Need Tax Efficiency in Taxable Account
Need Tax Efficiency in Taxable Account
I currently own two funds in a Vanguard taxable brokerage:
-Vanguard Federal Money Market Fund (VMFXX) - consists of EF plus major expenses anticipated in the 3-5 years (new car, home repairs, etc.)
-Vanguard Total World Index Fund - (VTWAX)
-Portfolio compositions: 60/40 (VMFXX/VTWAX) - I do not pay state income tax (Washington)
Without increasing my exposure to equities, I want to explore more tax-efficient options for fixed-income. Here are my thoughts:
Vanguard High-Yield Tax Exempt Fund Investor Shares (VWAHX) - The taxable equivalent yield makes this advantageous BUT it introduces more risk than VMFXX.
Vanguard Tax-Exempt Bond Fund Admiral Shares (VTEAX) - Again, the taxable equivalent yield is favorable but with more risk.
Alpha Architect 1-3 Month Box ETF (BOXX) - Takes interest and converts it to LTCG....allegedly. This forum has identified possible tax problems with the strategy. Plus, I do not understand box spreads or the "straddle" methodology this ETF uses.
I am tentatively considering moving my EF to BOXX and splitting the remainder of my fixed income allocation to VTEAX, VWAHX, and VMFXX. Using VMFXX as an anchor, I could get significantly more tax efficiency with the other funds.
Thoughts?
-Vanguard Federal Money Market Fund (VMFXX) - consists of EF plus major expenses anticipated in the 3-5 years (new car, home repairs, etc.)
-Vanguard Total World Index Fund - (VTWAX)
-Portfolio compositions: 60/40 (VMFXX/VTWAX) - I do not pay state income tax (Washington)
Without increasing my exposure to equities, I want to explore more tax-efficient options for fixed-income. Here are my thoughts:
Vanguard High-Yield Tax Exempt Fund Investor Shares (VWAHX) - The taxable equivalent yield makes this advantageous BUT it introduces more risk than VMFXX.
Vanguard Tax-Exempt Bond Fund Admiral Shares (VTEAX) - Again, the taxable equivalent yield is favorable but with more risk.
Alpha Architect 1-3 Month Box ETF (BOXX) - Takes interest and converts it to LTCG....allegedly. This forum has identified possible tax problems with the strategy. Plus, I do not understand box spreads or the "straddle" methodology this ETF uses.
I am tentatively considering moving my EF to BOXX and splitting the remainder of my fixed income allocation to VTEAX, VWAHX, and VMFXX. Using VMFXX as an anchor, I could get significantly more tax efficiency with the other funds.
Thoughts?
Re: Need Tax Efficiency in Taxable Account
The most tax efficient option for fixed income in a taxable account is absolutely no fixed income in a taxable account.
What is wrong with making your taxable account 100% VTWAX / VT?
Put your cash in a tax-deferred account: https://www.bogleheads.org/wiki/Placing ... ed_account
What is wrong with making your taxable account 100% VTWAX / VT?
Put your cash in a tax-deferred account: https://www.bogleheads.org/wiki/Placing ... ed_account
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Re: Need Tax Efficiency in Taxable Account
+1 to holding tax-efficient equities only in Taxable, fixed income on tax deferred
If you are subject to state income taxes and want to continue holding cash in Taxable, use VUSXX rather than VMFXX.
If you are subject to state income taxes and want to continue holding cash in Taxable, use VUSXX rather than VMFXX.
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Re: Need Tax Efficiency in Taxable Account
Yes, I do what livesoft suggested.
My taxable account is 100% VTI.
Saves me a lot of unnecessary taxes, both federal and state.
My taxable account is 100% VTI.
Saves me a lot of unnecessary taxes, both federal and state.
Credibility ... some posters have it.
Re: Need Tax Efficiency in Taxable Account
The problem with this approach is that if you have an emergency, your safe assets are stuck in tax deferred. You can’t sell them without penalty, so you’re forced to sell your equities. This is a problem if a downturn happens when you have an emergency. And it defeats the purpose of having bonds at all.HomeStretch wrote: Fri Jan 31, 2025 5:52 am +1 to holding tax-efficient equities only in Taxable, fixed income on tax deferred
If you are subject to state income taxes and want to continue holding cash in Taxable, use VUSXX rather than VMFXX.
Re: Need Tax Efficiency in Taxable Account
I suspect you didn't read the linked bogleheads wiki article that I had in my previous comment. Or if you read it, then you didn't understand it.rockstar wrote: Fri Jan 31, 2025 8:13 amThe problem with this approach is that if you have an emergency, your safe assets are stuck in tax deferred. You can’t sell them without penalty, so you’re forced to sell your equities. This is a problem if a downturn happens when you have an emergency. And it defeats the purpose of having bonds at all.

Here's a post from 2008 that also explains it: viewtopic.php?t=13712
Re: Need Tax Efficiency in Taxable Account
I’ve read it before. You’re still selling equities in a downturn if you need cash. Folks here are always worried about the market dropping 50%. Well, let’s say the market drops 50%, and you lose your job. Does it make sense to sell equities to save a little on taxes by putting all of your bonds in tax deferred?livesoft wrote: Fri Jan 31, 2025 8:26 amI suspect you didn't read the linked bogleheads wiki article that I had in my previous comment. Or if you read it, then you didn't understand it.rockstar wrote: Fri Jan 31, 2025 8:13 amThe problem with this approach is that if you have an emergency, your safe assets are stuck in tax deferred. You can’t sell them without penalty, so you’re forced to sell your equities. This is a problem if a downturn happens when you have an emergency. And it defeats the purpose of having bonds at all.
Here's a post from 2008 that also explains it: viewtopic.php?t=13712
Re: Need Tax Efficiency in Taxable Account
One is still buying equities in a downtown [downturn] if you need cash. That's the whole point. Once again: The whole point is that you have the same number of shares of your equities before and after, but they are distributed in different accounts now.rockstar wrote: Fri Jan 31, 2025 9:43 amI’ve read it before. You’re still selling equities in a downturn if you need cash.
Selling equities in taxable at a loss has a tax benefit, too.
