Portfolio review: help avoiding bonds in taxable

[Accident Prone]

Emergency funds: yes, cash in checking
Debt: Mortgage (3.5%)
Tax Filing Status: Married Filing Jointly
Tax Rate: 37% Federal, 0% State (5% on interest & dividends)
State of Residence: New Hampshire
Age: 40
Desired Asset allocation: 80% stocks / 20% bonds
Desired International allocation: undecided


Current retirement assets (incl. spouse)

Approx. portfolio: $5M

Taxable
55% Fidelity® Total Market Index Fund (FSKAX) (0.015%)
5% Fidelity® Global ex U.S. Index Fund (FSGGX) (0.055%)
4% Fidelity® Total International Index Fund (FTIHX) (0.06%)
6% Fidelity® U.S. Bond Index Fund (FXNAX) (0.025%)

19% Ally High Yield CD 18-Month (+6.3% if held to Nov, 2024)

Roth IRA
8% Fidelity® U.S. Bond Index Fund (FXNAX) (0.025%)

Trad 401k
2% American Funds 2040 Target Date Retirement Fund® Class R-5E (RHGTX) (0.51%)

Roth 401k
1% American Funds 2040 Target Date Retirement Fund® Class R-5E (RHGTX) (0.51%)

401k fund alternatives being considered:
Fidelity® 500 Index Fund (FXAIX) (0.015%)
Fidelity® Inflation-Protected Bond Index Fund (FIPDX) (0.05%)
Cohen & Steers Real Estate Securities Fund, Inc. Class Institutional (CSDIX) (0.84%) (REITs would further diversify)
Pioneer Bond Fund Class Y (PICYX) (0.44%) (lowest ER diverse bond fund available)

Questions:

1. I'd like to get the bonds out of taxable given my high tax rate, but don't have anywhere obvious to put them. I could swap 401ks to something more bonds heavy to get part of the way there. I could swap to a muni bond fund in taxable. Or maybe my bond target is too high with that CD. What should I do?

2. I'm considering redeeming the CD early and investing in something else. It'll only grow 3.7% (after taxes) in 14 months above the current redemption value. But early redemption just makes problem #1 even bigger. Should I do it?

[steadyosmosis]

Since tax-advantaged accounts combined are 11% of your portfolio, looks like you'll have to hold some bonds in taxable to achieve that desired 20%.
For tax advantages, I also try to hold (almost) zero 'ordinary-income-producing' assets in taxable.
Good luck with your decisions.

[Accident Prone]

Since tax-advantaged accounts combined are 11% of your portfolio, looks like you'll have to hold some bonds in taxable to achieve that desired 20%.

Fair enough. I guess what I'm really aiming to do is minimize the tax implications of holding bonds in taxable while achieving something close to the risk profile of 80/20.

Something like an 'all bonds funds excluding municipal' would be helpful. That would allow me to shift just municipal holdings into taxable. I don't think such a fund exists, but maybe I could approximate it by bundling a few funds?

Are there other portfolio configurations I should be considering?

For tax advantages, I also try to hold (almost) zero 'ordinary-income-producing' assets in taxable.
Good luck with your decisions.

That's the general boglehead advice from what I've been reading. But when it's not possible to achieve my desired ratio while keeping all bonds in tax-advantaged, should I let that influence the ratio? ie. should I shift to 85/15 while in this tax bracket?

I determined my target ratio independant of my tax situation and now it feels wrong not to adjust to it accordingly. But I can't tell how much to adjust or if I'm just trying to over-optimize.

[southernlucky]

Hi op. At your tax rate I too would consider putting all your 401k tax deferred accounts in a low cost, bond index fund (that would also eliminate the more expensive American funds you hold now saving you a small amount of expense each year). But as the earlier poster mentioned you will still need to hold some bonds in taxable to achieve your desired 20% AA. Therefore, you could exchange your taxable bonds for a muni bond fund with comparable intermediate term duration (5-7 yrs). If they happen to be at a capital loss due to rising interest rates that is a bonus. At 37% marginal tax rate and likely 3.8% NIIT tax too munis are financially better for you in the end. Doing those 2 things will get you to 17% bonds. I would then consider exchanging most of the CD to a stock index fund to get to your desired AA. However, you don’t have to do all this right away you can wait till the CD comes due and use new contributions to help manage your AA.

Great job on accumulating your nest egg so far and having a simple portfolio of funds.

[Accident Prone]

Thanks, very helpful.

I wasn't aware of NIIT, so thanks for more good news This is the first year I've invested in bonds; still learning.

For my 401k, I have PICYX and FIPDX as my best bond fund choices:
Fidelity® Inflation-Protected Bond Index Fund (FIPDX) (0.05%)
Pioneer Bond Fund Class Y (PICYX) (0.44%)

If I'm going for low-ER, sounds like FIPDX is the one to go with. The PICYX ER isn't much better than the American target date funds.

For muni bonds in taxable, I'm leaning towards Fidelity ® Tax-Free Bond Fund (FTABX) (0.25%). Not the lowest ER, but I'm worried about the relatively low net assets in Fidelity® Municipal Bond Index Fund (FMBIX) (0.07%). I guess that caused some index tracking issues in 2020. Also considering Vanguard Tax-Exempt Bond ETF (VTEB) (0.05%), but still learning about ETF vs Mutual Fund trade-off.

[JayDee37]

Here's another vote for moving to all bonds in your traditional retirement accounts (I'd probably go with the Fidelity TIPS fund), and to Munis in taxable. I have VTEB in my taxable account, as well as some state-specific Muni funds for CA (you can research whether there are any state-specific Munis for NH at any of the good brokerages).

You should definitely consider I bonds as a way to boost your tax-deferred bond holdings since you don't have adequate space in your traditional retirement accounts. They are good for that purpose. You purchase I bonds from TreasuryDirect with post-tax dollars, but the interest on them is deferred until redemption or at maturity in 30 years, whichever comes first.

[CenTexan]

Have you evaluated VWALX (Vanguard High-Yield Tax-Exempt Admiral)? Does New Hampshire claim 5% of interest/dividends earned on tax-free bond funds?

T. Rowe Price has an essential dupicate (in performance) of the above Vanguard fund - PRFHX (T. Rowe Price Tax-Free High Yield)

[Accident Prone]

Couldn't find any NH muni bond funds. NHMUX doesn't appear to exist anymore. Seems like I could buy numerous individual NH muni bonds through Fidelity, but I think that might start getting a little complicated. Though buying a bond from my own city does sound fun for some reason.

The NH I&D tax would still apply to the tax-free bond funds. Found this worksheet that breaks it down. Not many ways to avoid it, but its got me thinking about superfunding a 529 to move more bond investments out of taxable.

Haven't looked at VWALX before, but seems like I can't get it in Fidelity (trying to keep everything there for simplicity). Looks like I do have access to non-admiral version VWAHX. T. Rowe Price Tax-Free High Yield Fund (PRFHX) (0.67%) has a worse ER compared to the Vanguard funds. VWAHX does seem like the it hits the sweet spot for performance + low ER. Thanks for getting me to look at more alternatives.

And yeah, it does seem like maxing out my I bonds every year would make a lot of sense. Great advice.

[southernlucky]

Hi op. I know nothing about them but iShares has its Muni bond ETF ticker MUN and their short term flavor SUB. They apparently have ~15 muni bond funds in all. Below are first two.

https://www.ishares.com/us/products/239 ... i-bond-etf

https://www.ishares.com/us/products/239 ... i-bond-etf