Maximize after tax returns: question on understanding

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PNW86
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Maximize after tax returns: question on understanding

Post by PNW86 »

Overall allocation: 15% bonds, 85% stock

Question: how do we best place bonds for maximum after tax return - what buckets do we fill first? Are they first placed in Roth IRA/401k (tax exempt account) with any additional bonds then being placed in traditional 401k (tax deferred account), while avoiding placing bonds in a taxable account? This is my understanding from the book - “ place most tax-inefficient investments (bonds other than non-taxable muni bonds) In tax deferred accounts”

Thank you!
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midareff
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Re: Maximize after tax returns: question on understanding

Post by midareff »

At the moment the best after tax return seems to be (your pick) Intermediate Term Tax-Exempt Bond Fund. Long Term Tax-Exempt Bond Fund or the Tax Exempt Bond Index in a taxable account. Their SEC and Distribution Yields are higher than even the Intermediate Term Corporate Index and seemingly the highest after tax from an investment grade bond fund.
cowbman
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Re: Maximize after tax returns: question on understanding

Post by cowbman »

You can do significantly better (even after taxes) with some online savings accounts/high yield-checking accounts. No principal risk either.
BogleFan510
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Re: Maximize after tax returns: question on understanding

Post by BogleFan510 »

cowbman wrote: Sat Nov 21, 2020 1:37 pm You can do significantly better (even after taxes) with some online savings accounts/high yield-checking accounts. No principal risk either.
This is actually an unknown. You are confusing current yield, expected future yields, and ultimate total return. You do not know what the total return will be in the future for any bond funds, hence your assertion is not necessarily correct. If you had this information you would be the top hedge fund in the world and arbitrage the hell out of markets to earn fortunes.

Most tax deferred accounts (e.g. IRAs have very poor CD or savings account options), so not sure why you are recommending them. Are you saying because you dont believe bond funds will offer good returns that the OP should favor taxible fixed income options for their 'safe money?' That is reasonable, but you should be clearer what you mean and why you think bond funds will not be able to perform.

For many, bonds in tax deferred is an efficient strategy. It depends on your current and future tax rates, however.
Last edited by BogleFan510 on Sat Nov 21, 2020 1:51 pm, edited 5 times in total.
retired@50
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Re: Maximize after tax returns: question on understanding

Post by retired@50 »

PNW86 wrote: Sat Nov 21, 2020 1:25 pm Overall allocation: 15% bonds, 85% stock

Question: how do we best place bonds for maximum after tax return - what buckets do we fill first? Are they first placed in Roth IRA/401k (tax exempt account) with any additional bonds then being placed in traditional 401k (tax deferred account), while avoiding placing bonds in a taxable account? This is my understanding from the book - “ place most tax-inefficient investments (bonds other than non-taxable muni bonds) In tax deferred accounts”

Thank you!
I use my tax-deferred account for bonds. This is the "first bucket" for bonds, assuming your tax-deferred account has enough space to hold all the bonds you want to hold. If not, then you could use Roth space, or a taxable account and consider a municipal bond fund.

I think the general preference is to use Roth space for maximum growth assets (stock index funds).

See also: https://www.bogleheads.org/wiki/Tax-eff ... _placement

Regards,
This is one person's opinion. Nothing more.
retiredjg
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Re: Maximize after tax returns: question on understanding

Post by retiredjg »

People have differing opinions on this question. There are also some situations which benefit more from bonds in one location or another.

I prefer to place bonds in a tax-deferred 401k or IRA first. I don't mind having some bonds in Roth IRA if it serves a need (but not a lot). Taxable is not the best place for bonds in my opinion, but high income people in high tax states may be an exception.

I would also put bonds in taxable for something short term - like parking the downpayment for a house or saving for a high dollar vacation.