Last edited by livesoft on Fri Jan 31, 2025 11:56 am, edited 1 time in total.
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Re: Need Tax Efficiency in Taxable Account
Read the links livesoft posted again. Money is fungible. Reducing the amount of unnecessary taxes paid is good.
Re: Need Tax Efficiency in Taxable Account
What livesoft and others said. Wrapping my head around the fungibility of money has been one of the most important things I’ve gained from this forum.
OP - you didn’t mention what sort of space you have in tax-deferred. If it’s already filled with fixed income, then you might consider a MYGA for taxable. It’s an approach I’m considering, but I’m letting the tax tail wag me at the moment. I need to get over that.
Be well.
OP - you didn’t mention what sort of space you have in tax-deferred. If it’s already filled with fixed income, then you might consider a MYGA for taxable. It’s an approach I’m considering, but I’m letting the tax tail wag me at the moment. I need to get over that.
Be well.
Re: Need Tax Efficiency in Taxable Account
Doesn't this assume that a dollar in taxable is the same as a dollar in tax deferred?
How does this change if at all if instead of a tax deferred account one uses Roth?
I took me several reads to get my mind around this too. The tax dog/tail came to mind here for me too.
How does this change if at all if instead of a tax deferred account one uses Roth?
I took me several reads to get my mind around this too. The tax dog/tail came to mind here for me too.
"Plans are useless; planning is indispensable.” (Dwight Eisenhower) |
"Man plans, God laughs" (Yiddish proverb)
- medchemguy
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Re: Need Tax Efficiency in Taxable Account
What livesoft and others say is true, to a point. There are caveats, perhaps situation specific, with this approach that should be considered if you need to access cash in a taxable account. It can get a little complicated. But if the only thing you consider is overall AA, it is ideal. That said, and in the parlance of thermodynamics, this approach to managing cash is not the equivalent of a financial Carnot cycle.livesoft wrote: Fri Jan 31, 2025 9:46 amOne is still buying equities in a downtown if you need cash. That's the whole point. Once again: The whole point is that you have the same number of shares of your equities before and after, but they are distributed in different accounts now.rockstar wrote: Fri Jan 31, 2025 9:43 amI’ve read it before. You’re still selling equities in a downturn if you need cash.
Selling equities in taxable at a loss has a tax benefit, too.
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Re: Need Tax Efficiency in Taxable Account
To OP:
If you don't want to rebalance your whole portfolio to reflect the AA model some are prescribing, replacing non-tax-exempt bonds with tax-exempt holdings is the simplest, single-step, within-same-account way to reduce tax exposure. You take on a bit more risk, but this is the trade-off: nothing is free.
Also, whether the effective (tax-equivalent) bond yields surpass your break-even point depends upon your tax bracket.
If you don't want to rebalance your whole portfolio to reflect the AA model some are prescribing, replacing non-tax-exempt bonds with tax-exempt holdings is the simplest, single-step, within-same-account way to reduce tax exposure. You take on a bit more risk, but this is the trade-off: nothing is free.
Also, whether the effective (tax-equivalent) bond yields surpass your break-even point depends upon your tax bracket.
Re: Need Tax Efficiency in Taxable Account
I can't open original Livesoft's post. I'd like to better understand.
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Re: Need Tax Efficiency in Taxable Account
Look here of an explanation: https://www.bogleheads.org/wiki/Placing ... ed_accountdperkins wrote: Fri Jan 31, 2025 12:48 pm I can't open original Livesoft's post. I'd like to better understand.
Re: Need Tax Efficiency in Taxable Account
I would stick with what you have. The S&P 500 index might be slightly more efficient than Total World, but probably not worth changing.
There is a small cost for keeping some relatively safe assets.
If the markets drop 50-60% (people forget they do), then all stocks in taxable isn't very safe.
I wouldn't switch to the slightly riskier tax-exempt funds either.
There is a small cost for keeping some relatively safe assets.
If the markets drop 50-60% (people forget they do), then all stocks in taxable isn't very safe.
I wouldn't switch to the slightly riskier tax-exempt funds either.
Last edited by bloom2708 on Fri Jan 31, 2025 4:07 pm, edited 2 times in total.
Re: Need Tax Efficiency in Taxable Account
If the market drops 50-60%, then putting stocks in tax-advantaged will NOT prevent them from dropping in those accounts. That is, stocks in taxable or tax-deferred or Roth isn't very safe.bloom2708 wrote: Fri Jan 31, 2025 1:24 pmIf the markets drop 50-60% (people forget they do), then all stocks in taxable isn't very safe.
By the same token, cash in tax-deferred or Roth or taxable will not drop if equities drop.
So asset location is not really affected by what the stock market does or doesn't do. However, taxes are definitely affected by asset location.
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Re: Need Tax Efficiency in Taxable Account
You should consider the fact that Vanguard Total World is not eligible for the foreign tax credit, even though the fund pays significant foreign taxes. That is not a negligible impact. If you replaced it with Vanguard Total International and Vanguard Total Stock Market, then you would be eligible to claim the foreign tax credit on foreign taxes paid by Vanguard Total International. Of course you have to consider the tax effect from selling Total World.
Re: Need Tax Efficiency in Taxable Account
People in their 30-40s will have a difficult time spending fixed money from a Trad IRA or 401k (10% penalty or loan from 401k). Using Roth dollars early means they can't grow. I can't recommend putting fixed in Roth. That leaves Trad IRA/401k/403b or Taxable. SEPP/72T in mid 50s isn't a bad idea.livesoft wrote: Fri Jan 31, 2025 2:13 pmIf the market drops 50-60%, then putting stocks in tax-advantaged will NOT prevent them from dropping in those accounts. That is, stocks in taxable or tax-deferred or Roth isn't very safe.bloom2708 wrote: Fri Jan 31, 2025 1:24 pmIf the markets drop 50-60% (people forget they do), then all stocks in taxable isn't very safe.
By the same token, cash in tax-deferred or Roth or taxable will not drop if equities drop.
So asset location is not really affected by what the stock market does or doesn't do. However, taxes are definitely affected by asset location.
