Bonds in Taxable Account - any other options?

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poprocks
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Bonds in Taxable Account - any other options?

Post by poprocks »

Hey all -

Age 37, living in Oregon, in high paying job the last 7 years. My "problem" is that I'm out of space in my 401k to increase my bond allocation.

Current allocation:
VTSAX: $631k (100% in taxable w/some in HSA)
VTIAX: $156k (100% taxable account)
VBTLX: $282k (100% of my 401k)
Cash: $15k
Home (paid off): $426k
Net worth: $1.5M

I want to increase my bond allocation, but I have no way to do that unless I buy bonds in my taxable Vanguard account. I know about iBonds, and will be buying my $10k there. But I'm usually investing between $5k-$10k/month. Is there a tax efficient way to buy bonds within my taxable account without getting hit with the tax on dividends?

I was looking at California tax funds like VCAIX, but do those tax benefits only help if you actually live in California?

Just unsure how to increase my bond allocation at this point now that my 401k is 100% bonds already.

Thanks all
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retired@50
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Re: Bonds in Taxable Account - any other options?

Post by retired@50 »

poprocks wrote: Thu Sep 22, 2022 2:19 pm I was looking at California tax funds like VCAIX, but do those tax benefits only help if you actually live in California?

Just unsure how to increase my bond allocation at this point now that my 401k is 100% bonds already.

Thanks all
If you live in Oregon, then don't use the California fund. It's for CA residents.

You could consider VTEAX or VTEB or VMLTX instead. These are nationally focused tax-exempt bond funds.

You'd likely still have to pay Oregon state income taxes on the interest, but it would be exempt from Federal taxes.

Regards,
This is one person's opinion. Nothing more.
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grabiner
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Re: Bonds in Taxable Account - any other options?

Post by grabiner »

Another option for your taxable bond holdings is Treasury bonds (including TIPS, if appropriate). They are exempt from OR state tax, and since they are the least risky bonds, the federal tax is lower than on other bonds. And since they are the least risky bonds, you need less in Treasury bonds to get the same risk reduction, or you could mimic Total Bond Market by holding a Treasury fund in your taxable account and a corporate fund in your 401(k).

Whether this makes sense depends on your tax situation. If you are in the 32% tax bracket, your marginal tax rate on Treasury funds would be 35.8% including Net Investment Income tax, while your marginal tax rate on muni funds would be your OR tax rate.
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tutu-turtle
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Re: Bonds in Taxable Account - any other options?

Post by tutu-turtle »

Most folks have more funds on retirement accounts, how did you manage to have more in taxable?

Also you could use Roth IRAs for you and your spouse as an extra space of tax advantage accounts.
PaunchyPirate
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Re: Bonds in Taxable Account - any other options?

Post by PaunchyPirate »

tutu-turtle wrote: Sat Sep 24, 2022 5:17 pm Most folks have more funds on retirement accounts, how did you manage to have more in taxable?

Also you could use Roth IRAs for you and your spouse as an extra space of tax advantage accounts.
My taxable account is more than double the size of my IRA. It happens.
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retired@50
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Re: Bonds in Taxable Account - any other options?

Post by retired@50 »

PaunchyPirate wrote: Sat Sep 24, 2022 5:47 pm
tutu-turtle wrote: Sat Sep 24, 2022 5:17 pm Most folks have more funds on retirement accounts, how did you manage to have more in taxable?

Also you could use Roth IRAs for you and your spouse as an extra space of tax advantage accounts.
My taxable account is more than double the size of my IRA. It happens.
Same here. I think taxable accounts tend to dominate retirement accounts when one has a high savings rate, combined with limited dollars that can be dedicated to 401k and Roth. In one of my jobs I was considered a HCE, which put an upper limit on my 401k contribution that was below what the IRS would generally allow.

Regards,
This is one person's opinion. Nothing more.
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William Million
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Re: Bonds in Taxable Account - any other options?

Post by William Million »

Retirement accounts (other than Roth IRAs) are over-rated and you're often better off with funds in ordinary taxable accounts. When you withdraw, you pay ordinary income tax rates. In an ordinary account, you pay the capital gains rate.
lazynovice
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Re: Bonds in Taxable Account - any other options?

Post by lazynovice »

tutu-turtle wrote: Sat Sep 24, 2022 5:17 pm Most folks have more funds on retirement accounts, how did you manage to have more in taxable?

Also you could use Roth IRAs for you and your spouse as an extra space of tax advantage accounts.
OP is 37, so he is limited to 19,500 in 401k and 6,000 in Roth per year. No limit on what he can put in a taxable account. And his entire 401k is bonds which grow very slowly while his taxable account is in equities which (not so much this year) grow very quickly. It tends to happen to high earners who follow the tax efficient placement guidance in this sub- unless you have access to a mega back door Roth.
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grabiner
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Re: Bonds in Taxable Account - any other options?

Post by grabiner »

William Million wrote: Sun Sep 25, 2022 12:44 pm Retirement accounts (other than Roth IRAs) are over-rated and you're often better off with funds in ordinary taxable accounts. When you withdraw, you pay ordinary income tax rates. In an ordinary account, you pay the capital gains rate.
This is misleading. A dollar in a traditional IRA/401(k) may not be as good as a dollar in a taxable account, because you will lose more to taxes on the dollar in the traditional account. However, this isn't the choice you have. If you are in a 32% tax bracket, which I believe the OP is, then you can use $6800 in cash to invest $6800 in your taxable account, or $10,000 in a 401(k). And that $10,000 in a 401(k) is as good as $6800 growing tax-free if you withdraw the money in a 32% bracket, or even better if you retire in a lower bracket.

Whether traditional or Roth retirement accounts are better depends on your tax situation, but it is very rare for a taxable account to be better than either one for retirement savings. (One possible situation: you will be stuck with a high-cost 403(b) for a very long time.)
Wiki David Grabiner
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