Regarding Roth 401k vs traditional, I'd rather have the bonds in traditional 401k (tax-deferred) but sometimes there is no choice in this matter.
cowbman
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Re: Maximize after tax returns: question on understanding

Post by cowbman »

BogleFan510 wrote: Sat Nov 21, 2020 1:42 pm
cowbman wrote: Sat Nov 21, 2020 1:37 pm You can do significantly better (even after taxes) with some online savings accounts/high yield-checking accounts. No principal risk either.
This is actually an unknown. You are confusing current yield, expected future yields, and ultimate total return. You do not know what the total return will be in the future for any bond funds, hence your assertion is not necessarily correct. If you had this information you would be the top hedge fund in the world and arbitrage the hell out of markets to earn fortunes.

For many, bonds in tax deferred is an efficient strategy. It depends on your current and future tax rates, however.
All true. I don't know what bond rates are going to do, but usually rates correlate. The last few decades have shown bonds to be a great investment, but I have no idea if they will be in the future. If you are investing in a taxable account and want to be conservative, you could do much worse than the 3% APY I'm currently collecting from my online savings account.
BogleFan510
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Re: Maximize after tax returns: question on understanding

Post by BogleFan510 »

cowbman wrote: Sat Nov 21, 2020 1:50 pm
BogleFan510 wrote: Sat Nov 21, 2020 1:42 pm
cowbman wrote: Sat Nov 21, 2020 1:37 pm You can do significantly better (even after taxes) with some online savings accounts/high yield-checking accounts. No principal risk either.
This is actually an unknown. You are confusing current yield, expected future yields, and ultimate total return. You do not know what the total return will be in the future for any bond funds, hence your assertion is not necessarily correct. If you had this information you would be the top hedge fund in the world and arbitrage the hell out of markets to earn fortunes.

For many, bonds in tax deferred is an efficient strategy. It depends on your current and future tax rates, however.
All true. I don't know what bond rates are going to do, but usually rates correlate. The last few decades have shown bonds to be a great investment, but I have no idea if they will be in the future. If you are investing in a taxable account and want to be conservative, you could do much worse than the 3% APY I'm currently collecting from my online savings account.
Whoa! Who is paying 3% for online savings? What country do you live in?
cowbman
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Re: Maximize after tax returns: question on understanding

Post by cowbman »

DM, I can send a referral. USA
mike_in_ny
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Re: Maximize after tax returns: question on understanding

Post by mike_in_ny »

I agree with the idea of putting bonds in tax advantaged accounts, but have actually embarked
on the following strategy. I'd appreciate comments if I'm view this poorly. My current asset
allocation is 80/20 (stock/bond).

1) While I'm working (High income and high tax state)
- keep fairly large amount of my bond in taxable account -- intermediate munis
- benefit here is no taxable income AND the dividends from stocks are in 401k/IRA
- this also gives me high flexibility and liquidity in event of job loss, and stock crash etc.
- I would max this out at 6-7x annual spend

2) When I retire, I will shift this as I approach 59yo.
- keep bonds in taxable that would cover me until I was 59.5
- if I were 57, I'd keep 2.5x annual spend
-however, switch out of munis (since my tax rate will be low)
- sell the excess munis in taxable and buy stock with proceeds
- sell stocks in IRA and buy bond index fund to keep at allocation
- benefit is that I'd now be getting dividends

Does this strategy make sense both in terms of taxes and liquidity/protection of downside?
Topic Author
PNW86
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Re: Maximize after tax returns: question on understanding

Post by PNW86 »

retired@50 wrote: Sat Nov 21, 2020 1:44 pm
PNW86 wrote: Sat Nov 21, 2020 1:25 pm Overall allocation: 15% bonds, 85% stock

Question: how do we best place bonds for maximum after tax return - what buckets do we fill first? Are they first placed in Roth IRA/401k (tax exempt account) with any additional bonds then being placed in traditional 401k (tax deferred account), while avoiding placing bonds in a taxable account? This is my understanding from the book - “ place most tax-inefficient investments (bonds other than non-taxable muni bonds) In tax deferred accounts”

Thank you!
I use my tax-deferred account for bonds. This is the "first bucket" for bonds, assuming your tax-deferred account has enough space to hold all the bonds you want to hold. If not, then you could use Roth space, or a taxable account and consider a municipal bond fund.

I think the general preference is to use Roth space for maximum growth assets (stock index funds).