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Re: Need Tax Efficiency in Taxable Account
The light-bulb may yet come on.bloom2708 wrote: Fri Jan 31, 2025 4:10 pmPeople in their 30-40s will have a difficult time spending fixed money from a Trad IRA or 401k (10% penalty or loan from 401k). Using Roth dollars early means they can't grow. I can't recommend putting fixed in Roth. That leaves Trad IRA/401k/403b or Taxable. SEPP/72T in mid 50s isn't a bad idea.livesoft wrote: Fri Jan 31, 2025 2:13 pm
If the market drops 50-60%, then putting stocks in tax-advantaged will NOT prevent them from dropping in those accounts. That is, stocks in taxable or tax-deferred or Roth isn't very safe.
By the same token, cash in tax-deferred or Roth or taxable will not drop if equities drop.
So asset location is not really affected by what the stock market does or doesn't do. However, taxes are definitely affected by asset location.
Credibility ... some posters have it.
Re: Need Tax Efficiency in Taxable Account
Sigh. Nobody has said to remove fixed money from a Trad IRA or 401k or even a Roth IRA in this thread. No penalty would ever apply.bloom2708 wrote: Fri Jan 31, 2025 4:10 pmPeople in their 30-40s will have a difficult time spending fixed money from a Trad IRA or 401k (10% penalty or loan from 401k). Using Roth dollars early means they can't grow. I can't recommend putting fixed in Roth. That leaves Trad IRA/401k/403b or Taxable. SEPP/72T in mid 50s isn't a bad idea.
@steadyosmosis, the light-bulb has not come on yet.
Re: Need Tax Efficiency in Taxable Account
Fine. You have $200k in taxable. It drops to $100k. You need to spend $150k for a house purchase.livesoft wrote: Fri Jan 31, 2025 4:50 pmSigh. Nobody has said to remove fixed money from a Trad IRA or 401k or even a Roth IRA in this thread. No penalty would ever apply.bloom2708 wrote: Fri Jan 31, 2025 4:10 pmPeople in their 30-40s will have a difficult time spending fixed money from a Trad IRA or 401k (10% penalty or loan from 401k). Using Roth dollars early means they can't grow. I can't recommend putting fixed in Roth. That leaves Trad IRA/401k/403b or Taxable. SEPP/72T in mid 50s isn't a bad idea.
@steadyosmosis, the light-bulb has not come on yet.
Where do you get $50k? 401k loan? Roth IRA contribution?
I think most people have taxable money to fund nearer/closer term purchases. It is the closest money to be spent. Ours sure is.
If you don't need to ever spend any money, then it really doesn't matter where it is. Money is usually meant to be spent.
Re: Need Tax Efficiency in Taxable Account
I like the contrived scenario, but many people would re-think a house purchase if stock markets dropped 50%. Even so the Bogleheads.org wiki article discusses the scenario.bloom2708 wrote: Fri Jan 31, 2025 4:55 pmFine. You have $200k in taxable. It drops to $100k. You need to spend $150k for a house purchase.
Where do you get $50k? 401k loan? Roth IRA contribution? .
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Re: Need Tax Efficiency in Taxable Account
Agreed.livesoft wrote: Fri Jan 31, 2025 5:04 pmI like the contrived scenario, but many people would re-think a house purchase if stock markets dropped 50%. Even so the Bogleheads.org wiki article discusses the scenario.bloom2708 wrote: Fri Jan 31, 2025 4:55 pmFine. You have $200k in taxable. It drops to $100k. You need to spend $150k for a house purchase.
Where do you get $50k? 401k loan? Roth IRA contribution? .
FWIW, I've been sitting on a large chunk in cash in taxable ($0.5M+, VUSXX) for about a year with the intent to buy a property when one becomes available that I like. When it does, that cash will be combined with additional $ coming from the sale of taxable equities to fund the purchase. This will be followed by a portfolio rebalance with an increase in equities in tax deferred. So a hybrid version of the discussed approach.
If the market were to drop 20% I'd probably still move forward if I found something I really liked. If the market drops 30%+, I'd likely hold off on the property purchase and I'd dump all that cash into equities. And depending on the resulting AA balance, maybe even free up some additional $ from bonds to invest in equities as well.
The discussed approach in this thread is not restricted to a binary choice of all or none.
One has to make decisions that work for them, and of course, without the benefit of hindsight. There ain't no crystal ball.
Re: Need Tax Efficiency in Taxable Account
This is true if the overall value of the taxable account can afford the 50% or so drop in equities and still be enough for its intended purpose. If it cannot, then it makes sense to put fixed income of some sort in taxable.livesoft wrote: Fri Jan 31, 2025 9:46 amOne is still buying equities in a downtown [downturn] if you need cash. That's the whole point. Once again: The whole point is that you have the same number of shares of your equities before and after, but they are distributed in different accounts now.rockstar wrote: Fri Jan 31, 2025 9:43 amI’ve read it before. You’re still selling equities in a downturn if you need cash.
Selling equities in taxable at a loss has a tax benefit, too.
I do plan to increase the tax efficient equity (VTI) in my taxable as it grows, but I'd be in a world of hurt and be forced to sell tax advantaged if I were to get laid off in a recession and had 100% taxable in equities.
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Re: Need Tax Efficiency in Taxable Account
VMFXX is great for an emergency fund because the NAV is stable.PNWpilot wrote: Fri Jan 31, 2025 4:59 am I currently own two funds in a Vanguard taxable brokerage:
-Vanguard Federal Money Market Fund (VMFXX) - consists of EF plus major expenses anticipated in the 3-5 years (new car, home repairs, etc.)
-Vanguard Total World Index Fund - (VTWAX)
-Portfolio compositions: 60/40 (VMFXX/VTWAX) - I do not pay state income tax (Washington)
Without increasing my exposure to equities, I want to explore more tax-efficient options for fixed-income. Here are my thoughts:
Vanguard High-Yield Tax Exempt Fund Investor Shares (VWAHX) - The taxable equivalent yield makes this advantageous BUT it introduces more risk than VMFXX.
Vanguard Tax-Exempt Bond Fund Admiral Shares (VTEAX) - Again, the taxable equivalent yield is favorable but with more risk.
