Munis in Taxable or Bonds in the 401K?

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FungusDoc
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Munis in Taxable or Bonds in the 401K?

Post by FungusDoc » Sun Sep 29, 2019 9:14 pm

Posted the same question over at White Coat Investor...
My wife and I are both physicians in our early 30s and have settled on a 85/15 AA. I’m keeping bonds out of our BD Roths, and I don’t like the bond funds offered in my wife’s 403b (mainly limited options with the lowest ER starting at 0.3%).

So, I’m choosing between a “moderate risk” US bond fund (NOBOX) in my 401K, vs putting munis in taxable, likely the VG intermediate tax-exempt fund. Again, we are talking the location of 15% of my assets. There is also a long-term treasury option in my 401K.

Put all bonds in the 401K? All in munis in taxable? Or mix it up? Or do something totally different?

On the equity side (60% US (Large 32.5, Mid 10, Small Value 10, REIT 7.5), 25% Int (Total Int 15, EM 5, Small Int 5)

My thoughts: 5% US bonds in the 401K, 10% Munis in the taxable acct.

My reasons: Use the 401K bond fund to add some bond diversification as opposed to doing all munis. But keep bonds in the 401K to a minimum, so as to benefit from long-term returns/growth from mostly stocks in the tax-deferred account.

Thoughts?

WolfgangPauli
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Re: Munis in Taxable or Bonds in the 401K?

Post by WolfgangPauli » Sun Sep 29, 2019 9:34 pm

General thoughts:

1. For asset allocation reasons and to take advantage of favorable capital gains taxation you should have the majority of your bonds in 401K etc. (Does not matter with Roth since you already paid taxes on it. Keep stocks in taxable accounts for this reason.

2. Munis can go either place but you lose the benefit if in tax deferred .. I keep mine in taxable accounts to take advantage of the taxation.
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Notsobad
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Re: Munis in Taxable or Bonds in the 401K?

Post by Notsobad » Sun Sep 29, 2019 9:34 pm

Agree that it is less desirable to fill up Roth with bonds. Tax exempt bonds in taxable is reasonable if you have already filled up all tax advantaged accounts and are investing additional in taxable accounts. Of course, this is only a major issue if your taxable savings is a sizable portion of your portfolio.

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FungusDoc
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Re: Munis in Taxable or Bonds in the 401K?

Post by FungusDoc » Sun Sep 29, 2019 9:45 pm

How about only keeping equities in the 401K to maximize long-term tax deferred return and keep all fixed income in the taxable acct in munis? Something like the VG intermediate tax-exempt fund (VWITX)?

Prettyfrtnt
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Re: Munis in Taxable or Bonds in the 401K?

Post by Prettyfrtnt » Sun Sep 29, 2019 10:18 pm

FungusDoc wrote:
Sun Sep 29, 2019 9:45 pm
How about only keeping equities in the 401K to maximize long-term tax deferred return and keep all fixed income in the taxable acct in munis? Something like the VG intermediate tax-exempt fund (VWITX)?
This is what I do in your situation after studying and reflecting on it for a long time... I use vwalx high yield muni after also asking a lot of questions. But I would consider half and half.

yogesh
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Re: Munis in Taxable or Bonds in the 401K?

Post by yogesh » Sun Sep 29, 2019 10:25 pm

I like keeping munis in taxable as well as I get nervous with stock volatility and give up during downturns. It also acts like extended emergency with ease of withdrawal without much cap gains. 401k rides through ups and downs with constant payroll additions so its on auto-pilot. It's okay to have 401k in stocks and taxable in munis. The only caveat I have heard so far is high correlation of munis to stocks. Munis won't zag like treasury with stocks zig.
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SDLinguist
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Re: Munis in Taxable or Bonds in the 401K?

Post by SDLinguist » Sun Sep 29, 2019 10:50 pm

The thing you want to look at is taxation at contribution, withdrawal and treatment of growth. Looking at how withdrawals are taxed is in part a proxy for how growth is taxed.

In a taxable account you contribute after having payed taxes. You "withdraw" at cap gains rates. Interest and dividend payments are treated as income for the year.

In a Roth you contribute after paying taxes. You withdraw tax free and growth is tax free. Interest and dividends aren't taxed.

In a tax deferred account (401k,403b) you contribute money before taxes, withdrawals (growth, either via appreciation or interest/dividends) are taxed as ordinary income.