See also: https://www.bogleheads.org/wiki/Tax-eff ... _placement

Regards,

This is exactly my question, and the answer I am seeking. To ask a clarifying question (I will use some of your wording): assuming I will not access these accounts for 30+ years, and assuming tax deferred accounts can hold all the bonds I want to hold, is it generally thought that the first “bucket” to fill is tax exempt (Roth), the second “bucket” tax deferred (401k), and last “bucket, if necessary, taxable?

The book states first to fill is tax deferred and second is taxable; it does not necessarily specify between tax exempt (Roth) and tax deferred (traditional 401k) though.
sailaway
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Re: Maximize after tax returns: question on understanding

Post by sailaway »

If the book says tax deferred, it certainly does not mean Roth.

Over 30 years, I expect bonds to have less growth than stocks. Therefore, I prioritize them in tax deferred accounts. Then Roth if you run out of tax deferred space.

If we need money from taxable, we sell stocks, then rebalance in tax deferred, as necessary.
retiredjg
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Re: Maximize after tax returns: question on understanding

Post by retiredjg »

Roth is definitely not the first bucket to put your bonds in. Second or last bucket for bonds, depending on situation and/or preference.

It does not matter if your tax-deferred account is a 401k or an traditional IRA. Either is fine and bonds are treated exactly the same in either one.
Last edited by retiredjg on Sat Nov 21, 2020 3:36 pm, edited 1 time in total.
UpperNwGuy
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Re: Maximize after tax returns: question on understanding

Post by UpperNwGuy »

cowbman wrote: Sat Nov 21, 2020 1:56 pm DM, I can send a referral. USA
So it's a secret? Why would it be a secret?
retired@50
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Re: Maximize after tax returns: question on understanding

Post by retired@50 »

PNW86 wrote: Sat Nov 21, 2020 2:26 pm
retired@50 wrote: Sat Nov 21, 2020 1:44 pm
PNW86 wrote: Sat Nov 21, 2020 1:25 pm Overall allocation: 15% bonds, 85% stock

Question: how do we best place bonds for maximum after tax return - what buckets do we fill first? Are they first placed in Roth IRA/401k (tax exempt account) with any additional bonds then being placed in traditional 401k (tax deferred account), while avoiding placing bonds in a taxable account? This is my understanding from the book - “ place most tax-inefficient investments (bonds other than non-taxable muni bonds) In tax deferred accounts”

Thank you!
I use my tax-deferred account for bonds. This is the "first bucket" for bonds, assuming your tax-deferred account has enough space to hold all the bonds you want to hold. If not, then you could use Roth space, or a taxable account and consider a municipal bond fund.

I think the general preference is to use Roth space for maximum growth assets (stock index funds).

See also: https://www.bogleheads.org/wiki/Tax-eff ... _placement

Regards,

This is exactly my question, and the answer I am seeking. To ask a clarifying question (I will use some of your wording): assuming I will not access these accounts for 30+ years, and assuming tax deferred accounts can hold all the bonds I want to hold, is it generally thought that the first “bucket” to fill is tax exempt (Roth), the second “bucket” tax deferred (401k), and last “bucket, if necessary, taxable?

The book states first to fill is tax deferred and second is taxable; it does not necessarily specify between tax exempt (Roth) and tax deferred (traditional 401k) though.
With regard to which account type to fill first, (tax-deferred 401k/IRA, Roth 401k/IRA, or taxable) the correct answer for you depends on your current tax bracket and potential tax bracket in retirement.

For many investors, using a tax-deferred account (1), then filling a Roth IRA (2), then finally, filling a taxable account (3) if you still have the capacity to save is the proper order.

