Questions re having only muni bonds in taxable account and general allocation strategy

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Topic Author
DanM82
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Joined: Sat Jun 27, 2020 12:52 pm

Questions re having only muni bonds in taxable account and general allocation strategy

Post by DanM82 » Sat Jun 27, 2020 2:29 pm

Hello,

I’ve been lurking for a while on the board. Fabulous amount of information available on the site. I’m hoping to gain some perspectives on my allocation across multiple investment accounts (brokerage and retirement) in general and, in particular, whether it’s a mistake to have only one type of fixed-income investment - Vanguard Intermediate-Term Tax-Exempt Fund Admiral Shares (VWIUX) – in my brokerage account. In other words, whether I should be looking to diversify my bond holdings to include other fixed income securities (i.e., treasuries, corporate, larger index bond fund (e.g., VBTLX), etc.) or even do something else entirely.

Thus far I’ve tried to be an active participant in my investment and retirement planning and have not worked with an outside advisor. But I do wonder sometimes if I’m approaching everything in the right way. For what it’s worth, given our ages and years to retirement, I have targeted a 90/10 stock/bond split for our portfolio as a whole. (Whether I’ve achieved this target in the most efficient manner is a different story . . . ) I try to focus on low-cost index funds and ETFs. Here are some other details that may be useful.

Ages: me (38); spouse (36)

Tax status / marginal tax rate: Married Filing Jointly / 35%

Roth IRA x 2: Vanguard Total Stock Market ETF (VTI) (approx. 80K in each account)

Roth 401K (mine): Vanguard Target Retirement 2050 Trust Select (approx. 235K). (Note: my 401K offers few good options beyond “life cycle” funds.) The fund is approximately 90/10 stock/bond.

Traditional (pre-tax) Thrift Savings Plan (spouse): My wife also has a 2050 retirement fund (approx. 140K). (Same as above; appear to be few good options beyond life cycle funds.) The fund is approximately 90/10 stock/bond.

Brokerage account: I opened a Vanguard brokerage a few years ago to invest extra amounts we are able to save each money above and beyond what we can put into our IRAs / 401Ks. I didn’t do enough research at first and initially invested in another “life cycle” fund. (I now understand that approach is not tax efficient and have stopped contributing to the 2050 fund. But I assume that it is better to simply hold and not pay tax on the unrealized gains. Or maybe it isn’t. I don’t know.) The current breakdown of our brokerage account is below. The account balance is approximately 440K.
• Vanguard Target Retirement 2050 Fund (VFIFX) = approximately 14.3% (no longer making regular contributions). Unrealized gains of approx. 2K
(mostly long-term)
• Vanguard 500 Index Fund Admiral Shares (VFIAX) = approximately 5.5% (no longer making regular contributions)
• Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) = approximately 46% (regular contributions each month)
• Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) = approximately 23% (regular contributions each month)
• Vanguard Intermediate-Term Tax-Exempt Fund Admiral Shares (VWIUX) = approximately 11.5% (regular contributions each month)

Looking at our portfolio as a whole, we are close to the 90/10 target split. And at the end of each month I divide up my contribution to try and maintain that target. But, as noted above, I’m concerned that I’m contributing too much to VWIUX and without an appropriate level of diversification into other fixed income investments. Or maybe in general it’s too much money (50K) to be tied up at my age in a pretty low yield investment.

I would appreciate any and all comments, critiques, recommendations, etc. Thanks very much.

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David Jay
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Re: Questions re having only muni bonds in taxable account and general allocation strategy

Post by David Jay » Sat Jun 27, 2020 3:40 pm

Welcome to the forum!

Just to keep the portfolio simple, I would sell the Target Date fund and pay the tax on $2000 of long term gains.

You guys are doing great and are using your accounts well (from a tax-efficiency standpoint). For review, there is a Wiki page on tax-efficient fund placement here: https://www.bogleheads.org/wiki/Tax-eff ... _placement
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

retiredjg
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Re: Questions re having only muni bonds in taxable account and general allocation strategy

Post by retiredjg » Sat Jun 27, 2020 3:44 pm

Your question could mean two different things.

1. Is it ok to hold my entire bond allocation in a single muni fund which is held in a taxable account?

2. Is it OK for all the bonds that are in my taxable account to be munis?

Just based on your tax bracket and the fact that you did not list a high tax state, I'd suggest that all your bonds would best be in one of the tax-deferred accounts. But it would be OK for some of your bonds to be in taxable and if you do, it should definitely be a muni because of your tax bracket.

I do not think it is wise for anyone who has a choice to hold their entire bond allocation in a muni fund in a taxable account. A muni fund has little diversification and they are a sneaky kind of risky - many people were surprised what their muni funds did last March.

