Bonds in Taxable

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Kevin M
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Re: Bonds in Taxable

Post by Kevin M » Sat Nov 26, 2016 12:16 pm

sperry8 wrote:These articles discuss Roths. Would the same advice be given for IRAs?
A Roth is an IRA, but you mean a traditional IRA as opposed to a Roth IRA. If you properly tax-adjust your holdings, there is no difference between a traditional IRA and a Roth IRA. Tax-adjusted asset allocation - Bogleheads. A lot of the discussion in this thread has been about exactly this.

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wprs
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Re: Bonds in Taxable

Post by wprs » Fri Feb 10, 2017 3:51 pm

Just made this comment on WCIs article: I understand the simplicity of the using ROTH as a proxy for all tax-advantaged accounts. The rule of thumb that a fraction (say 30%) of a tax-deferred account actually belongs to the government--and the rest is a ROTH--is a good one, but I think it misses a VERY important point here--US progressive tax brackets will likely effect the situation.

In the situation of dramatically changing the traditional advice and putting stocks in tax-advantaged you will likely also dramatically increase the investor's liability to a higher tax-bracket in the future. Tax-brackets in retirement are based on social security and any other income, but they are largely based on the actual size of your tax-deferred account and how it is drawn upon.

For example, if the investor has seen an average of say 7% stock growth and 2.5% bond growth over 30 years and wants to draw upon that as income in retirement, a dramatically larger amount of that would need to come from their much more capital-appreciated stocks vs the bonds, wherever they are. If the stocks are in taxable the percentage the government actually ends up owning in the 401k is likely a very different number. Yes, you improve the total portfolio by 13% (in WCI's article), but the government might easily own 30% of your 401k vs 15% had you gone with bonds in the 401k (your tax bracket at distribution).

Negating this is the trade-off with the stocks growing the valuable advantaged space more than bonds would (negating tax-drag on dividends and cap gains).

Would greatly appreciate thoughts on this!

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Re: Bonds in Taxable

Post by Doc » Fri Feb 10, 2017 4:17 pm

wprs wrote: I understand the simplicity of the using ROTH as a proxy for all tax-advantaged accounts. The rule of thumb that a fraction (say 30%) of a tax-deferred account actually belongs to the government--and the rest is a ROTH--is a good one, but I think it misses a VERY important point here--US progressive tax brackets will likely effect the situation.
OK
wprs wrote:In the situation of dramatically changing the traditional advice and putting stocks in tax-advantaged you will likely also dramatically increase the investor's liability to a higher tax-bracket in the future
OK

But the two are separate issues. Estimating your future tax may or may not be hard to do. You do the best you can and make your calculations accordingly. If you think you are going to be in the 25% and you income goes above $151k (MFJ) you have $80k to go before you tax rate goes above 28%. So if you can't estimate your income within a $100k to $200 your marginal rate may change by 3% more than you think.

Suppose you have a security earning 6% and your tax goes up by 3% of 6% or 0.18% increase in tax. Is that going to change your placement decision more than that same investment earning only 5% or maybe 7%?

You are asking a question only a scientist would ask. Investing is not a science. :D
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Re: Bonds in Taxable

Post by wprs » Fri Feb 10, 2017 6:49 pm

Thanks for taking a look, Doc. Agreed that trying to turn investing within US tax structure into a science is frustrating at best...

BTW, just ran the numbers for WCIs example for someone with a social security payout of 34,688 (based on 150k salary) and 100k stocks and bonds each (which accrues to about 1M) to cover the rest of their expenses with a Safe Withdrawal Rate of 3%. The example with stocks in deferred bumps up their taxable income from 36k a year to 60k (15% to 25% tax brackets) and total after-tax income in retirement is reduced from 62.3k to 61.3k when they follow the plan of bonds in taxable.

Maybe they saved more, so I also doubled that net worth to ~2M and re-ran (200k starting balances in each). In this situation taxable income was increased from 43k to 89k (and tax bracket again from 15% to 25%). Here total after tax income in retirement is reduced from 93k to 90k when they follow the plan of bonds in taxable.

I'm sure some sort of accurate retirement modelling software could improve my estimate. The takeaway though seems to be that increasing taxable while at the same time increasing tax bracket from 15% to 25%, take home pay may be slightly reduced and WCI's described effect may be negated.

EDIT: Misread WCI's cap gains reduction so my math was OFF! Looks like they are closer to a wash!
Last edited by wprs on Fri Feb 10, 2017 7:37 pm, edited 1 time in total.

livesoft
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Re: Bonds in Taxable

Post by livesoft » Fri Feb 10, 2017 6:59 pm

^Are you using tax-exempt bonds in taxable?
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wprs
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Re: Bonds in Taxable

Post by wprs » Fri Feb 10, 2017 7:03 pm

livesoft wrote:^Are you using tax-exempt bonds in taxable?
yes, I was working from the net worth's that White Coat Investor calculated for each situation. He was using tax-exempt.

http://whitecoatinvestor.com/asset-loca ... n-taxable/

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Re: Bonds in Taxable

Post by wprs » Fri Feb 10, 2017 7:37 pm

Re-ran my math! see post above..

