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Bond placement taxable v. tax advantaged

Posted: Fri Jul 17, 2020 1:07 pm
by beckwith
I have read and understand the Wiki on tax-efficient placement of bond funds, the strategy being to place them in tax advantaged accounts. But, one advantage I see of bond holdings is to provide that ballast that we talk about so often here for the downturns in the market. Having the ballast in a taxable account where it's readily available to draw on, if necessary, makes more sense to me as a 32 year old than having it in my retirement accounts that I won't touch for ~another 30 years. I'm sure I'm simplifying this...thoughts?

Re: Bond placement taxable v. tax advantaged

Posted: Fri Jul 17, 2020 1:19 pm
by aristotelian
What do you mean by ballast? It is easier to do rebalancing in tax advantaged accounts where transactions will not be taxable. If you sold bonds in a crash in your taxable account, you would likely incur a tax hit. If you mean liquidity, yes, bonds make sense in taxable as extra security backing up your emergency fund. However, in that case you will be trading liquidity for tax efficiency and will not be able to use your bonds for rebalancing.

Re: Bond placement taxable v. tax advantaged

Posted: Fri Jul 17, 2020 1:29 pm
by beckwith
aristotelian wrote: Fri Jul 17, 2020 1:19 pm
If you mean liquidity, yes, bonds make sense in taxable as extra security backing up your emergency fund.
Yes, this is what I mean. So perhaps some of the bond allocation in taxable for liquidity purposes might be appropriate, with the rest in tax advantaged accounts?

Re: Bond placement taxable v. tax advantaged

Posted: Fri Jul 17, 2020 1:56 pm
by aristotelian
beckwith wrote: Fri Jul 17, 2020 1:29 pm
aristotelian wrote: Fri Jul 17, 2020 1:19 pm
If you mean liquidity, yes, bonds make sense in taxable as extra security backing up your emergency fund.
Yes, this is what I mean. So perhaps some of the bond allocation in taxable for liquidity purposes might be appropriate, with the rest in tax advantaged accounts?
Sounds good to me! I Bonds are a great choice if you don't mind a separate account with Treasury Direct.

Re: Bond placement taxable v. tax advantaged

Posted: Fri Jul 17, 2020 2:37 pm
by Gadget
beckwith wrote: Fri Jul 17, 2020 1:29 pm
aristotelian wrote: Fri Jul 17, 2020 1:19 pm
If you mean liquidity, yes, bonds make sense in taxable as extra security backing up your emergency fund.
Yes, this is what I mean. So perhaps some of the bond allocation in taxable for liquidity purposes might be appropriate, with the rest in tax advantaged accounts?
Are you maxing all your tax advantaged space? I don't think you should really have a taxable account to worry about this scenario unless you are maxing all tax advantaged space. 401k, roth IRA, HSA, etc.

I keep about half my bonds in taxable from my 20% bond allocation. Partly as an emergency fund, and partly due to the white coat investor article on the case for bonds in taxable at today's low interest rates. I figure this gives me liquidity, and I can always change my mind in the future if interest rates rise.

Re: Bond placement taxable v. tax advantaged

Posted: Fri Jul 17, 2020 2:55 pm
by beckwith
Gadget wrote: Fri Jul 17, 2020 2:37 pm
Are you maxing all your tax advantaged space? I don't think you should really have a taxable account to worry about this scenario unless you are maxing all tax advantaged space. 401k, roth IRA, HSA, etc.
Yes, maxing out all tax advantaged space! The taxable holdings are significant due to an inheritance...
Gadget wrote: Fri Jul 17, 2020 2:37 pm
I keep about half my bonds in taxable from my 20% bond allocation. Partly as an emergency fund, and partly due to the white coat investor article on the case for bonds in taxable at today's low interest rates. I figure this gives me liquidity, and I can always change my mind in the future if interest rates rise.
I've seen this article as well. I agree with you that I like the liquidity advantage of holding bonds in taxable. As our tax deferred accounts grow (and as we grow older...), we'll allocate bonds to those accounts, no additional bonds in the taxable moving forward.

Re: Bond placement taxable v. tax advantaged

Posted: Sun Jul 19, 2020 10:15 am
by grabiner
beckwith wrote: Fri Jul 17, 2020 1:07 pm I have read and understand the Wiki on tax-efficient placement of bond funds, the strategy being to place them in tax advantaged accounts. But, one advantage I see of bond holdings is to provide that ballast that we talk about so often here for the downturns in the market. Having the ballast in a taxable account where it's readily available to draw on, if necessary, makes more sense to me as a 32 year old than having it in my retirement accounts that I won't touch for ~another 30 years. I'm sure I'm simplifying this...thoughts?
Wiki article link: Placing cash needs in a tax-advantaged account

If you need to draw on your taxable account, and want to sell bonds, you can sell stock in your taxable account, then move an equal amount from bonds to stock in your IRA or 401(k); the net effect is that you sold bonds. This works as long as your taxable account is at least twice the cash you would need to withdraw from it, so that it will still be large enough even if you have to sell stock in a downturn.

Re: Bond placement taxable v. tax advantaged

Posted: Sun Jul 19, 2020 11:59 am
by Dandy
I always had both equities and fixed income in my 401k/Roth/TIRA/Taxable accounts. Gave me lots of options to rebalance my overall investments without having to incur taxes to rebalance or to fund unexpected expenses. Many times a surge in equities will trigger a rebalance only to have equities decline down the road a bit - making a taxable rebalance unnecessary. Over the long term equities will likely out perform the fixed income since their historic growth is much higher. So keeping your overall risk allocation under control can be a challenge. Sometimes you may have to bite the bullet and incur taxes - the longer you have a taxable account the more likely the equities will have large capital gain exposure. Good for your investment goals but a rebalancing challenge.

Re: Bond placement taxable v. tax advantaged

Posted: Sun Jul 19, 2020 2:45 pm
by emlowe
I will second that I think I-bonds are great for this. Inflation protection, principal protection, tax deferred, liquid (after one year). They make a great second (or first) tier of e-fund. They can also be used as part of your normal bond portfolio and give a little more tax advantaged space.

Re: Bond placement taxable v. tax advantaged

Posted: Sun Jul 19, 2020 5:12 pm
by JaneyLH
I followed the Wiki advice and now after 5 years with Vanguard with a 3-fund portfolio, mostly bonds in IRAs and equities in taxable accounts, I am sorry I did it that way. Now I am retired and have moved from a 70/30 to 50/50 portfolio, and can't rebalance anymore without triggering big capital gains in my taxable accounts. :oops:

Of course, the stock market might take a big hit in the future and I'll be easily able to rebalance back into equities in my IRAs. Not what I am hoping for, however!

Re: Bond placement taxable v. tax advantaged

Posted: Sun Jul 19, 2020 5:53 pm
by Dandy
can't rebalance anymore without triggering big capital gains in my taxable accounts. :oops:
You can consider not having taxable equity distributions reinvested but sent to fixed income. Large cap gains are a sign of success even though it causes rebalancing challenges. I try to use the TIRA to rebalance my overall investments.