Topic Author
DanM82
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Re: Questions re having only muni bonds in taxable account and general allocation strategy

Post by DanM82 » Sat Jun 27, 2020 4:11 pm

Thanks to you both. I really appreciate the feedback.

To follow-up on the below, I think my question was more along #2; i.e., is it OK for all the bonds in my taxable account to be munis. I do own other bonds through the "life cycle" funds in my wife's TSP and my 401k. The bond allocation for a retirement 2050 fund is a bit less than 10% - 6.6% Vanguard Total Bond Market II Index Fund and 2.7% Vanguard Total International Bond Index Fund.

I forgot to mention jurisdiction. Unfortunately I do live in a high-tax area (DC). My marginal rate is 8.75%.

And selling the target date fund probably does make sense under the circumstances. $2000 gain at LT rate won't break the bank.

Thanks again.

mojorisin
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Re: Questions re having only muni bonds in taxable account and general allocation strategy

Post by mojorisin » Sun Jun 28, 2020 8:07 am

Subscribing.

I have 60% of my investments in non retirement accounts, so in my "taxable" accounts I hold muni's as I have BND/BIV in my retirement accounts.

As I type this, I'm curious what other bond funds people use in their taxable accounts as well.

retiredjg
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Re: Questions re having only muni bonds in taxable account and general allocation strategy

Post by retiredjg » Sun Jun 28, 2020 9:12 am

DanM82 wrote:
Sat Jun 27, 2020 4:11 pm
To follow-up on the below, I think my question was more along #2; i.e., is it OK for all the bonds in my taxable account to be munis. I do own other bonds through the "life cycle" funds in my wife's TSP and my 401k. The bond allocation for a retirement 2050 fund is a bit less than 10% - 6.6% Vanguard Total Bond Market II Index Fund and 2.7% Vanguard Total International Bond Index Fund.
If you wish to keep the target funds in the 401k/TSP accounts (which I think is a fine idea) then holding this in your taxable account is what I would suggest.

Total Stock
Total International
10% Intermediate term tax-exempt

I would definitely get rid of the target fund there. Just do it. It does not matter if you get rid of the 500 index or not unless you wish to tax loss harvest between total stock and 500 index. If you do, you will have to watch for wash sales.

There really are few other muni bonds that would work unless you want to hold a short term tax-exempt bond. Vanguard seems to be fond of that approach.

I forgot to mention jurisdiction. Unfortunately I do live in a high-tax area (DC). My marginal rate is 8.75%.
I don't recall ever seeing any DC specific muni bonds. Do you know if any exist? If you find one and if it is low cost, you could hold half and half.

Topic Author
DanM82
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Joined: Sat Jun 27, 2020 12:52 pm

Re: Questions re having only muni bonds in taxable account and general allocation strategy

Post by DanM82 » Mon Jun 29, 2020 12:15 pm

Thanks. Very helpful. I am going to do as you suggest (i.e., sell the retirement fund in my brokerage account and reallocate across the three funds).

Regarding DC-specific muni bonds: I am not aware of any. But DC exempts from DC income tax the interest earned on municipal bonds issued by any state or municipality. So I did not spend much time looking and just went with VWIUX.

retiredjg
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Re: Questions re having only muni bonds in taxable account and general allocation strategy

Post by retiredjg » Mon Jun 29, 2020 12:20 pm

So you are saying you don't pay District or federal tax on that fund? Seems like a winner.

Topic Author
DanM82
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Re: Questions re having only muni bonds in taxable account and general allocation strategy

Post by DanM82 » Mon Jun 29, 2020 12:45 pm

Correct - no fed or DC tax on the fund at all. In 2013 the DC gov't retroactively repealed a provision that would have subjected income earned on out-of-state tax-exempt bonds owned by DC residents to DC income tax. So the income is not subject to the 8.75% rate, thankfully.

retiredjg
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Re: Questions re having only muni bonds in taxable account and general allocation strategy

Post by retiredjg » Mon Jun 29, 2020 12:57 pm

That's what I would do then. Easy peasy.

sycamore
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Re: Questions re having only muni bonds in taxable account and general allocation strategy

Post by sycamore » Mon Jun 29, 2020 1:11 pm

Regarding the general question of how much fixed income to hold in munis, I didn't have a particular framework to help me figure it out.

I basically decided to limit them to my comfort level of 33% of FI. This was an arbitrary number for sure. I didn't research the various bond sub-markets to understand the various risks inherent in each one. I didn't/don't lean on market gurus/prognosticators (think Meredith Whitney) to decide how much to put in munis. It was more of a "don't put all your eggs in one basket" thing applied to fixed income allocation. I was aware of the "pension" risk to muni bonds, but on some level I have enough optimism that most municipal governments will try to make good on their bond obligations.

Whether there are better fixed income options in taxable is another question. I've done some moving around of accounts to earn bank and brokerage bonuses, but at a cost of some complexity in my portfolio and record keeping.

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