Alpha Architect 1-3 Month Box ETF (BOXX) - Takes interest and converts it to LTCG....allegedly. This forum has identified possible tax problems with the strategy. Plus, I do not understand box spreads or the "straddle" methodology this ETF uses.
I am tentatively considering moving my EF to BOXX and splitting the remainder of my fixed income allocation to VTEAX, VWAHX, and VMFXX. Using VMFXX as an anchor, I could get significantly more tax efficiency with the other funds.
Thoughts?
BOXX seems fine for an emergency fund due to its short duration, although gains will be treated as short term if held less than a year. The tax issue with BOXX is that it was not intended to have any distributions, but it kicked off a small distribution last year.
VWAHX has an average duration of 7.7 years. VTEAX has an average duration of 6.7 years. Are you sure you want to use these for expenses 3-5 years out? I find it really annoying that the duration of bond funds never decreases, unlike individual bonds held to maturity.
You're probably aware that the goal should be highest after-tax yield not merely lowest taxes. Perhaps this is why you did not mention municipal money market funds.
Consider Series I government savings bonds, which have tax deferral on interest. Purchase limit is $10k per year per SSN, although you can buy more with accounts created in the name of a trust. I've created a couple of these.
The thing others have mentioned about placing cash needs in a tax advantaged account is clever. An issue I have with that is paying long term capital gains on the equities sold in the taxable account if one needs to use the "cash" when the market is up. I guess one has to balance that against repeatedly paying tax on interest. Additionally, my 401k doesn't have great fixed income options.
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Re: Need Tax Efficiency in Taxable Account
Saving up for a house before a major stock market crash is not a contrived scenario. It’s extremely common, and most financial experts don’t recommend investing everything you need in the short term for a house in the stock market because then your timeline is dictated by stocks. Think about how target date funds work. If you need the money at a certain date in the future, it needs to be safer if you are close to needing the money. Stocks can crash and stay down a long time. Think about the 70s or the lost decade from 2000 to 2010. Are you going to recommend investors near retirement to hold 100% stocks and tell them to move their retirement date 10 years if stock crash? Or buy a house in 10 years when stocks have come back? People have a schedule and a time limit on this planet. How stocks behave should NOT determine life changing decisions.livesoft wrote: Fri Jan 31, 2025 5:04 pmI like the contrived scenario, but many people would re-think a house purchase if stock markets dropped 50%. Even so the Bogleheads.org wiki article discusses the scenario.bloom2708 wrote: Fri Jan 31, 2025 4:55 pmFine. You have $200k in taxable. It drops to $100k. You need to spend $150k for a house purchase.
Where do you get $50k? 401k loan? Roth IRA contribution? .
Last edited by smartinvestor2020 on Fri Jan 31, 2025 9:43 pm, edited 3 times in total.
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Re: Need Tax Efficiency in Taxable Account
You made a strong point about having to sell stocks with a capital gains tax when you need it.blortchplop wrote: Fri Jan 31, 2025 9:13 pmVMFXX is great for an emergency fund because the NAV is stable.PNWpilot wrote: Fri Jan 31, 2025 4:59 am I currently own two funds in a Vanguard taxable brokerage:
-Vanguard Federal Money Market Fund (VMFXX) - consists of EF plus major expenses anticipated in the 3-5 years (new car, home repairs, etc.)
-Vanguard Total World Index Fund - (VTWAX)
-Portfolio compositions: 60/40 (VMFXX/VTWAX) - I do not pay state income tax (Washington)
Without increasing my exposure to equities, I want to explore more tax-efficient options for fixed-income. Here are my thoughts:
Vanguard High-Yield Tax Exempt Fund Investor Shares (VWAHX) - The taxable equivalent yield makes this advantageous BUT it introduces more risk than VMFXX.
Vanguard Tax-Exempt Bond Fund Admiral Shares (VTEAX) - Again, the taxable equivalent yield is favorable but with more risk.
Alpha Architect 1-3 Month Box ETF (BOXX) - Takes interest and converts it to LTCG....allegedly. This forum has identified possible tax problems with the strategy. Plus, I do not understand box spreads or the "straddle" methodology this ETF uses.
I am tentatively considering moving my EF to BOXX and splitting the remainder of my fixed income allocation to VTEAX, VWAHX, and VMFXX. Using VMFXX as an anchor, I could get significantly more tax efficiency with the other funds.
Thoughts?
BOXX seems fine for an emergency fund due to its short duration, although gains will be treated as short term if held less than a year. The tax issue with BOXX is that it was not intended to have any distributions, but it kicked off a small distribution last year.
VWAHX has an average duration of 7.7 years. VTEAX has an average duration of 6.7 years. Are you sure you want to use these for expenses 3-5 years out? I find it really annoying that the duration of bond funds never decreases, unlike individual bonds held to maturity.
You're probably aware that the goal should be highest after-tax yield not merely lowest taxes. Perhaps this is why you did not mention municipal money market funds.
Consider Series I government savings bonds, which have tax deferral on interest. Purchase limit is $10k per year per SSN, although you can buy more with accounts created in the name of a trust. I've created a couple of these.
The thing others have mentioned about placing cash needs in a tax advantaged account is clever. An issue I have with that is paying long term capital gains on the equities sold in the taxable account if one needs to use the "cash" when the market is up. I guess one has to balance that against repeatedly paying tax on interest. Additionally, my 401k doesn't have great fixed income options.
In fact most investors buying and holding VTI or VOO diligently over many years should have mostly huge gains. If stocks crash, they will still have mostly gains so a big purchase like a house will cause a big capital gains tax. The markets are almost always “up” and will continue to go up so gains are more likely.
For a big purchase you will have big gains even after a crash if you’ve been saving a long time little by little each year.
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Re: Need Tax Efficiency in Taxable Account
I know this has all been debated out N+1 times, but what worries me with the stocks-in-taxable-and-bonds-in-taxdeferred approach, is that long term, since stocks grow faster than bonds, then later in retirement you'll find yourself trapped in an increasingly aggressive portfolio. Especially once those RMD's start hitting, your remaining bonds will get increasingly decimated and your stocks will keep growing. I know you can rebalance, but you won't, because of the tax hits from those low-cost-basis stocks. And because the growing RMD's will supply most of your income, you'll have even less motivation to take the tax hits from rebalancing those dangerously overweighted stocks.