In an HSA you contribute before taxes, withdrawals for medical care are not taxed, other withdrawals are taxed as ordinary income just like a 401k.

Given these constraints you can see how you might want to allocate funds. Things that derive their growth from dividends or interest and have lower overall growth (bonds) are best in an account that do not tax interest and dividends when they are payed. (401k, HSA, Roth).

Things that derive their growth from other sources not dividends and interest (Equities) are best in a place where growth is taxed favorably (HSA, Roth, Taxable; in that order)

Since HSA and Roth space is small in comparison to the other account types you quickly fill those with equities. Once Roth and HSA space is filled you need to think about bonds and the remaining equity portion of your AA. Since Roth and HSA space are filled, bonds now need to go into either taxable or 401k. The tax treatment of bonds (total bond, not tax exempt bonds) in the 401k is much better than a taxable account because the growth (interest payments) are not taxed when payed.

Equities on the other hand are treated more favorably in your taxable account. In a 401k the growth is taxed as income at the time of withdrawals, but in a taxable account growth is taxed at lower cap gains rates.

penumbra
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Re: Munis in Taxable or Bonds in the 401K?

Post by penumbra » Sun Sep 29, 2019 11:17 pm

^^ +1

Retired doc here. Originally handled account the way you suggested. Big mistake. 401k grows much too big over time (now over 8 figures), resulting in tax problems when its time for RMD’s. Much much better to keep equities in taxable and bonds in 401k. You’ll see.

Good luck.

3Fund4Life
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Re: Munis in Taxable or Bonds in the 401K?

Post by 3Fund4Life » Mon Sep 30, 2019 1:15 am

OP - we are in similar situation and recently made some changes to our bond location within our accounts. We have a 20% asset allocation to bonds. I think there are good arguments for placing your bonds in tax deferred and in taxable, depending on each individual’s situation. There are many other people who are more educated on the specifics who will have more insight.

However, after consideration, we decided to split the difference and did the following: 50% of our bond allocation is now located in a vanguard total bond market fund in our tax-deferred accounts. The other 50% is now in our taxable accounts, split between the three Vanguard national municipal funds (30% long-term, 40% intermediate term and 30% limited term).

We split our municipal position between these three funds as advised by the Vanguard CFP. Have discussed this before on the forum as to why. My best understanding is to avoid state specific risk/lack of diversification of our state specific muni fund.

By investing in those three Vanguard national municipal funds, we are now exposed to over 17,000 municipal bonds, as opposed to just over 9000 municipal bonds in the intermediate term tax exempt fund alone or only 500-600 bonds in our state specific tax exempt. So I guess better diversification would be the main reason. Vineviz also posted an interesting analysis awhile back, showing decreased sensitivity to interest rate fluctuations (3 national munis vs just the intermediate fund). The national municipal funds are also a bit cheaper than our state specific fund (9 v 17 bps). I realize I am giving up the small (state and local) tax savings on our state specific fund.

I hope others also provide you with differing opinions. Good luck.
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indexlover
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Re: Munis in Taxable or Bonds in the 401K?

Post by indexlover » Mon Sep 30, 2019 8:40 am

SDLinguist wrote:
Sun Sep 29, 2019 10:50 pm
The tax treatment of bonds (total bond, not tax exempt bonds) in the 401k is much better than a taxable account because the growth (interest payments) are not taxed when payed.

I didn't know this. I thought everything in 401k is taxed during withdrawal.
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Re: Munis in Taxable or Bonds in the 401K?

Post by Whakamole » Mon Sep 30, 2019 8:44 am

indexlover wrote:
Mon Sep 30, 2019 8:40 am
SDLinguist wrote:
Sun Sep 29, 2019 10:50 pm
The tax treatment of bonds (total bond, not tax exempt bonds) in the 401k is much better than a taxable account because the growth (interest payments) are not taxed when payed.

I didn't know this. I thought everything in 401k is taxed during withdrawal.
It is. But interest (and dividends, and capital gains) is all deferred until withdrawal.

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goingup
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Re: Munis in Taxable or Bonds in the 401K?

Post by goingup » Mon Sep 30, 2019 9:16 am

You're young and presumably high-earners so your taxable account will soon dwarf your tax-advantaged accounts. Likely you'll end up holding muni funds in taxable space.

