3 Fund Portfolio in Taxable Account (what bond fund)?

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eggplantbbq123
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3 Fund Portfolio in Taxable Account (what bond fund)?

Post by eggplantbbq123 »

Hello everyone, first time poster here! Really love this website and was hoping to get some portfolio advice. For background, I am 23, no debt, and have done all the basics like set up an emergency fund, retirement (target date fund), etc.

I would like to save for a down payment on a house, and since I don't anticipate needing this money for the next 10 years or so, I am going to invest it in my taxable account at Fidelity. I was planning on setting it up as a 3 fund portfolio to keep things really simple. So, FSKAX (Fidelity Total Market Index Fund); FTIHX (Fidelity Total Intl Index Fund); and FXNAX (Fidelity US Bond Index Fund).

However, I was reading the Bogleheads' Guide to the 3 Fund Portfolio and it says that Total Bond Market Funds are not tax-efficient. I've read some other threads on here that say you can put the bond fund in a tax-advantaged account and keep the 2 equity funds in your taxable, but I would really like to have everything within my taxable account so it's easier for me to understand and manage. Is there a good bond index fund to put in a taxable account? The book says "...consider a high quality tax-exempt intermediate-term bond fund such as Vanguard's Tax-Exempt Intermediate-Term Bond Fund (VWIUX), for your taxable account." I'm not sure what the Fidelity equivalent of that is!

I live in California and if I have calculated correctly, my federal tax rate is 12% (I make ~$38,000 before tax).

Thank you in advance! :happy
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retired@50
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Re: 3 Fund Portfolio in Taxable Account (what bond fund)?

Post by retired@50 »

eggplantbbq123 wrote: Tue Sep 14, 2021 5:01 pm Hello everyone, first time poster here! Really love this website and was hoping to get some portfolio advice. For background, I am 23, no debt, and have done all the basics like set up an emergency fund, retirement (target date fund), etc.

I would like to save for a down payment on a house, and since I don't anticipate needing this money for the next 10 years or so, I am going to invest it in my taxable account at Fidelity. I was planning on setting it up as a 3 fund portfolio to keep things really simple. So, FSKAX (Fidelity Total Market Index Fund); FTIHX (Fidelity Total Intl Index Fund); and FXNAX (Fidelity US Bond Index Fund).

However, I was reading the Bogleheads' Guide to the 3 Fund Portfolio and it says that Total Bond Market Funds are not tax-efficient. I've read some other threads on here that say you can put the bond fund in a tax-advantaged account and keep the 2 equity funds in your taxable, but I would really like to have everything within my taxable account so it's easier for me to understand and manage. Is there a good bond index fund to put in a taxable account? The book says "...consider a high quality tax-exempt intermediate-term bond fund such as Vanguard's Tax-Exempt Intermediate-Term Bond Fund (VWIUX), for your taxable account." I'm not sure what the Fidelity equivalent of that is!

I live in California and if I have calculated correctly, my federal tax rate is 12% (I make ~$38,000 before tax).

Thank you in advance! :happy
Welcome to the forum. :happy

If you expect to stay in the 12% bracket, or in that general range, then you can safely use a regular taxable bond fund (like FXNAX) in your taxable account.

If you were in a higher tax bracket, like 24% or above, and living in California, then using the Vanguard California municipal bond funds would make sense. (VCAIX / VCITX). From what I know, Fidelity doesn't come close to matching Vanguard in this particular area. Vanguard has much lower expense ratios.

Regards,
This is one person's opinion. Nothing more.
UpperNwGuy
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Re: 3 Fund Portfolio in Taxable Account (what bond fund)?

Post by UpperNwGuy »

I would go with either a treasury bond ETF like VGIT or SCHF or a municipal bond ETF like VTEB or MUB.
Topic Author
eggplantbbq123
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Re: 3 Fund Portfolio in Taxable Account (what bond fund)?

Post by eggplantbbq123 »

retired@50 wrote: Tue Sep 14, 2021 7:12 pm
Welcome to the forum. :happy

If you expect to stay in the 12% bracket, or in that general range, then you can safely use a regular taxable bond fund (like FXNAX) in your taxable account.

If you were in a higher tax bracket, like 24% or above, and living in California, then using the Vanguard California municipal bond funds would make sense. (VCAIX / VCITX). From what I know, Fidelity doesn't come close to matching Vanguard in this particular area. Vanguard has much lower expense ratios.