Re: Need Tax Efficiency in Taxable Account
I have thought about this also. If tax-deferred space is a small enough portion of the portfolio such that even 50% of the tax-deferred space isn't enough bonds, perhaps it makes sense to cap tax-deferred at half (or some other percentage) bonds, then add municipals, Savings Bonds or Treasury bonds in taxable. I'm doing this kind of accidentally as it is.MadHungarian wrote: Fri Jan 31, 2025 11:02 pm I know this has all been debated out N+1 times, but what worries me with the stocks-in-taxable-and-bonds-in-taxdeferred approach, is that long term, since stocks grow faster than bonds, then later in retirement you'll find yourself trapped in an increasingly aggressive portfolio. Especially once those RMD's start hitting, your remaining bonds will get increasingly decimated and your stocks will keep growing. I know you can rebalance, but you won't, because of the tax hits from those low-cost-basis stocks. And because the growing RMD's will supply most of your income, you'll have even less motivation to take the tax hits from rebalancing those dangerously overweighted stocks.
Re: Need Tax Efficiency in Taxable Account
What is proposed above has constraints under which it works better than using tax inefficient bonds or CDs in taxable.smartinvestor2020 wrote: Fri Jan 31, 2025 9:19 pmSaving up for a house before a major stock market crash is not a contrived scenario. It’s extremely common, and most financial experts don’t recommend investing everything you need in the short term for a house in the stock market because then your timeline is dictated by stocks. Think about how target date funds work. If you need the money at a certain date in the future, it needs to be safer if you are close to needing the money. Stocks can crash and stay down a long time. Think about the 70s or the lost decade from 2000 to 2010. Are you going to recommend investors near retirement to hold 100% stocks and tell them to move their retirement date 10 years if stock crash? Or buy a house in 10 years when stocks have come back? People have a schedule and a time limit on this planet. How stocks behave should NOT determine life changing decisions.livesoft wrote: Fri Jan 31, 2025 5:04 pm
I like the contrived scenario, but many people would re-think a house purchase if stock markets dropped 50%. Even so the Bogleheads.org wiki article discusses the scenario.
Please see the wiki for those constraints with an example.
https://www.bogleheads.org/wiki/Placing ... ed_account
Note: the 50% stock drop and 2x requirements. It is a strategy that works for some and doesn't work for others e.g. you don't have 2x. When it is suitable for your case then it is definitely more tax efficient.
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Re: Need Tax Efficiency in Taxable Account
Very few average income middle class investors have saved 2 times what they need for a house purchase in cash. As soon as I have enough, I am pulling the trigger so I will never get to 2 times what I need. I am trying to save up to pay for a house in cash in full. I cannot afford even a 30% crash, and stocks can crash more than 50% and stay down for a long time.babystep wrote: Sat Feb 01, 2025 12:17 amWhat is proposed above has constraints under which it works better than using tax inefficient bonds or CDs in taxable.smartinvestor2020 wrote: Fri Jan 31, 2025 9:19 pm
Saving up for a house before a major stock market crash is not a contrived scenario. It’s extremely common, and most financial experts don’t recommend investing everything you need in the short term for a house in the stock market because then your timeline is dictated by stocks. Think about how target date funds work. If you need the money at a certain date in the future, it needs to be safer if you are close to needing the money. Stocks can crash and stay down a long time. Think about the 70s or the lost decade from 2000 to 2010. Are you going to recommend investors near retirement to hold 100% stocks and tell them to move their retirement date 10 years if stock crash? Or buy a house in 10 years when stocks have come back? People have a schedule and a time limit on this planet. How stocks behave should NOT determine life changing decisions.
Please see the wiki for those constraints with an example.
https://www.bogleheads.org/wiki/Placing ... ed_account
Note: the 50% stock drop and 2x requirements. It is a strategy that works for some and doesn't work for others e.g. you don't have 2x. When it is suitable for your case then it is definitely more tax efficient.
Re: Need Tax Efficiency in Taxable Account
Sure, that is why it is conditional. All those who you refer above after they purchase the home should consider this. One can't keep buying taxable bonds or contain huge stockpile of cash in the taxable after the home purchase.smartinvestor2020 wrote: Sat Feb 01, 2025 12:58 amVery few average income middle class investors have saved 2 times what they need for a house purchase in cash. As soon as I have enough, I am pulling the trigger so I will never get to 2 times what I need. I am trying to save up to pay for a house in cash in full. I cannot afford even a 30% crash, and stocks can crash more than 50% and stay down for a long time.babystep wrote: Sat Feb 01, 2025 12:17 am
What is proposed above has constraints under which it works better than using tax inefficient bonds or CDs in taxable.
Please see the wiki for those constraints with an example.
https://www.bogleheads.org/wiki/Placing ... ed_account
Note: the 50% stock drop and 2x requirements. It is a strategy that works for some and doesn't work for others e.g. you don't have 2x. When it is suitable for your case then it is definitely more tax efficient.
If we keep it to the OP, OP already has home and should evaluate this for tax efficiency as the title of the thread suggests.
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Re: Need Tax Efficiency in Taxable Account
I agree that after you take care of big short term expenses, tax efficiency is very important. Short term safety has a tax cost that is worth it for big expenses. I’d rather pay a little more in taxes for short term safety than suffer a crash that changes my life. I am emphasizing that this boglehead tax rule is not always the best solution in every case for everyone.babystep wrote: Sat Feb 01, 2025 1:52 amSure, that is why it is conditional. All those who you refer above after they purchase the home should consider this. One can't keep buying taxable bonds or contain huge stockpile of cash in the taxable after the home purchase.smartinvestor2020 wrote: Sat Feb 01, 2025 12:58 am
Very few average income middle class investors have saved 2 times what they need for a house purchase in cash. As soon as I have enough, I am pulling the trigger so I will never get to 2 times what I need. I am trying to save up to pay for a house in cash in full. I cannot afford even a 30% crash, and stocks can crash more than 50% and stay down for a long time.
