From "The Bogleheads Guide to Investing" - a question

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
meercat8
Posts: 22
Joined: Tue Apr 02, 2019 5:29 pm

From "The Bogleheads Guide to Investing" - a question

Post by meercat8 » Sun Apr 14, 2019 1:18 pm

I am still trying to find out if it is equally tax efficient to have non retirement savings in the Total Stock Market Index Fund and the Total Bond Index Fund.

On page 121 of "The Bogleheads Guide to Investing" it says "Bond dividends are not IRS qualified for the lower tax rate....What do savvy investors do? They place taxable bonds in their tax-sheltered account whenever possible."

Can anyone explain how this effects what I am trying to do, which is put our savings (beyond the money market part of our savings) in the Total Stock and Total Bond funds, if and only if, it makes sense tax-wise.

User avatar
Mel Lindauer
Moderator
Posts: 29161
Joined: Mon Feb 19, 2007 8:49 pm
Location: Daytona Beach Shores, Florida
Contact:

Re: From "The Bogleheads Guide to Investing" - a question

Post by Mel Lindauer » Sun Apr 14, 2019 1:28 pm

meercat8 wrote:
Sun Apr 14, 2019 1:18 pm
I am still trying to find out if it is equally tax efficient to have non retirement savings in the Total Stock Market Index Fund and the Total Bond Index Fund.

On page 121 of "The Bogleheads Guide to Investing" it says "Bond dividends are not IRS qualified for the lower tax rate....What do savvy investors do? They place taxable bonds in their tax-sheltered account whenever possible."

Can anyone explain how this effects what I am trying to do, which is put our savings (beyond the money market part of our savings) in the Total Stock and Total Bond funds, if and only if, it makes sense tax-wise.
I don't understand your problem. Can you be more specific? Are all of your investment in either a tax-deferred account or in a taxable account or do you have both?

The guidance we provided in the book is for best tax efficiency, but if all of your accounts are tax-deferred, then put both funds there. And, if you want more Total Stock Market than you can fit in your tax-deferred account, put the bonds in there first, fill it up with TSM and then put the additional TSM in your taxable account.
Best Regards - Mel | | Semper Fi

GrowthSeeker
Posts: 446
Joined: Tue May 15, 2018 10:14 pm

Re: From "The Bogleheads Guide to Investing" - a question

Post by GrowthSeeker » Sun Apr 14, 2019 1:54 pm

meercat8 wrote:
Sun Apr 14, 2019 1:18 pm
I am still trying to find out if it is equally tax efficient to have non retirement savings in the Total Stock Market Index Fund and the Total Bond Index Fund.

On page 121 of "The Bogleheads Guide to Investing" it says "Bond dividends are not IRS qualified for the lower tax rate....What do savvy investors do? They place taxable bonds in their tax-sheltered account whenever possible."

Can anyone explain how this effects what I am trying to do, which is put our savings (beyond the money market part of our savings) in the Total Stock and Total Bond funds, if and only if, it makes sense tax-wise.
The issue of Bonds in taxable is a good question. Many of us don't have enough room in tax advantaged accounts for all the bonds.
The answer to your question depends on what highest tax bracket you are in.
AFAIK, dividends from the Total Bond Market Fund are taxed as ordinary income, so if your tax bracket is high enough, it could make more sense to use tax free bond funds for the taxable portion of "bond" money, depending on the "tax equivalent yield", TEY.
TEY(tax-free bond fund) = nominal yield * (1 - S)/(1 - F - S)
... where S is state tax rate and F is federal tax rate
Just because you're paranoid doesn't mean they're NOT out to get you.

pkcrafter
Posts: 13280
Joined: Sun Mar 04, 2007 12:19 pm
Location: CA
Contact:

Re: From "The Bogleheads Guide to Investing" - a question

Post by pkcrafter » Sun Apr 14, 2019 3:39 pm

Here are best Vanguard tax efficient bond funds for taxable. Note: you don't have to use Vanguard funds, but you should use the same type of funds listed here:

https://www.thebalance.com/best-vanguar ... ts-4121221

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

User avatar
bertilak
Posts: 6429
Joined: Tue Aug 02, 2011 5:23 pm
Location: East of the Pecos, West of the Mississippi

Re: From "The Bogleheads Guide to Investing" - a question

Post by bertilak » Sun Apr 14, 2019 3:51 pm

meercat8 wrote:
Sun Apr 14, 2019 1:18 pm
Can anyone explain how this effects what I am trying to do, which is put our savings (beyond the money market part of our savings) in the Total Stock and Total Bond funds, if and only if, it makes sense tax-wise.
Making sense tax-wise is secondary to having a reasonable stock/bond allocation. You only get to fiddle with placement of assets to the extent your restricted accounts (IRAs, 401(k)s) have room. What doesn't fit goes, of necessity, into a taxable account. You can't put ten pounds into a five-pound bag. Put the extra pounds wherever they fit.

That doesn't require you to use tax-free bonds (e.g. munis). Municipal bonds will reduce taxes, but they don’t pay as much as regular bonds, so it is a balancing act: lower tax rates vs. higher returns. What’s best depends on your tax bracket. For all but the very high earners it is usually best to forget the munis but ya gotta run the number for yourself.
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker, the Cowboy Poet

ExitStageLeft
Posts: 1310
Joined: Sat Jan 20, 2018 4:02 pm

Re: From "The Bogleheads Guide to Investing" - a question

Post by ExitStageLeft » Mon Apr 15, 2019 12:41 pm

I'm a little confused by the phrase "non-retirement savings" so perhaps it will help us if you clarify.

If these savings are meant for a specific purpose, particularly within a 5-year time frame, then they would best be in assets that have no risk of loss such as CDs or money market accounts.

If these savings are instead for long-term with no specific use intended then they should be deemed to be part of your retirement assets, even if they are in a taxable account. In that case the advice from the BHs above is appropriate for managing taxes in a taxable account of assets invested for the long term.

User avatar
arcticpineapplecorp.
Posts: 3893
Joined: Tue Mar 06, 2012 9:22 pm

Re: From "The Bogleheads Guide to Investing" - a question

Post by arcticpineapplecorp. » Mon Apr 15, 2019 1:15 pm

"May you live as long as you want and never want as long as you live" -- Irish Blessing | "Invest we must" -- Jack Bogle

mhalley
Posts: 6714
Joined: Tue Nov 20, 2007 6:02 am

Re: From "The Bogleheads Guide to Investing" - a question

Post by mhalley » Mon Apr 15, 2019 3:14 pm

Whether to put muni or taxable bonds in the taxable accounts depends on the tax equivalent yield. The yield on taxable bonds is generally higher than on munis, so often the higher yield makes up for the tax drag, so you make more money after taxes. WCI likes bonds in taxable:
https://www.whitecoatinvestor.com/asset ... n-taxable/
You can compare tax equivalent yields here: https://www.oppenheimerfunds.com/adviso ... calculator

User avatar
Mel Lindauer
Moderator
Posts: 29161
Joined: Mon Feb 19, 2007 8:49 pm
Location: Daytona Beach Shores, Florida
Contact:

Re: From "The Bogleheads Guide to Investing" - a question

Post by Mel Lindauer » Mon Apr 15, 2019 3:22 pm

If you're using the income from bonds for living expenses, then it's OK to have them in your taxable account. Remember, though, that when you hit 70 1/2, you'll be forced to take RMDs, so plan for how that, along with the bond income, will impact your tax bracket and income needs, too.
Best Regards - Mel | | Semper Fi

Post Reply