

It is possible to max out an employer 401K and an IRA while in the bottom two or three tax brackets.

bloom2708
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Location: Fargo, ND

Re: Bonds in Taxable Account

Post by bloom2708 » Fri Sep 21, 2018 3:41 pm

pspice78 wrote:
Fri Sep 21, 2018 3:28 pm
White Coat Investor wrote:
Fri Sep 21, 2018 2:51 pm


A reasonable rule of thumb, however, is that if you're in the top 2 or 3 brackets you should use a muni fund. If you're in the bottom 2 or 3 brackets are you really able to save enough to have much of a taxable account anyway? There's probably a way to get that money into a retirement account.

It is possible to max out an employer 401K and an IRA while in the bottom two or three tax brackets.
Sure. Married, filing jointly. One reasonable income. No debt. Max pre-tax 401k. Max family pre-tax HSA. All depends on income and spending.
"We are not here to please, but to provoke thoughtfulness." --Unknown Boglehead

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White Coat Investor
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Location: Greatest Snow On Earth

Re: Bonds in Taxable Account

Post by White Coat Investor » Fri Sep 21, 2018 4:38 pm

pspice78 wrote:
Fri Sep 21, 2018 3:28 pm
White Coat Investor wrote:
Fri Sep 21, 2018 2:51 pm


A reasonable rule of thumb, however, is that if you're in the top 2 or 3 brackets you should use a muni fund. If you're in the bottom 2 or 3 brackets are you really able to save enough to have much of a taxable account anyway? There's probably a way to get that money into a retirement account.

It is possible to max out an employer 401K and an IRA while in the bottom two or three tax brackets.
Of course it is, and in fact doing so might very well HELP you stay in those brackets. But I would argue it is far more likely that someone in the upper brackets is maxing out those retirement accounts. Thus why it is a rule of thumb and not a law of physics.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

PFInterest
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Joined: Sun Jan 08, 2017 12:25 pm

Re: Bonds in Taxable Account

Post by PFInterest » Fri Sep 21, 2018 4:43 pm

son.of.a.lummox wrote:
Fri Sep 21, 2018 2:38 pm
Hey Everybody,
I'm new to investing and certainly appreciate the wealth of information I've been able to collect from this forum. I'm looking to open both a ROTH IRA and an individual brokerage account through Vanguard and have a question regarding bonds in my brokerage account.

I'm a fan of tax-efficient asset location but given the total amount I'm looking to invest and annual ROTH contribution limits, it looks like I'll be holding bonds in my brokerage account until my ROTH has a chance to catch up. I recently read Rick Ferri's All About Asset Allocation and he provides an equation for determining whether municipal bonds are a better choice than taxable bonds in a taxable account: "To compare the yield on the taxable bonds to that of the tax-free bonds, simply multiply the taxable yield by your tax rate and subtract the result from that yield."

My question is should I be looking at the TTM yield or SEC yield of a bond fund when making this calculation?

Thanks in advance for everybody's help.
- SEC yield.
- you likely dont need any FI in taxable yet. you should fill up your workplace plans first. since you are new, you dont have enough money to make that a problem yet.

so crisis averted.

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