If we keep it to the OP, OP already has home and should evaluate this for tax efficiency as the title of the thread suggests.
I am responding to the constant beating that taxable accounts should be 100% stocks. Without understanding an investor’s situation, the boglehead solution cannot be blindly recommended.
Re: Need Tax Efficiency in Taxable Account
While I am not "most investors" I can write that we paid no capital gains taxes when we cashed in our taxable account for a purchase larger than what we used for a down payment on our house*. Of course, folks will wonder "How can that be possible?" The answer lies in that 50% drop in the stock market that has been mentioned: I am a diligent tax-loss harvester. I harvested losses throughout 2007-2009 that ended up "banking" a 6-figure carryover loss. Our bigger-than-a-home-down-payment expense was college education.smartinvestor2020 wrote: Fri Jan 31, 2025 9:36 pm You made a strong point about having to sell stocks with a capital gains tax when you need it.
In fact most investors buying and holding VTI or VOO diligently over many years should have mostly huge gains. If stocks crash, they will still have mostly gains so a big purchase like a house will cause a big capital gains tax. The markets are almost always “up” and will continue to go up so gains are more likely.
For a big purchase you will have big gains even after a crash if you’ve been saving a long time little by little each year.
[bolding added -livesoft]
We are retired and withdrawing from our taxable account. We finally used up all our carryover losses in 2023 and despite selling and withdrawing from our taxable account for many years we have not had to pay any capital gains taxes since before 2007. That's because LTCG tax rates are 0% for us.
Sure, folks don't have to have only equities in a taxable account if they don't want to, but discussions like this help people think it through more deeply and critically.
*I want to add that we cashed in mutual fund shares to pay for our home down payment before there was a crash, too. Yes, we paid capital gains taxes on the gains, but so what? LTCG tax rate is less than the tax rate on ordinary interest and dividends from the savings accounts and money market funds. I don't think folks ever would complain: "Oh, my savings account is making 20% a year and the taxes are terrible, so I decided to just avoid the 20% interest and keep my money in a checking account paying 0.1% interest."
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Re: Need Tax Efficiency in Taxable Account
I'm following this thread with interest, as I'm currently trying to figure out how to increase the tax-efficiency of my father's accounts (he's 87). I understand the fungible nature of money, but because he knew he'd have a generous pension, he didn't contribute much to tax-advantaged accounts while he was working. His tIRA is 6% of his portfolio; the rest is in a taxable account. I don't see a way around having bond or money market funds in his taxable, since 94/6 (!) is a little more aggressive of an asset allocation than we're comfortable with, but I'm struggling to make the right choice.
Re: Need Tax Efficiency in Taxable Account
Now that’s an interesting outcome. Smart way to take advantage of a downturn. Suppose if the downturn(s) occurred during high-earning years you could just harvest the losses and sit on them until retirement or job loss to (presumably) minimize capital gains on top of the tax loss harvesting.livesoft wrote: Sat Feb 01, 2025 5:09 am
While I am not "most investors" I can write that we paid no capital gains taxes when we cashed in our taxable account for a purchase larger than what we used for a down payment on our house*. Of course, folks will wonder "How can that be possible?" The answer lies in that 50% drop in the stock market that has been mentioned: I am a diligent tax-loss harvester. I harvested losses throughout 2007-2009 that ended up "banking" a 6-figure carryover loss. Our bigger-than-a-home-down-payment expense was college education.
We are retired and withdrawing from our taxable account. We finally used up all our carryover losses in 2023 and despite selling and withdrawing from our taxable account for many years we have not had to pay any capital gains taxes since before 2007. That's because LTCG tax rates are 0% for us.
Sure, folks don't have to have only equities in a taxable account if they don't want to, but discussions like this help people think it through more deeply and critically.
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Re: Need Tax Efficiency in Taxable Account
You must have bought a lot stocks just before the 2008 crash in order to have that much in carry over losses. A six figure loss from the 2008 crash means you bought over $200k of VTI at or near the peak before the crash and sold at or near the bottom. That type of contribution in one year is unusual for a middle class investor. Perfectly TLHing a major crash is also unusual. So you probably contributed even more than $200k across a few years prior to the crash. This is not diligent TLHing. It requires unusual contributions in a taxable account. The shares of a similar ETF that replaced VTI should be up almost 10 fold, not to mention all the contributions you must have made after the crash. Assuming the same contribution rate after the crash would mean you’re sitting on more than huge gains today even after using the 6 figure loss to realize big gains.livesoft wrote: Sat Feb 01, 2025 5:09 amWhile I am not "most investors" I can write that we paid no capital gains taxes when we cashed in our taxable account for a purchase larger than what we used for a down payment on our house*. Of course, folks will wonder "How can that be possible?" The answer lies in that 50% drop in the stock market that has been mentioned: I am a diligent tax-loss harvester. I harvested losses throughout 2007-2009 that ended up "banking" a 6-figure carryover loss. Our bigger-than-a-home-down-payment expense was college education.smartinvestor2020 wrote: Fri Jan 31, 2025 9:36 pm You made a strong point about having to sell stocks with a capital gains tax when you need it.
In fact most investors buying and holding VTI or VOO diligently over many years should have mostly huge gains. If stocks crash, they will still have mostly gains so a big purchase like a house will cause a big capital gains tax. The markets are almost always “up” and will continue to go up so gains are more likely.
For a big purchase you will have big gains even after a crash if you’ve been saving a long time little by little each year.
[bolding added -livesoft]
We are retired and withdrawing from our taxable account. We finally used up all our carryover losses in 2023 and despite selling and withdrawing from our taxable account for many years we have not had to pay any capital gains taxes since before 2007. That's because LTCG tax rates are 0% for us.
Sure, folks don't have to have only equities in a taxable account if they don't want to, but discussions like this help people think it through more deeply and critically.
*I want to add that we cashed in mutual fund shares to pay for our home down payment before there was a crash, too. Yes, we paid capital gains taxes on the gains, but so what? LTCG tax rate is less than the tax rate on ordinary interest and dividends from the savings accounts and money market funds. I don't think folks ever would complain: "Oh, my savings account is making 20% a year and the taxes are terrible, so I decided to just avoid the 20% interest and keep my money in a checking account paying 0.1% interest."