Conventional advice here is to hold bonds in tax-deferred. That's fine, but I never wanted to completely weigh down our tax-deferred and prohibit nearly all growth. It has the effect of blocking all sunlight for 30+ years. :| We settled on holding a balanced fund in 401Ks, which was a cheap way to hold bonds (mostly corporates) and allowed growth. Taxable holds intermediate and ST muni funds, in addition to mostly equity funds.

The result now at ages 50/58 (retired) is about a 50/50 split of bonds held in taxable and tax-deferred. Frankly, if we had followed the advice to lard up the 401K with only bonds 20 years ago the 401Ks would be 1/2 the size they are now. (I guess the taxable account would be a lot bigger though.)

So, yes you'll need muni funds in taxable because of your high income and limited tax-advantaged space. There are tax-efficiency considerations as well as personal preferences about bond placement. It helped us to live in a no-income tax state so that muni bond income is tax free. Retired now, I appreciate the monthly muni bond interest income.

Here's some info on bond placement and tax efficiency from the forum wiki: https://www.bogleheads.org/wiki/Tax-eff ... _placement

Prettyfrtnt
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Re: Munis in Taxable or Bonds in the 401K?

Post by Prettyfrtnt » Mon Sep 30, 2019 11:42 am

penumbra wrote:
Sun Sep 29, 2019 11:17 pm
^^ +1

Retired doc here. Originally handled account the way you suggested. Big mistake. 401k grows much too big over time (now over 8 figures), resulting in tax problems when its time for RMD’s. Much much better to keep equities in taxable and bonds in 401k. You’ll see.

Good luck.
Man I hope I have this problem some day...

Can’t I just convert the 401k to bonds once I have this terrible problem of my 401k getting over 5M??

The thing people seem to be missing here is the original poster (and frankly mine) longer timelines and younger age and desire to see our 401ks develop these problems or being so burgeoning.

retiredjg
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Re: Munis in Taxable or Bonds in the 401K?

Post by retiredjg » Mon Sep 30, 2019 2:04 pm

Unless you live in NJ or CA, I'd put most or all of the bonds in a 401k or traditional IRA if you have one of those. That would be the most tax-efficient place to hold them.

In NJ or CA (or maybe other states I'm not aware of) the high state taxes can mean that it is better to hold state tax exempt bonds in taxable. I'd still probably hold the majority of the bonds in 401k but others might use the state bonds instead.

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Re: Munis in Taxable or Bonds in the 401K?

Post by retiredjg » Mon Sep 30, 2019 2:15 pm

Prettyfrtnt wrote:
Mon Sep 30, 2019 11:42 am
Can’t I just convert the 401k to bonds once I have this terrible problem of my 401k getting over 5M??

The thing people seem to be missing here is the original poster (and frankly mine) longer timelines and younger age and desire to see our 401ks develop these problems or being so burgeoning.
I think you are missing how things are taxed. The earnings that occur inside a 401k are all taxed at your ordinary tax rate. The earnings from stocks in a taxable account are taxed at the lower capital gains rate.

This is one reason it is better for bonds funds to be in a 401k - their earnings will be taxed the same no matter where they live. Not so for stocks funds - their earnings are taxed higher when coming from the 401k.

This is not to say that you should not put any stocks into a 401k - the tax-deferral alone is worthwhile. But when it comes time to choose which goes into taxable (because the 401k is full), the standard answer is to put stock funds in taxable instead of bond funds.

There are exceptions. I'm just talking generalities.

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FungusDoc
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Re: Munis in Taxable or Bonds in the 401K?

Post by FungusDoc » Tue Oct 01, 2019 9:18 am

Thanks for the help everyone. Marginal tax rate (married filing jointly) is 32%. I'm in a no-income tax state, and I have enough funds in my 401(k) to place the entire 15% bond allocation there for now (granted this would only leave very little percentage of stocks in my 401k, about 2% of my portfolio). So I guess the take home point is just buy munis in taxable when I run out of tax-advantaged space.

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neurosphere
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Re: Munis in Taxable or Bonds in the 401K?

