Why not pick Vanguard Intermediate-Term Tax Exempt Fund??

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scutu
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Why not pick Vanguard Intermediate-Term Tax Exempt Fund??

Post by scutu » Wed Oct 17, 2018 2:08 pm

I'm trying to pick a bond fund to round things out. What is the difference between the Vanguard Intermediate Term Bond fund and the variety that comes tax exempt? Why would a person not pick the tax exempt variety? Thanks!

magicrat
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Re: Why not pick Vanguard Intermediate-Term Tax Exempt Fund??

Post by magicrat » Wed Oct 17, 2018 2:18 pm

scutu wrote:
Wed Oct 17, 2018 2:08 pm
I'm trying to pick a bond fund to round things out. What is the difference between the Vanguard Intermediate Term Bond fund and the variety that comes tax exempt? Why would a person not pick the tax exempt variety? Thanks!
Depending on your marginal tax rate, the after-tax return on a taxable bond fund may be higher than a tax exempt fund.

The Int Term Bond fund is 50% Corporate Bonds and 50% Government Bonds. Int Term Tax Exempt is 100% municipal bonds

ahnathan
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Re: Why not pick Vanguard Intermediate-Term Tax Exempt Fund??

Post by ahnathan » Wed Oct 17, 2018 2:21 pm

scutu wrote:
Wed Oct 17, 2018 2:08 pm
I'm trying to pick a bond fund to round things out. What is the difference between the Vanguard Intermediate Term Bond fund and the variety that comes tax exempt? Why would a person not pick the tax exempt variety? Thanks!
Is this in a taxable account or a tax deferred account?

I am not a bond expert by any means but the tax exempt bond funds are largely composed of municipal bonds. They are good for a taxable account but the expected return is often lower. If you are putting bond holdings in a tax deferred account like a 401k there *may* be better options for you.

retiredjg
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Re: Why not pick Vanguard Intermediate-Term Tax Exempt Fund??

Post by retiredjg » Wed Oct 17, 2018 2:29 pm

The allure of "tax free income" is strong. But unless you are in a high tax bracket, you can actually make less money even considering that there were no taxes to pay!

If you can, hold your bonds in a tax-deferred account and pay taxes when you withdraw the money. If you need to hold bonds in a taxable account, people in the lower brackets should usually use a taxable bond fund (and pay the tax). People in the higher tax brackets should use tax-exempt bonds to get the most money.

The current 24% federal tax bracket is sort of no man's land or every man's land depending on how you look at it. Things tend to break even about there.

scutu
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Re: Why not pick Vanguard Intermediate-Term Tax Exempt Fund??

Post by scutu » Wed Oct 17, 2018 2:38 pm

Much appreciated. No option to buy either in my tax-deferreds, so I'll stick with tax exempt in my taxable.Thanks to all!

retiredjg
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Re: Why not pick Vanguard Intermediate-Term Tax Exempt Fund??

Post by retiredjg » Wed Oct 17, 2018 2:56 pm

scutu wrote:
Wed Oct 17, 2018 2:38 pm
Much appreciated. No option to buy either in my tax-deferreds, so I'll stick with tax exempt in my taxable.Thanks to all!
I think you might be mistaken about this. You have a 401k and a 457b. Each should have at least one bond fund option, maybe several choices.

Yes, maybe you can't buy that exact fund - Vanguard's Intermediate Term - but there is no need to have that exact fund. You just need a good fund, as low cost as possible, intermediate term (a description, not a name) if available.

SpideyIndexer
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Re: Why not pick Vanguard Intermediate-Term Tax Exempt Fund??

Post by SpideyIndexer » Wed Oct 17, 2018 3:25 pm

To echo and add to the above, I would expect there is a bond fund that you can choose that is something like "total bond market" or "Barclays's Aggregate US Bond Index" fund. These are very similar with intermediate term average duration and perfectly suitable for rounding things out.

It's probably wise to hold some percentage of bonds in tax-deferred; in fact the conventional wisdom is hold all of your bonds there.

RCL
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Re: Why not pick Vanguard Intermediate-Term Tax Exempt Fund??

Post by RCL » Wed Oct 17, 2018 5:22 pm

scutu wrote:
Wed Oct 17, 2018 2:08 pm
I'm trying to pick a bond fund to round things out. What is the difference between the Vanguard Intermediate Term Bond fund and the variety that comes tax exempt? Why would a person not pick the tax exempt variety? Thanks!
I pretty much use the tax exempt fund to ensure I stay in my tax Federal bracket for now. Doing so also gives me some room to do IRA to Roth conversions with minimal tax consquences.
It Is Best To Consult Others Before Taking Unusual Actions

scutu
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Re: Why not pick Vanguard Intermediate-Term Tax Exempt Fund??