Regards,
Hi there, thank you so much for the reply! I thought this might be the case since I'm in such a low tax bracket, but I was not sure. For now, I expect to stay in the 12% bracket so looks like I will get FXNAX.

Can I ask one more question - if I get bumped up to the 22% bracket, can I still safely use FXNAX? I know you mentioned 24% but I'm not sure about 22%. Thanks!
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retired@50
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Re: 3 Fund Portfolio in Taxable Account (what bond fund)?

Post by retired@50 »

UpperNwGuy wrote: Tue Sep 14, 2021 7:32 pm I would go with either a treasury bond ETF like VGIT or SCHF or a municipal bond ETF like VTEB or MUB.
I'm assuming you didn't mean to recommend an international stock fund here (SCHF) did you?

Probably a typo...?

Source: https://www.schwabassetmanagement.com/products/schf

Regards,
This is one person's opinion. Nothing more.
UpperNwGuy
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Re: 3 Fund Portfolio in Taxable Account (what bond fund)?

Post by UpperNwGuy »

retired@50 wrote: Tue Sep 14, 2021 7:41 pm
UpperNwGuy wrote: Tue Sep 14, 2021 7:32 pm I would go with either a treasury bond ETF like VGIT or SCHF or a municipal bond ETF like VTEB or MUB.
I'm assuming you didn't mean to recommend an international stock fund here (SCHF) did you?

Probably a typo...?

Source: https://www.schwabassetmanagement.com/products/schf

Regards,
Ooops.... I meant SCHR.
Ferdinand2014
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Re: 3 Fund Portfolio in Taxable Account (what bond fund)?

Post by Ferdinand2014 »

Id go with FUAMX (Fidelity Intermediate Treasury Bond Index Fund). All U.S. Treasury's so it is state tax deductible and similar duration to FXNAX. It is very low cost as well at 0.03
Last edited by Ferdinand2014 on Tue Sep 14, 2021 7:47 pm, edited 1 time in total.
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UpperNwGuy
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Re: 3 Fund Portfolio in Taxable Account (what bond fund)?

Post by UpperNwGuy »

eggplantbbq123 wrote: Tue Sep 14, 2021 7:38 pm
retired@50 wrote: Tue Sep 14, 2021 7:12 pm
Welcome to the forum. :happy

If you expect to stay in the 12% bracket, or in that general range, then you can safely use a regular taxable bond fund (like FXNAX) in your taxable account.

If you were in a higher tax bracket, like 24% or above, and living in California, then using the Vanguard California municipal bond funds would make sense. (VCAIX / VCITX). From what I know, Fidelity doesn't come close to matching Vanguard in this particular area. Vanguard has much lower expense ratios.

Regards,
Hi there, thank you so much for the reply! I thought this might be the case since I'm in such a low tax bracket, but I was not sure. For now, I expect to stay in the 12% bracket so looks like I will get FXNAX.

Can I ask one more question - if I get bumped up to the 22% bracket, can I still safely use FXNAX? I know you mentioned 24% but I'm not sure about 22%. Thanks!
FXNAX is fine in the 22% bracket.
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retired@50
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Re: 3 Fund Portfolio in Taxable Account (what bond fund)?

Post by retired@50 »

eggplantbbq123 wrote: Tue Sep 14, 2021 7:38 pm
retired@50 wrote: Tue Sep 14, 2021 7:12 pm
Welcome to the forum. :happy

If you expect to stay in the 12% bracket, or in that general range, then you can safely use a regular taxable bond fund (like FXNAX) in your taxable account.

If you were in a higher tax bracket, like 24% or above, and living in California, then using the Vanguard California municipal bond funds would make sense. (VCAIX / VCITX). From what I know, Fidelity doesn't come close to matching Vanguard in this particular area. Vanguard has much lower expense ratios.

Regards,
Hi there, thank you so much for the reply! I thought this might be the case since I'm in such a low tax bracket, but I was not sure. For now, I expect to stay in the 12% bracket so looks like I will get FXNAX.