Post by neurosphere » Tue Oct 01, 2019 10:51 am

FungusDoc wrote:
Tue Oct 01, 2019 9:18 am
Thanks for the help everyone. Marginal tax rate (married filing jointly) is 32%. I'm in a no-income tax state, and I have enough funds in my 401(k) to place the entire 15% bond allocation there for now (granted this would only leave very little percentage of stocks in my 401k, about 2% of my portfolio). So I guess the take home point is just buy munis in taxable when I run out of tax-advantaged space.
One more opinion. At your bracket (I'm in a similar one), and age, I really like muni bonds in taxable. I use long-term bonds. In a rising interest rate environment don't forget that tax loss harvesting will mitigate some losses. I go back and forth between VG's long term muni and intermediate term muni funds. These muni funds also serve as my emergency fund (along with my MM fund) and are also a source of liquidity that (in general) would be more tax-friendly to temporarily sell if needed, as there are unlikely to be substantial gains. Rebalancing, if needed, could be done within tax advantaged accounts. Of course, it's still fine also hold bonds in retirement accounts, which will add diversity and also give some flexibility with respect to rebalancing.

btw, I'm also a doc. :)
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Re: Munis in Taxable or Bonds in the 401K?

Post by international001 » Tue Oct 01, 2019 5:16 pm

Prettyfrtnt wrote:
Sun Sep 29, 2019 10:18 pm
FungusDoc wrote:
Sun Sep 29, 2019 9:45 pm
How about only keeping equities in the 401K to maximize long-term tax deferred return and keep all fixed income in the taxable acct in munis? Something like the VG intermediate tax-exempt fund (VWITX)?
This is what I do in your situation after studying and reflecting on it for a long time... I use vwalx high yield muni after also asking a lot of questions. But I would consider half and half.
No.. that's just a mental trick

If you consider your portfolio as a hole (so you rebalance between taxable and non-taxabe to maintain a constant AA), then use bonds on non-taxable
Also, consider if you really need munis. It may be better just to hold non-muni bonds in non-taxable

Jimsad
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Re: Munis in Taxable or Bonds in the 401K?

Post by Jimsad » Tue Oct 01, 2019 5:36 pm

Can anyone comment if there is a role for a total bond fund in taxable account?

Prettyfrtnt
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Re: Munis in Taxable or Bonds in the 401K?

Post by Prettyfrtnt » Tue Oct 01, 2019 7:51 pm

I don’t think there is a role for total bonds in taxable. At least until you’re older and retired. It’s awful when you are young and accumulating and in the 37%. As people above have said put the bonds into tax advantaged.

Now in my situation people seem to comment about. I don’t personally want 100% bonds in my tax-deferred right now. So I hold some munis in taxable to get to my preferred AA. Munis have no federal taxation which is huge for me. Plenty of people on this forum have munis for the same reason. My taxable is orders of magnitude bigger than my tax advantaged. So I hold some munis.

Over the next 30 plus years I don’t want my tax advantaged space to be completely clogged with bonds.

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Re: Munis in Taxable or Bonds in the 401K?

Post by WolfgangPauli » Tue Oct 01, 2019 8:02 pm

Jimsad wrote:
Tue Oct 01, 2019 5:36 pm
Can anyone comment if there is a role for a total bond fund in taxable account?
This is unanswerable unless we knew everything about you. Need to know if you need the money soon (in which case it would argue for bonds over stocks), need to know how much you have etc. etc.

The key to this advice (which then I think you apply to your situation) is if you can do it you should have bonds in tax deferred "qualified" accounts and stocks in your non deferred accounts. This is purely to take advantage of favorable cap gains taxes.
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retiredjg
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Re: Munis in Taxable or Bonds in the 401K?

Post by retiredjg » Wed Oct 02, 2019 5:56 am

Jimsad wrote:
Tue Oct 01, 2019 5:36 pm
Can anyone comment if there is a role for a total bond fund in taxable account?
There can be a role for total bond in a taxable account, but probably not for people in a higher tax bracket.

Juice3
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Re: Munis in Taxable or Bonds in the 401K?

Post by Juice3 » Wed Oct 02, 2019 6:15 am

retiredjg wrote:
Wed Oct 02, 2019 5:56 am
Jimsad wrote:
Tue Oct 01, 2019 5:36 pm
Can anyone comment if there is a role for a total bond fund in taxable account?
There can be a role for total bond in a taxable account, but probably not for people in a higher tax bracket.
An instance of bonds in taxable would be approaching retirement and thus needed access to the money in the short term and desiring to minimize volatility especially if you are part of the FIRE crowd and thus are restricted in your access to tax advantage accounts at your current age.

In other words, you should look at the time horizons for accumulation AND decumulation BY account type.

This situation would be typical of those in "higher tax bracket" as they are the ones that can afford to save in taxable account and thus FIRE without minimalist spending.

Juice3
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Re: Munis in Taxable or Bonds in the 401K?