In addition, you have realized gains in the 0% LTGC bracket. There are many single and married investors with incomes above that who don’t have the luxury of realizing gains at 0%. How many people with incomes in the 0% LTGC bracket, can contribute over $200k near a stock market peak? That would have to be with inheritance money or other non earned income source. I think you had a high income or received money back in 2007 and 2008 and are now retired in the 0% LTGC bracket. Most investors above the 0% LTGC bracket working and saving up for a house don’t have the ability to do this unless they buy a house after retiring into the 0% LTGC bracket. People with middle class or even upper middle class incomes usually cannot contribute $200k over 1 or 2 years.
Last edited by smartinvestor2020 on Sat Feb 01, 2025 8:58 am, edited 1 time in total.
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Re: Need Tax Efficiency in Taxable Account
You seem to be arguing that if it does not work for you it does not work or something like that. OK. Don't do it then.smartinvestor2020 wrote: Sat Feb 01, 2025 8:49 amYou must have bought a lot stocks just before the 2008 crash in order to have that much in carry over losses. A six figure loss from the 2008 crashlivesoft wrote: Sat Feb 01, 2025 5:09 am
While I am not "most investors" I can write that we paid no capital gains taxes when we cashed in our taxable account for a purchase larger than
However, it it a great strategy for anyone who fits the case study.
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Re: Need Tax Efficiency in Taxable Account
I am arguing that it does not work for the majority of middle class investors. Look at the math carefully. Unless you want to risk short term money, it doesn’t work for short term needs when you have middle class contributions and much less than 2 times what you need short term.Mike Scott wrote: Sat Feb 01, 2025 8:55 amYou seem to be arguing that if it does not work for you it does not work or something like that. OK. Don't do it then.smartinvestor2020 wrote: Sat Feb 01, 2025 8:49 am
You must have bought a lot stocks just before the 2008 crash in order to have that much in carry over losses. A six figure loss from the 2008 crash
However, it it a great strategy for anyone who fits the case study.
I am NOT arguing that bonds are more tax efficient than stocks. I am only arguing that if you need a large amount of money short term, and haven’t made huge contributions at stock market peaks, and don’t have large realized losses, and don’t have enough in taxable accounts, then stocks are not the best choice for that short term need. Tax efficiency is less important than safety for short term needs. Realizing big gains will also come with big taxes for most average investors. Stocks are tax efficient over time but livesoft’s situation is more unusual than my own situation for middle class investors. There is nothing usual or normal about contributing near $200k near the stock market peak and selling near the low to realize a six figure loss for most Americans with middle class incomes.
Re: Need Tax Efficiency in Taxable Account
#1) Vanguard Total World Index Fund (VTWAX) doesn't qualify for the Foreign Tax Credit. FTC is not the only factor when comparing VTWAX against separate US & International funds (VTSAX & VTIAX) but was wondering if you'd done any investigation? The Vanguard Fund Tax Analysis & Efficiency (2018 to 2023)thread discusses tax-efficiency of various options, including Total World versus comparable separate funds. In any case you may prioritize one-fund simplicity over tax-efficiency.
#2) What do you think of the back & forth in this thread about "Placing cash needs in a tax-advantaged account"?
Re: Need Tax Efficiency in Taxable Account
Washington is not state tax free for LTCG. It looks like there are restrictions around loss harvesting as well. I’m not a tax expert and also not a WA resident but I think this needs a mention in this thread.
https://dor.wa.gov/taxes-rates/other-ta ... -gains-tax
I agree with smartinvestor2020 in that the use case for stocks as an emergency fund is highly nuanced and it’s wrongly positioned on this forum as a general guidance. It may be optimal for high net worth Americans particularly in lower tax states, but I don’t think it’s a good recommendation for most middle class investors.
I like a layered EF: I-bonds for unemployment and/or indeterminate, savings account for insurance deductibles, t-bills and/or applicable funds to save up for short term goals. I looked at boxx but I couldn’t make sense of it so I don’t invest in it.
OP - are you sure that the stock funds you mentioned will be taxed less than treasuries in WA? You would be subjecting your emergency funds to risk. Can you afford it is one question that I have; is it worth much is another.
https://dor.wa.gov/taxes-rates/other-ta ... -gains-tax
I agree with smartinvestor2020 in that the use case for stocks as an emergency fund is highly nuanced and it’s wrongly positioned on this forum as a general guidance. It may be optimal for high net worth Americans particularly in lower tax states, but I don’t think it’s a good recommendation for most middle class investors.
I like a layered EF: I-bonds for unemployment and/or indeterminate, savings account for insurance deductibles, t-bills and/or applicable funds to save up for short term goals. I looked at boxx but I couldn’t make sense of it so I don’t invest in it.
OP - are you sure that the stock funds you mentioned will be taxed less than treasuries in WA? You would be subjecting your emergency funds to risk. Can you afford it is one question that I have; is it worth much is another.
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Re: Need Tax Efficiency in Taxable Account
Delete
Last edited by prioritarian on Sat Feb 01, 2025 2:23 pm, edited 1 time in total.
Re: Need Tax Efficiency in Taxable Account
There are two competing problems here:
1) how to minimize tax in accounts?
2) where to put an emergency fund for future emergencies?
If you put all of your bonds in your tax deferred, then if you want to get that money, you have limited options. If you put all of your equities in your taxable, then you might have to sell taxable equities regardless of what the market is doing for an emergency. It's likely that an emergency will also correspond with a down market.
My current approach is to put long duration bonds into tax deferred. That's where all of my TIPS with durations over a year sit. I keep all of my short duration in my taxable. Then, I have some I Bonds and some checking.
If you have a really big taxable account, then maybe you can use the dividends from your equities to pay for emergencies. But this is likely something that someone over 50 is going to do, and it doesn't help those younger.
There really should be a Bogleheads approach that maximizes the two competing problems.
1) how to minimize tax in accounts?
2) where to put an emergency fund for future emergencies?
If you put all of your bonds in your tax deferred, then if you want to get that money, you have limited options. If you put all of your equities in your taxable, then you might have to sell taxable equities regardless of what the market is doing for an emergency. It's likely that an emergency will also correspond with a down market.
