What does having bond ETF in Tax Advantaged accounts mean?

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gmehta
Posts: 7
Joined: Fri Oct 12, 2018 9:28 pm

What does having bond ETF in Tax Advantaged accounts mean?

Post by gmehta » Tue Oct 16, 2018 4:13 pm

Hi Bogleheads,

I am relatively new to investing. Been working in US for last 6 years

Have around 50K invested in my 401K so far.My 401K is with Fidelity and the money is invested in RFITX
https://www.americanfunds.com/individua ... fund/rfitx

I am looking to start investing around 4-5K into a 4 ETF fund portfolio using Vanguard with the following breakdown.
Vanguard Total Bond Market Index Fund -- 20%
Vanguard Total Stock Market Index Fund -- 40%
Vanguard Total International Stock Index Fund -- 32%
Vanguard REIT Index Fund -- 8%

I have been reading that bonds ETF should be held in Tax Advantaged accounts.
What does that really mean?
Should I be holding bond ETF in 401K account?
Would that mean that I invest less in the RFITX and buy more in my 401K?

Kind of confused on the tax advantaged account thing. I was hoping to keep it simple for investing and focus more on generating more income.

UniversityEmployee9
Posts: 104
Joined: Wed Mar 18, 2015 10:01 am

Re: What does having bond ETF in Tax Advantaged accounts mean?

Post by UniversityEmployee9 » Tue Oct 16, 2018 4:20 pm

A 401k is a type of tax advantaged account.

delamer
Posts: 6283
Joined: Tue Feb 08, 2011 6:13 pm

Re: What does having bond ETF in Tax Advantaged accounts mean?

Post by delamer » Tue Oct 16, 2018 5:05 pm

In a taxable account, interest on bonds is taxed at ordinary income rates.

In a taxable account, most stock dividends are taxed as long-term capital gains. Those tax rates are lower than ordinary income tax rates.

Therefore, it is better to hold bonds in your 401(k), where there are no taxes due until withdrawal.

Holding stocks in your taxable account means the earnings are taxed at lower rates (as compared to bonds).

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