Can I ask one more question - if I get bumped up to the 22% bracket, can I still safely use FXNAX? I know you mentioned 24% but I'm not sure about 22%. Thanks!
The best way to answer the "Municipal versus Taxable" bond question is to get familiar with the concept of "taxable equivalent yield". There are calculators that can help with this task. See link: https://www.calcxml.com/calculators/inc11?skn=

The main point is to figure out how much interest you actually get to keep, and how much you'll surrender to the taxing authorities you're subject to. In this case California and the Federal Government.

You'll also need to try to compare bond funds with similar levels of risk, which can be a challenge sometimes. Try to use funds with a similar duration. The duration is a "bond statistic" that should be mentioned on the website of the fund in question.

See link for Vanguard CA Intermediate Fund: https://investor.vanguard.com/mutual-fu ... olio/vcaix

Regards,
This is one person's opinion. Nothing more.
Topic Author
eggplantbbq123
Posts: 6
Joined: Tue Sep 14, 2021 4:26 pm

Re: 3 Fund Portfolio in Taxable Account (what bond fund)?

Post by eggplantbbq123 »

UpperNwGuy wrote: Tue Sep 14, 2021 7:32 pm I would go with either a treasury bond ETF like VGIT or SCHF or a municipal bond ETF like VTEB or MUB.
Interesting, I haven't looked much into ETFs but thank you for letting me know! I'll do some more research on this :happy (And I saw your edit about SCHR!).
Topic Author
eggplantbbq123
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Joined: Tue Sep 14, 2021 4:26 pm

Re: 3 Fund Portfolio in Taxable Account (what bond fund)?

Post by eggplantbbq123 »

Ferdinand2014 wrote: Tue Sep 14, 2021 7:46 pm Id go with FUAMX (Fidelity Intermediate Treasury Bond Index Fund). All U.S. Treasury's so it is state tax deductible and similar duration to FXNAX. It is very low cost as well at 0.03
Ah, thanks for the advice! I used to have FUAMX but sold recently since I'm reconfiguring my portfolio. But this might be a better alternative to FXNAX. I'll look into it - thanks again :happy
Topic Author
eggplantbbq123
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Joined: Tue Sep 14, 2021 4:26 pm

Re: 3 Fund Portfolio in Taxable Account (what bond fund)?

Post by eggplantbbq123 »

UpperNwGuy wrote: Tue Sep 14, 2021 7:47 pm
eggplantbbq123 wrote: Tue Sep 14, 2021 7:38 pm
retired@50 wrote: Tue Sep 14, 2021 7:12 pm
Welcome to the forum. :happy

If you expect to stay in the 12% bracket, or in that general range, then you can safely use a regular taxable bond fund (like FXNAX) in your taxable account.

If you were in a higher tax bracket, like 24% or above, and living in California, then using the Vanguard California municipal bond funds would make sense. (VCAIX / VCITX). From what I know, Fidelity doesn't come close to matching Vanguard in this particular area. Vanguard has much lower expense ratios.

Regards,
Hi there, thank you so much for the reply! I thought this might be the case since I'm in such a low tax bracket, but I was not sure. For now, I expect to stay in the 12% bracket so looks like I will get FXNAX.

Can I ask one more question - if I get bumped up to the 22% bracket, can I still safely use FXNAX? I know you mentioned 24% but I'm not sure about 22%. Thanks!
FXNAX is fine in the 22% bracket.
Okay, thank you! Taxes are so annoying :?
Topic Author
eggplantbbq123
Posts: 6
Joined: Tue Sep 14, 2021 4:26 pm

Re: 3 Fund Portfolio in Taxable Account (what bond fund)?

Post by eggplantbbq123 »

retired@50 wrote: Tue Sep 14, 2021 7:48 pm
The best way to answer the "Municipal versus Taxable" bond question is to get familiar with the concept of "taxable equivalent yield". There are calculators that can help with this task. See link: https://www.calcxml.com/calculators/inc11?skn=

The main point is to figure out how much interest you actually get to keep, and how much you'll surrender to the taxing authorities you're subject to. In this case California and the Federal Government.

You'll also need to try to compare bond funds with similar levels of risk, which can be a challenge sometimes. Try to use funds with a similar duration. The duration is a "bond statistic" that should be mentioned on the website of the fund in question.

See link for Vanguard CA Intermediate Fund: https://investor.vanguard.com/mutual-fu ... olio/vcaix

Regards,
Thanks for all the info! I definitely need to read up on this as I'm not great with tax stuff haha. Really appreciate the help!!
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