Post by Juice3 » Wed Oct 02, 2019 6:25 am

FungusDoc wrote:
Tue Oct 01, 2019 9:18 am
Thanks for the help everyone. Marginal tax rate (married filing jointly) is 32%. I'm in a no-income tax state, and I have enough funds in my 401(k) to place the entire 15% bond allocation there for now (granted this would only leave very little percentage of stocks in my 401k, about 2% of my portfolio). So I guess the take home point is just buy munis in taxable when I run out of tax-advantaged space.
This is kind of anti-Boglehead advice as we are a DIY crew, but your situation is somewhat unique.

As a 30 something, with a family income of 400K+ and great prospects for both increasing income and income longevity and well , thus putting your household income in the 99th percentile. Not to mention many available creative tax planning possibilities ...

You should consider seeking paid advice at a reasonable cost.

Would you recommend I act as my own doctor?

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Re: Munis in Taxable or Bonds in the 401K?

Post by retiredjg » Wed Oct 02, 2019 6:30 am

Juice3 wrote:
Wed Oct 02, 2019 6:15 am
retiredjg wrote:
Wed Oct 02, 2019 5:56 am
Jimsad wrote:
Tue Oct 01, 2019 5:36 pm
Can anyone comment if there is a role for a total bond fund in taxable account?
There can be a role for total bond in a taxable account, but probably not for people in a higher tax bracket.
An instance of bonds in taxable would be approaching retirement and thus needed access to the money in the short term and desiring to minimize volatility especially if you are part of the FIRE crowd and thus are restricted in your access to tax advantage accounts at your current age.

In other words, you should look at the time horizons for accumulation AND decumulation BY account type.

This situation would be typical of those in "higher tax bracket" as they are the ones that can afford to save in taxable account and thus FIRE without minimalist spending.
This is an argument for bonds in taxable, but not necessarily for total bond in taxable. People who are/will be in a higher tax bracket should probably be using tax-exempt bonds instead of total bond.

Juice3
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Re: Munis in Taxable or Bonds in the 401K?

Post by Juice3 » Wed Oct 02, 2019 6:39 am

retiredjg wrote:
Wed Oct 02, 2019 6:30 am
This is an argument for bonds in taxable, but not necessarily for total bond in taxable. People who are/will be in a higher tax bracket should probably be using tax-exempt bonds instead of total bond.
I used the term bond loosely. The question posed actually used the term fixed income.
How about only keeping equities in the 401K to maximize long-term tax deferred return and keep all fixed income in the taxable acct in munis?
Your point also reinforces my main point, that for a complex and unique situation such as the OP has, DIY might not be the best approach.

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Re: Munis in Taxable or Bonds in the 401K?

Post by MotoTrojan » Wed Oct 02, 2019 8:23 am

Some long treasuries in 401K could net an efficiency and even return (rebalance bonus) boost.

aristotelian
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Re: Munis in Taxable or Bonds in the 401K?

Post by aristotelian » Wed Oct 02, 2019 8:36 am

I think your logic is backward. If you want to benefit the most from long term gains, you would not want those gains taxed as ordinary income in retirement. You would want them tax free (Roth) first, or taxed as LTCG (taxable). 401k would be the last place to locate gains, so therefore the best account for bonds.

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Re: Munis in Taxable or Bonds in the 401K?

Post by Juice3 » Wed Oct 02, 2019 8:45 am

FungusDoc wrote:
Tue Oct 01, 2019 9:18 am
Thanks for the help everyone. Marginal tax rate (married filing jointly) is 32%. I'm in a no-income tax state, and I have enough funds in my 401(k) to place the entire 15% bond allocation there for now (granted this would only leave very little percentage of stocks in my 401k, about 2% of my portfolio). So I guess the take home point is just buy munis in taxable when I run out of tax-advantaged space.
It seems unlikely you would "run out" of tax-advantaged space with appropriate planning. You can find various other threads here where DRs contribute well over the 19K annual 401K elective deferral limit maybe approaching 100K a year to tax-advantaged. The elective deferral limits can be worked around through employer matching and non elective contributions.

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Re: Munis in Taxable or Bonds in the 401K?