See link for this important, and often misunderstood, choice: https://www.bogleheads.org/wiki/Traditional_versus_Roth

Regards,
This is one person's opinion. Nothing more.
cowbman
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Re: Maximize after tax returns: question on understanding

Post by cowbman »

UpperNwGuy wrote: Sat Nov 21, 2020 2:47 pm
cowbman wrote: Sat Nov 21, 2020 1:56 pm DM, I can send a referral. USA
So it's a secret? Why would it be a secret?
It's not, I just want the referral bonuses. Other forums here on BH talk about it.
cowbman
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Re: Maximize after tax returns: question on understanding

Post by cowbman »

mike_in_ny wrote: Sat Nov 21, 2020 2:18 pm I agree with the idea of putting bonds in tax advantaged accounts, but have actually embarked
on the following strategy. I'd appreciate comments if I'm view this poorly. My current asset
allocation is 80/20 (stock/bond).

1) While I'm working (High income and high tax state)
- keep fairly large amount of my bond in taxable account -- intermediate munis
- benefit here is no taxable income AND the dividends from stocks are in 401k/IRA
- this also gives me high flexibility and liquidity in event of job loss, and stock crash etc.
- I would max this out at 6-7x annual spend

2) When I retire, I will shift this as I approach 59yo.
- keep bonds in taxable that would cover me until I was 59.5
- if I were 57, I'd keep 2.5x annual spend
-however, switch out of munis (since my tax rate will be low)
- sell the excess munis in taxable and buy stock with proceeds
- sell stocks in IRA and buy bond index fund to keep at allocation
- benefit is that I'd now be getting dividends

Does this strategy make sense both in terms of taxes and liquidity/protection of downside?
Not everyone does this, but it DOES make sense. WCI talks about it here: https://www.whitecoatinvestor.com/asset ... n-taxable/
retiredjg
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Re: Maximize after tax returns: question on understanding

Post by retiredjg »

PNW86 wrote: Sat Nov 21, 2020 2:26 pm This is exactly my question, and the answer I am seeking. To ask a clarifying question (I will use some of your wording): assuming I will not access these accounts for 30+ years, and assuming tax deferred accounts can hold all the bonds I want to hold, is it generally thought that the first “bucket” to fill is tax exempt (Roth), the second “bucket” tax deferred (401k), and last “bucket, if necessary, taxable?
When I read this the first time, I thought you were still talking about "filling with bonds". Now I think you just mean "fill" with money.

Almost everybody should fill both a 401k or similar and an IRA (usually Roth) before putting retirement money into a taxable account.

Opinions vary about which of these to fill first, but I think most would say to put money into traditional 401k before Roth IRA. Whether you fill the 401k full or just partly before putting money into Roth IRA is also a matter of opinion.

(Edited my first answer above.)
BogleFan510
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Re: Maximize after tax returns: question on understanding

Post by BogleFan510 »

cowbman wrote: Sat Nov 21, 2020 2:54 pm
UpperNwGuy wrote: Sat Nov 21, 2020 2:47 pm
cowbman wrote: Sat Nov 21, 2020 1:56 pm DM, I can send a referral. USA
So it's a secret? Why would it be a secret?
It's not, I just want the referral bonuses. Other forums here on BH talk about it.
Getting a referral bonus for opening an account is not earning 3%. You are selling your personal data, or it is a scam, or it is limited to a small amount of money, or it is really an insurance product with lots of contract terms, full of strings. Be real and post it or stop posting false information, like one can get 3% USD on saving accounts or CDs.
Last edited by BogleFan510 on Sat Nov 21, 2020 4:02 pm, edited 2 times in total.
retired@50
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Re: Maximize after tax returns: question on understanding

Post by retired@50 »

BogleFan510 wrote: Sat Nov 21, 2020 3:43 pm
Be real and post it or stop posting false information, like one can get 3% USD on saving accounts or CDs.
Here's one account that pays 3%, on deposits up to $15,000 plus the normal "free" checking account hoops to jump through.

See link: https://www.lmcu.org/personal/banking/c ... -checking/

Regards,
This is one person's opinion. Nothing more.
cowbman
Posts: 231
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Re: Maximize after tax returns: question on understanding

Post by cowbman »

BogleFan510 wrote: Sat Nov 21, 2020 3:43 pm
cowbman wrote: Sat Nov 21, 2020 2:54 pm
UpperNwGuy wrote: Sat Nov 21, 2020 2:47 pm
cowbman wrote: Sat Nov 21, 2020 1:56 pm DM, I can send a referral. USA
So it's a secret? Why would it be a secret?
It's not, I just want the referral bonuses. Other forums here on BH talk about it.
Getting a referral bonus for opening an account is not earning 3%. You are selling your personal data, or it is a scam, or it is limited to a small amount of money, or it is really an insurance product with lots of contract terms, full of strings. Be real and post it or stop posting false information, like one can get 3% USD on saving accounts or CDs.