My current approach is to put long duration bonds into tax deferred. That's where all of my TIPS with durations over a year sit. I keep all of my short duration in my taxable. Then, I have some I Bonds and some checking.
If you have a really big taxable account, then maybe you can use the dividends from your equities to pay for emergencies. But this is likely something that someone over 50 is going to do, and it doesn't help those younger.
There really should be a Bogleheads approach that maximizes the two competing problems.
Re: Need Tax Efficiency in Taxable Account
That's a solid summary. The strategy also depends on the size of your taxable account.rockstar wrote: Sat Feb 01, 2025 2:16 pm There are two competing problems here:
1) how to minimize tax in accounts?
2) where to put an emergency fund for future emergencies?
If you put all of your bonds in your tax deferred, then if you want to get that money, you have limited options. If you put all of your equities in your taxable, then you might have to sell taxable equities regardless of what the market is doing for an emergency. It's likely that an emergency will also correspond with a down market.
My current approach is to put long duration bonds into tax deferred. That's where all of my TIPS with durations over a year sit. I keep all of my short duration in my taxable. Then, I have some I Bonds and some checking.
If you have a really big taxable account, then maybe you can use the dividends from your equities to pay for emergencies. But this is likely something that someone over 50 is going to do, and it doesn't help those younger.
There really should be a Bogleheads approach that maximizes the two competing problems.
For example, consider having 5x in taxable vs. 1x in taxable:
- With 5x in taxable, you might allocate 4.5x to VTI and 0.5x to a HYSA. This is very tax-efficient since 90% is in tax-efficient stocks, and only 10% is in the tax in-efficient HYSA.
- With 1x in taxable, it might make more sense to keep the entire amount in a HYSA.
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Re: Need Tax Efficiency in Taxable Account
I'm going to post the wiki link again.
https://www.bogleheads.org/wiki/Placing ... ed_account
You should understand how it works whether you choose to do it or not.
https://www.bogleheads.org/wiki/Placing ... ed_account
You should understand how it works whether you choose to do it or not.
Re: Need Tax Efficiency in Taxable Account
Don't let the tax tail wag the asset allocation dog. I'm in a similar situation with my mother's portfolio (she's older than your dad). She has about half her assets in taxable and half in tax-deferred. A 50/50 asset allocation makes absolutely no sense at her age, so she has some taxable in bonds.inforapound wrote: Sat Feb 01, 2025 6:57 am I'm following this thread with interest, as I'm currently trying to figure out how to increase the tax-efficiency of my father's accounts (he's 87). I understand the fungible nature of money, but because he knew he'd have a generous pension, he didn't contribute much to tax-advantaged accounts while he was working. His tIRA is 6% of his portfolio; the rest is in a taxable account. I don't see a way around having bond or money market funds in his taxable, since 94/6 (!) is a little more aggressive of an asset allocation than we're comfortable with, but I'm struggling to make the right choice.
If your dad's tax bracket is really high, you could consider municipal bonds (no federal tax on the income, but the interest rate is lower than other bonds). In my mom's case, I'm sticking with treasuries (no state tax, interest rates are decent).
"Financial ignorance is expensive."
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Re: Need Tax Efficiency in Taxable Account
I understand the tax efficient drawdown argument that livesoft and others are making. One question I do have is whether this should be viewed as some form of tax arbitrage - trading tax efficiency for oneself vs. tax efficiency for potential heirs who may inherit the tax-advantaged accounts (potentially larger due to higher equity mix)? Or, even for oneself, a compensating tax efficiency hit with larger RMDs due to the higher equity mix in tax advantaged?MadHungarian wrote: Fri Jan 31, 2025 11:02 pm I know this has all been debated out N+1 times, but what worries me with the stocks-in-taxable-and-bonds-in-taxdeferred approach, is that long term, since stocks grow faster than bonds, then later in retirement you'll find yourself trapped in an increasingly aggressive portfolio. [...]
One answer to my own question could be - that asset allocation need not remain constant in the drawdown phase, so that the taxable equities that were sold need not be replaced 1:1 with equities in tax-advantaged (I know it could be less than 1:1 even with constant asset allocation given changes in total portfolio after withdrawals and portfolio variations, but putting that aside for now).
Re: Need Tax Efficiency in Taxable Account
The reason this does not happen is that you can sell from either account in retirement, and reallocate if necessary. Usually, you will prefer to take RMDs first, then sell for other expenses from taxable, so you will get rid of some of the stock there.MadHungarian wrote: Fri Jan 31, 2025 11:02 pm I know this has all been debated out N+1 times, but what worries me with the stocks-in-taxable-and-bonds-in-taxdeferred approach, is that long term, since stocks grow faster than bonds, then later in retirement you'll find yourself trapped in an increasingly aggressive portfolio. Especially once those RMD's start hitting, your remaining bonds will get increasingly decimated and your stocks will keep growing. I know you can rebalance, but you won't, because of the tax hits from those low-cost-basis stocks. And because the growing RMD's will supply most of your income, you'll have even less motivation to take the tax hits from rebalancing those dangerously overweighted stocks.
And if the stock market booms, then you won't need a large percentage of your portfolio in bonds in retirement; much of the stock holding will go to your heirs or charity rather than being needed for your spending. (And then the stock becomes even more tax-efficient because no capital-gains tax will be paid.)
Re: Need Tax Efficiency in Taxable Account
Agreeing with this point. Tax efficiency is relative. Once you decide what to hold, you should put the most tax-efficient holdings in your taxable account. For example, if US stock is more tax-efficient than international stock for you, and all stock is more tax-efficient than bonds, you might hold US stock in taxable, international stock in taxable and also some in your 401(k) and IRA, and bonds only in your 401(k) or IRA.snic wrote: Sat Feb 01, 2025 4:43 pm Don't let the tax tail wag the asset allocation dog. I'm in a similar situation with my mother's portfolio (she's older than your dad). She has about half her assets in taxable and half in tax-deferred. A 50/50 asset allocation makes absolutely no sense at her age, so she has some taxable in bonds.