Post by scutu » Wed Oct 17, 2018 6:45 pm

retiredjg wrote:
Wed Oct 17, 2018 2:56 pm
scutu wrote:
Wed Oct 17, 2018 2:38 pm
Much appreciated. No option to buy either in my tax-deferreds, so I'll stick with tax exempt in my taxable.Thanks to all!
I think you might be mistaken about this. You have a 401k and a 457b. Each should have at least one bond fund option, maybe several choices.

Yes, maybe you can't buy that exact fund - Vanguard's Intermediate Term - but there is no need to have that exact fund. You just need a good fund, as low cost as possible, intermediate term (a description, not a name) if available.
I think it's going to hard inside of my 457b to hit 15% AA of my total. I can contribute more outside of those into a taxable. I guess I would be close currently but I don't think that will always be the case.

retiredjg
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Re: Why not pick Vanguard Intermediate-Term Tax Exempt Fund??

Post by retiredjg » Wed Oct 17, 2018 7:15 pm

Are you saying that your tax-deferred accounts (both of them together) are not large enough to hold your bond allocation?

scutu
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Re: Why not pick Vanguard Intermediate-Term Tax Exempt Fund??

Post by scutu » Wed Oct 17, 2018 10:40 pm

I'm just saying my 401k doesn't have it as an option and my 457 only has corporate bonds now that I look. I thought it had Vanguard Total Bond but it doesn't.

MiamiHeat
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Re: Why not pick Vanguard Intermediate-Term Tax Exempt Fund??

Post by MiamiHeat » Thu Oct 18, 2018 4:45 am

This topic applies to me as well, so thank you OP for posting. For clarification, is VWIUX the closest thing to a federal tax exempt version of VBILX? With my 35% federal income tax bracket, my TEY for the former fund would be approximately 4.1%, is that right?

I actually just had my wife invest in VBILX and VBTLX in a taxable account a few days ago, so was this a (minor) mistake? Is it worth it to transfer funds into VWIUX?

retiredjg
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Re: Why not pick Vanguard Intermediate-Term Tax Exempt Fund??

Post by retiredjg » Thu Oct 18, 2018 6:23 am

scutu wrote:
Wed Oct 17, 2018 10:40 pm
I'm just saying my 401k doesn't have it as an option and my 457 only has corporate bonds now that I look. I thought it had Vanguard Total Bond but it doesn't.
Where did you get the idea you need that specific fund? Where did you get the idea you should avoid corporates?

I think you have somehow gotten off on the wrong track in building your portfolio.

SpideyIndexer
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Re: Why not pick Vanguard Intermediate-Term Tax Exempt Fund??

Post by SpideyIndexer » Sat Oct 20, 2018 2:00 pm

Holding corporates as your only bonds is not ideal, but perhaps you could hold corporates in the 457 and treasuries in the 401k.

Some 401k's let you buy and sell any securities in an auxiliary brokerage account. Does yours have that option?

Total bond is not a magic bullet. Currently it is about 43% treasury/agency, 31% corporate and 24% mortgage-backed securities with a few other odds and ends. Any split reasonably close would be close enough. And there is debate about whether this is the best bond allocation. Many criticize its lack of high yield and municipals. Munis have been omitted so one can hold them in taxable account. My personal preference is more treasuries and fewer MSBs in my total portfolio.

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ruralavalon
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Re: Why not pick Vanguard Intermediate-Term Tax Exempt Fund??

Post by ruralavalon » Sat Oct 20, 2018 2:10 pm

scutu wrote:
Wed Oct 17, 2018 10:40 pm
I'm just saying my 401k doesn't have it as an option and my 457 only has corporate bonds now that I look. I thought it had Vanguard Total Bond but it doesn't.
What bond funds are offered in each of those plans? Please give fund names, tickers and expense ratios.

There may very well be a useful bond fund in one or both of those plans, but no one can tell without the specifics. There are many useful bond funds besides Vanguard Total Bond Market Index Fund.
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SpideyIndexer
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Re: Why not pick Vanguard Intermediate-Term Tax Exempt Fund??

Post by SpideyIndexer » Sat Oct 20, 2018 2:15 pm

MiamiHeat wrote:
Thu Oct 18, 2018 4:45 am
This topic applies to me as well, so thank you OP for posting. For clarification, is VWIUX the closest thing to a federal tax exempt version of VBILX? With my 35% federal income tax bracket, my TEY for the former fund would be approximately 4.1%, is that right?

I actually just had my wife invest in VBILX and VBTLX in a taxable account a few days ago, so was this a (minor) mistake? Is it worth it to transfer funds into VWIUX?
It is up to you whether it is worthwhile. It may depend on tax brackets and AGI/MAGI and the size of the investment. You need to weigh the tax benefits of municipals to their risk factors. As an example, munis make up about 10% of the total global bond market, so anything more than 10% is technically overweighting munis wrt the total market. But holding 30-50% of one's bonds in municipals is not uncommon.

VWIUX is a good bond holding for taxable accounts. If you can find a state-tax exempt fund applicable to you, consider splitting your taxable account bond holdings between that and VWIUX.

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