Post by Prettyfrtnt » Wed Oct 02, 2019 9:34 am

Juice3 wrote:
Wed Oct 02, 2019 6:39 am
retiredjg wrote:
Wed Oct 02, 2019 6:30 am
This is an argument for bonds in taxable, but not necessarily for total bond in taxable. People who are/will be in a higher tax bracket should probably be using tax-exempt bonds instead of total bond.
I used the term bond loosely. The question posed actually used the term fixed income.
How about only keeping equities in the 401K to maximize long-term tax deferred return and keep all fixed income in the taxable acct in munis?
Your point also reinforces my main point, that for a complex and unique situation such as the OP has, DIY might not be the best approach.
Being in a very similar situation to the OP... and having a very large cadre of friends around the USA in the same situation... I can assure you it is quite rare to find a fiduciary or financial advisor that has 50% the insight of a dedicated DIYer with BH and WCI. This is not a choice of if you want to understand your finances. You can shovel your entire careers’ net monetary effect into a dumpster if you don’t take this head on. This is the advice I give my friends and when they wake up to this reality they are usually quite grateful to me. Some keep their faces buried in AUM.

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Re: Munis in Taxable or Bonds in the 401K?

Post by Prettyfrtnt » Wed Oct 02, 2019 9:36 am

aristotelian wrote:
Wed Oct 02, 2019 8:36 am
I think your logic is backward. If you want to benefit the most from long term gains, you would not want those gains taxed as ordinary income in retirement. You would want them tax free (Roth) first, or taxed as LTCG (taxable). 401k would be the last place to locate gains, so therefore the best account for bonds.
Thank you quite simple and informative.

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goingup
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Re: Munis in Taxable or Bonds in the 401K?

Post by goingup » Wed Oct 02, 2019 10:14 am

Juice3 wrote:
Wed Oct 02, 2019 6:39 am
retiredjg wrote:
Wed Oct 02, 2019 6:30 am
This is an argument for bonds in taxable, but not necessarily for total bond in taxable. People who are/will be in a higher tax bracket should probably be using tax-exempt bonds instead of total bond.
I used the term bond loosely. The question posed actually used the term fixed income.
How about only keeping equities in the 401K to maximize long-term tax deferred return and keep all fixed income in the taxable acct in munis?
Your point also reinforces my main point, that for a complex and unique situation such as the OP has, DIY might not be the best approach.
The OP's situation is not unique or uncommon on this board. Many here have made (are making) decisions about using muni bond funds.

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Re: Munis in Taxable or Bonds in the 401K?

Post by retiredjg » Wed Oct 02, 2019 10:35 am

Juice3 wrote:
Wed Oct 02, 2019 6:39 am
retiredjg wrote:
Wed Oct 02, 2019 6:30 am
This is an argument for bonds in taxable, but not necessarily for total bond in taxable. People who are/will be in a higher tax bracket should probably be using tax-exempt bonds instead of total bond.
I used the term bond loosely. The question posed actually used the term fixed income.
Well, actually the question I answered used the term "total bond". :happy

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Re: Munis in Taxable or Bonds in the 401K?

Post by international001 » Thu Oct 03, 2019 5:39 am

Juice3 wrote:
Wed Oct 02, 2019 8:45 am
It seems unlikely you would "run out" of tax-advantaged space with appropriate planning. You can find various other threads here where DRs contribute well over the 19K annual 401K elective deferral limit maybe approaching 100K a year to tax-advantaged. The elective deferral limits can be worked around through employer matching and non elective contributions.
100k in tax-advantage? How? 401k limit is 56k and roth limit is 6k

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neurosphere
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Re: Munis in Taxable or Bonds in the 401K?

Post by neurosphere » Thu Oct 03, 2019 6:44 am

international001 wrote:
Thu Oct 03, 2019 5:39 am
Juice3 wrote:
Wed Oct 02, 2019 8:45 am
It seems unlikely you would "run out" of tax-advantaged space with appropriate planning. You can find various other threads here where DRs contribute well over the 19K annual 401K elective deferral limit maybe approaching 100K a year to tax-advantaged. The elective deferral limits can be worked around through employer matching and non elective contributions.
100k in tax-advantage? How? 401k limit is 56k and roth limit is 6k
OP is married. So possibility of $56k x 2 + $6k x 2 = $124k. An HSA would increase that by another $7k. Some have 457b plans which allow additional savings. My wife and I struggle to fill up our tax advantaged space, and we're good savers with decent income.
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Re: Munis in Taxable or Bonds in the 401K?