P.S. I have individual long term munis paying 4-8% YTM, tax free and some older EEs still paying 4% guaranteed, so not really seeking a referral. Happy with my chosen bond funds and positions and a small amount in penalty free Marcus CDs. Was asking to have you put up, or ....
How can you make statements like this when you don't know what it is? It's a FDIC insured account. Some have limits yes, but the referral bonus is separate from the APY.
BogleFan510
Posts: 222
Joined: Tue Aug 04, 2020 2:13 pm

Re: Maximize after tax returns: question on understanding

Post by BogleFan510 »

retired@50 wrote: Sat Nov 21, 2020 3:52 pm
BogleFan510 wrote: Sat Nov 21, 2020 3:43 pm
Be real and post it or stop posting false information, like one can get 3% USD on saving accounts or CDs.
Here's one account that pays 3%, on deposits up to $15,000 plus the normal "free" checking account hoops to jump through.

See link: https://www.lmcu.org/personal/banking/c ... -checking/

Regards,
Requirements
To earn the most on a 3.00% Max Checking account, follow these requirements.

* Direct deposit into your Max Checking account
* Minimum of 10 posted debit card or credit card purchases per month
* Minimum of 4 logins to home banking per month
* Sign up to receive eStatements/eNotices
* Subect to change after account opening.
* $5 membership required.
* Interest not paid on balances over $15,000 (so useless for any decent sized portfolio)
* Fees may reduce earnings.
* Additional requirements apply.

Thems a lot of hoops. Teaser rate, and pretty low wages for a new job logging in and making debit charges.

Lets say I have a 3M retirement, 60/40 portfolio. Thats 1.2M in fixed assets I need to find and this maxes at 15k? Great suggestion. Anyway, this is going off the rails for what OP asked. Will not post again, but fishing for referral bonus here by posting incomplete information is not cool. These accounts are marketing teasers and not a good savings option for a portfolio. Maybe ok for an emergency fund cash position, if you dont mind working for a few peanuts, but that is not the OPs question.
Last edited by BogleFan510 on Tue Nov 24, 2020 12:07 am, edited 1 time in total.
cowbman
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Re: Maximize after tax returns: question on understanding

Post by cowbman »

If you are looking to put $3MM in cash somewhere, you are unlikely to be using savings accounts given the FDIC limits. T-Mobile Money pays 4% APY on the first $3000. Only requirement is transfer $200/mo into the account. Yes, you can immediately move it out too. After the first $3,000, they pay 1% APY.
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grabiner
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Re: Maximize after tax returns: question on understanding

Post by grabiner »

You want to optimize returns and risk, not maximize them. If you want to maximize returns, you shouldn't hold bonds at all. But you have some risk tolerance, so you should decide where to put your bonds to get the best trade-off between return and risk.

If you will retire at a 25% marginal tax rate, then investing $40K in a traditional retirement account or $30K in a Roth account are equivalent; both will have the same after-tax value (the tax-free growth of $30K) if invested the same way. Thus it doesn't matter which one is in stock or bonds. If your options favor one over the other (because of 401(k) choices), that should be the determining factor. If all else is equal, it is slightly better to have bonds in a traditional account, since stocks in a traditional account might lead to RMDs you don't need, or RMDs taxed at a higher rate than you expected, if the stock market booms.

Whether bonds should be in taxable or tax-advantaged depends on your own tax situation. At current yields, I recommend munis in taxable for investors in high tax brackets, or high-tax states if Vanguard has a fund for their state. These investors pay more than the usual 15% on stock dividends and capital gains, but pay no more than anyone else on in-state munis. In moderate brackets, it is much closer.
Wiki David Grabiner
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