Allocating more to tax advantaged accounts for STRIPs?

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AskingBH
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Allocating more to tax advantaged accounts for STRIPs?

Post by AskingBH » Sun Apr 14, 2019 9:48 pm

I'd like to increase the amount of zero coupon treasury bonds in my portfolio but it's my understanding that you only want to hold them in tax advantaged accounts (trad ira, roth ira, 401k, etc) to bypass the "phantom tax" you'd have to pay otherwise. However, I've already maxed out my IRA accounts with zeroes and I can't purchase them in my 401k. This accounts for a very small portion of my portfolio unfortunately (late to the IRA game) and the only way I can find to increase the amount of money I have in my tax advantaged accounts to purchase more zeroes is a mega backdoor roth. To that end I've already sent an email to my employer's 401k admin, waiting to hear back.

Besides the mega backdoor roth, is there any other way to get more cash into tax advantaged accounts?

123
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Re: Allocating more to tax advantaged accounts for STRIPs?

Post by 123 » Sun Apr 14, 2019 10:01 pm

I would rethink my investment strategy is I expected to have to incur a large immediate tax liability to implement it.
The closest helping hand is at the end of your own arm.

HEDGEFUNDIE
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Re: Allocating more to tax advantaged accounts for STRIPs?

Post by HEDGEFUNDIE » Mon Apr 15, 2019 12:59 am

What is your Federal tax bracket?

It is true that you should try your best to avoid holding these in taxable if you can, but if you can’t, it’s not the end of the world.

Vanguard says the tax cost of holding EDV in taxable since inception is 2% CAGR per year, which is a lot, but this assumes your income puts you in the highest marginal tax bracket. If your tax bracket is lower, holding in taxable becomes more palatable.

Topic Author
AskingBH
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Re: Allocating more to tax advantaged accounts for STRIPs?

Post by AskingBH » Mon Apr 15, 2019 8:13 pm

HEDGEFUNDIE wrote:
Mon Apr 15, 2019 12:59 am
What is your Federal tax bracket?

It is true that you should try your best to avoid holding these in taxable if you can, but if you can’t, it’s not the end of the world.

Vanguard says the tax cost of holding EDV in taxable since inception is 2% CAGR per year, which is a lot, but this assumes your income puts you in the highest marginal tax bracket. If your tax bracket is lower, holding in taxable becomes more palatable.
I'm in the 12% tax bracket.

I also thought about investing in EDV but it doesn't have the same sort of security that an actual zero affords me by being able to hold until maturity. EDV is fine for pure speculation on interest rates but if your guess is wrong then you stand to lose a lot. An actual zero held to maturity guarantees return of principal with interest.

HEDGEFUNDIE
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Re: Allocating more to tax advantaged accounts for STRIPs?

Post by HEDGEFUNDIE » Mon Apr 15, 2019 8:55 pm

AskingBH wrote:
Mon Apr 15, 2019 8:13 pm
An actual zero held to maturity guarantees return of principal with interest.
Not if you count opportunity costs, which you should.

Topic Author
AskingBH
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Re: Allocating more to tax advantaged accounts for STRIPs?

Post by AskingBH » Tue Apr 16, 2019 8:59 pm

HEDGEFUNDIE wrote:
Mon Apr 15, 2019 8:55 pm
AskingBH wrote:
Mon Apr 15, 2019 8:13 pm
An actual zero held to maturity guarantees return of principal with interest.
Not if you count opportunity costs, which you should.
Perhaps I'm missing something but what would opportunity costs have to do with return of principal and interest? If I purchase a zero coupon bond at $400 it will mature at $1000 at the end of it's duration no matter what, barring the US govt defaulting. Even if a better investment opportunity arises that just means you could have made more but that doesn't change the fact that the zero has a guaranteed return of principal and interest when held to maturity.

HEDGEFUNDIE
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Re: Allocating more to tax advantaged accounts for STRIPs?

Post by HEDGEFUNDIE » Tue Apr 16, 2019 10:56 pm

AskingBH wrote:
Tue Apr 16, 2019 8:59 pm
Even if a better investment opportunity arises that just means you could have made more
Which is a cost that you should be subtracting from your “guaranteed” return.

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