Post by Juice3 » Thu Oct 03, 2019 4:43 pm

neurosphere wrote:
Thu Oct 03, 2019 6:44 am
international001 wrote:
Thu Oct 03, 2019 5:39 am
Juice3 wrote:
Wed Oct 02, 2019 8:45 am
It seems unlikely you would "run out" of tax-advantaged space with appropriate planning. You can find various other threads here where DRs contribute well over the 19K annual 401K elective deferral limit maybe approaching 100K a year to tax-advantaged. The elective deferral limits can be worked around through employer matching and non elective contributions.
100k in tax-advantage? How? 401k limit is 56k and roth limit is 6k
OP is married. So possibility of $56k x 2 + $6k x 2 = $124k. An HSA would increase that by another $7k. Some have 457b plans which allow additional savings. My wife and I struggle to fill up our tax advantaged space, and we're good savers with decent income.
International001, I gave the how in my original post
> The elective deferral limits can be worked around through employer matching and non elective contributions.

DRs often find themselves in a position to be both employer and employee, making this a trivial exercise. The most contentious part is often agreeing with their partners (as those opportunities are often "practices"). In the end, they end up with multiple plans and money accumulating at a much faster rate than a 9to5er.

When you start to stretch it even further with things like a spouse making significant $, you can double up again.

I believe this thread was a DR couple, so 100K a year in tax deferred should not be a problem.

Topic Author
FungusDoc
Posts: 4
Joined: Sun Sep 29, 2019 8:40 pm

Re: Munis in Taxable or Bonds in the 401K?

Post by FungusDoc » Thu Oct 03, 2019 9:53 pm

Juice3 wrote:
Wed Oct 02, 2019 6:25 am
Would you recommend I act as my own doctor?
Depends...if it's the end of the day and I'm trying to leave the office, then I highly recommend it! However, I do see your point. Maybe I'm crazy but WCI has inspired me to try the DIY approach.
Juice3 wrote:
Wed Oct 02, 2019 8:45 am
It seems unlikely you would "run out" of tax-advantaged space with appropriate planning. You can find various other threads here where DRs contribute well over the 19K annual 401K elective deferral limit maybe approaching 100K a year to tax-advantaged. The elective deferral limits can be worked around through employer matching and non elective contributions.
I do have a match, but I need to be there a few more years before it gets significant. I am also ONLY an employee, no employer status. Tell me more about these non-elective contributions...

Bottom line is I suppose I am leaning toward cramming all of my bonds in the 401(k). I have enough room to do so at the moment, but it would mean I would have a very small percentage of stocks in the 401(k). I'll save the munis in taxable for when I run out of tax-deferred space. Since I live in a no state income tax state, using munis would likely have less of an impact overall in terms of tax efficiency (although I still get the federal tax exemption), as opposed to placing all bonds in the 401(k) given my current situation.

Juice3
Posts: 133
Joined: Sun Nov 05, 2017 7:40 am

Re: Munis in Taxable or Bonds in the 401K?

Post by Juice3 » Fri Oct 04, 2019 5:46 am

FungusDoc wrote:
Thu Oct 03, 2019 9:53 pm
Juice3 wrote:
Wed Oct 02, 2019 6:25 am
Would you recommend I act as my own doctor?
Depends...if it's the end of the day and I'm trying to leave the office, then I highly recommend it! However, I do see your point. Maybe I'm crazy but WCI has inspired me to try the DIY approach.
I am all for DIY. I am not seeing you doing the leg work to support DIY in your less common situation. Maybe WIC will better identify paths for you or maybe you should consider my suggestion to have an adviser.
FungusDoc wrote:
Thu Oct 03, 2019 9:53 pm
Juice3 wrote:
Wed Oct 02, 2019 8:45 am
It seems unlikely you would "run out" of tax-advantaged space with appropriate planning. You can find various other threads here where DRs contribute well over the 19K annual 401K elective deferral limit maybe approaching 100K a year to tax-advantaged. The elective deferral limits can be worked around through employer matching and non elective contributions.
I do have a match, but I need to be there a few more years before it gets significant. I am also ONLY an employee, no employer status. Tell me more about these non-elective contributions...
Here is a posting that talks about a DR that was able to structure his income and plans to get something like 75K into tax deferred a year.

viewtopic.php?f=1&t=284291&p=4613365#p4613365

That one was super easy to find just by clicking my post history and reviewing it. IMO a DIYer should show at least that level of initiative, research, and ability. What should I expect from one that obviously prides himself on knowledge and capability?

At the end of the day, you have been given the same 24 hours that we all have. Ask yourself the question how do you want to use it?

J

retiredjg
Posts: 38497
Joined: Thu Jan 10, 2008 12:56 pm

Re: Munis in Taxable or Bonds in the 401K?

Post by retiredjg » Fri Oct 04, 2019 8:45 am

FungusDoc wrote:
Thu Oct 03, 2019 9:53 pm
Bottom line is I suppose I am leaning toward cramming all of my bonds in the 401(k). I have enough room to do so at the moment, but it would mean I would have a very small percentage of stocks in the 401(k). I'll save the munis in taxable for when I run out of tax-deferred space. Since I live in a no state income tax state, using munis would likely have less of an impact overall in terms of tax efficiency (although I still get the federal tax exemption), as opposed to placing all bonds in the 401(k) given my current situation.
If you are saving a lot, you will probably end up with bonds in taxable no matter what you do. It may be soon, it may be years from now, but it is very likely to happen unless you are using multiple tax-deferred accounts (which can cause a different problem later on in life).

There is only one reason I can think of not to fill your 401k with bonds - you might want to have a slice of stocks in there for rebalancing. I'm not sure it will help much but you may see if you like it.

If you are saving frequently in taxable, holding bonds stocks in the 401k is not really necessary because you can always decide just where to put this month's taxable contribution - into bonds or into stocks - and that can serve as a rebalancing method until things get really bad. When another significant market downturn occurs, you will either have to sit tight or sell bonds to buy stocks in taxable. I rdefinitely recommend the latter. If you don't sell bonds to buy stocks, your stock to bond ratio is going to get out of whack.
Last edited by retiredjg on Sat Oct 05, 2019 6:38 am, edited 1 time in total.

mjb
Posts: 129
Joined: Sat Nov 30, 2013 11:43 am

Re: Munis in Taxable or Bonds in the 401K?

Post by mjb » Fri Oct 04, 2019 9:41 am

Something to consider is to start stock heavy in all tax advantaged and liability match in taxable.

For the tax advantaged portion, you start 80 to 100% in stocks and do rebalancing to bonds as you age only in tax deferred.

In taxable, fill up emergency fund (not likely a problem for the OP), then some level of munis to the amount you would likely want for a future purchase (car, boat, kid related expenses + college outside 529, etc.). Once you hit that number then all to stocks.

Basically what my wife and I are doing. Not in as high a tax bracket, but the math works out even better the farther up the income scale.

international001
Posts: 1163
Joined: Thu Feb 15, 2018 7:31 pm

Re: Munis in Taxable or Bonds in the 401K?

Post by international001 » Fri Oct 04, 2019 6:27 pm

Juice3 wrote:
Thu Oct 03, 2019 4:43 pm
neurosphere wrote:
Thu Oct 03, 2019 6:44 am
international001 wrote:
Thu Oct 03, 2019 5:39 am
Juice3 wrote:
Wed Oct 02, 2019 8:45 am
It seems unlikely you would "run out" of tax-advantaged space with appropriate planning. You can find various other threads here where DRs contribute well over the 19K annual 401K elective deferral limit maybe approaching 100K a year to tax-advantaged. The elective deferral limits can be worked around through employer matching and non elective contributions.
100k in tax-advantage? How? 401k limit is 56k and roth limit is 6k
OP is married. So possibility of $56k x 2 + $6k x 2 = $124k. An HSA would increase that by another $7k. Some have 457b plans which allow additional savings. My wife and I struggle to fill up our tax advantaged space, and we're good savers with decent income.
International001, I gave the how in my original post
> The elective deferral limits can be worked around through employer matching and non elective contributions.

DRs often find themselves in a position to be both employer and employee, making this a trivial exercise. The most contentious part is often agreeing with their partners (as those opportunities are often "practices"). In the end, they end up with multiple plans and money accumulating at a much faster rate than a 9to5er.

When you start to stretch it even further with things like a spouse making significant $, you can double up again.

I believe this thread was a DR couple, so 100K a year in tax deferred should not be a problem.
Ok, ok.. I was thinking single ;-)

nordsteve
Posts: 734
Joined: Sun Oct 05, 2008 9:23 am

Re: Munis in Taxable or Bonds in the 401K?

Post by nordsteve » Fri Oct 04, 2019 6:59 pm

When I rant the numbers for my scenario: married, high tax bracket, high state tax state -- a muni bond fund in taxable made sense.

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