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Re: Bonds in Taxable

Post by billthecat » Sun Jul 29, 2018 10:30 am

White Coat Investor wrote:
Sun Aug 14, 2016 10:14 am
Doc wrote:
People should try to understand the concepts behind this discussion and apply it to their own situation. There is just too much chance of "bias of the familiar" in any broad statements that relate to the tax code.
That's an excellent point. One also must keep this in mind when reading articles and blogs. For instance, the target audience for my blog is high-income professionals. If you are in the 15% bracket, you may not be my intended audience of any given article. For instance, I just got done writing an article about financial aid planning and how it's basically pointless. That's not true for most people, but it is for my readers.

I think the people who have looked at this subject and come away agnostic or without strong feelings one way or the other get it. The articles I wrote about it are mostly a reaction to the dogmatic (bonds go in tax-protected) way of thinking that I think most people get from places like this forum and many good books. But even the wiki has been updated and I think people are more aware now that it isn't as cut and dried as we'd all like it to be.

If you are actually trying to make a decision for your own portfolio, you need a crystal ball, not only about future tax rates but about whether you'll leave appreciated taxable assets to heirs, give them to charity, or spend them themselves. Pretty hard to predict. I think it's important to realize that you might just be better off with bonds in taxable, but there is no way to know for sure.
My own situation involves high current taxes (about 43% marginal combined), then expected low taxes in retirement (maybe zero) due mostly because the vast majority of my holdings are basis (sadly) and I anticipate doing t401K to Roth conversions during early retirement. Is there a spreadsheet floating around that addresses where bonds should go based on my particular assumptions?

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Re: Bonds in Taxable

Post by abuss368 » Mon Jul 30, 2018 10:40 am

We have invested in Vanguard Intermediate Tax Exempt fund for a long time and it has done the job. Every time I consider adding a second bond fund such as TIPS, International, etc. I still can never pull the trigger. The yield is respectable and the NAV fluctuates a little more (but not much) from Total Bond. Our plan is that the cash flows from dividends will assist in the future with retirement.

Total Bond Index is in our tax advantaged accounts.
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Re: Bonds in Taxable

Post by White Coat Investor » Mon Jul 30, 2018 9:43 pm

billthecat wrote:
Sun Jul 29, 2018 10:30 am
White Coat Investor wrote:
Sun Aug 14, 2016 10:14 am
Doc wrote:
People should try to understand the concepts behind this discussion and apply it to their own situation. There is just too much chance of "bias of the familiar" in any broad statements that relate to the tax code.
That's an excellent point. One also must keep this in mind when reading articles and blogs. For instance, the target audience for my blog is high-income professionals. If you are in the 15% bracket, you may not be my intended audience of any given article. For instance, I just got done writing an article about financial aid planning and how it's basically pointless. That's not true for most people, but it is for my readers.

I think the people who have looked at this subject and come away agnostic or without strong feelings one way or the other get it. The articles I wrote about it are mostly a reaction to the dogmatic (bonds go in tax-protected) way of thinking that I think most people get from places like this forum and many good books. But even the wiki has been updated and I think people are more aware now that it isn't as cut and dried as we'd all like it to be.

If you are actually trying to make a decision for your own portfolio, you need a crystal ball, not only about future tax rates but about whether you'll leave appreciated taxable assets to heirs, give them to charity, or spend them themselves. Pretty hard to predict. I think it's important to realize that you might just be better off with bonds in taxable, but there is no way to know for sure.
My own situation involves high current taxes (about 43% marginal combined), then expected low taxes in retirement (maybe zero) due mostly because the vast majority of my holdings are basis (sadly) and I anticipate doing t401K to Roth conversions during early retirement. Is there a spreadsheet floating around that addresses where bonds should go based on my particular assumptions?
Not that I know of, and if there was it would need more inputs than you've listed, like whether you plan to leave most of your taxable account to charity, to heirs, or spend it.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

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Re: Bonds in Taxable

Post by billthecat » Mon Jul 30, 2018 9:47 pm

White Coat Investor wrote:
Mon Jul 30, 2018 9:43 pm
billthecat wrote:
Sun Jul 29, 2018 10:30 am
White Coat Investor wrote:
Sun Aug 14, 2016 10:14 am
Doc wrote:
People should try to understand the concepts behind this discussion and apply it to their own situation. There is just too much chance of "bias of the familiar" in any broad statements that relate to the tax code.
That's an excellent point. One also must keep this in mind when reading articles and blogs. For instance, the target audience for my blog is high-income professionals. If you are in the 15% bracket, you may not be my intended audience of any given article. For instance, I just got done writing an article about financial aid planning and how it's basically pointless. That's not true for most people, but it is for my readers.

I think the people who have looked at this subject and come away agnostic or without strong feelings one way or the other get it. The articles I wrote about it are mostly a reaction to the dogmatic (bonds go in tax-protected) way of thinking that I think most people get from places like this forum and many good books. But even the wiki has been updated and I think people are more aware now that it isn't as cut and dried as we'd all like it to be.

If you are actually trying to make a decision for your own portfolio, you need a crystal ball, not only about future tax rates but about whether you'll leave appreciated taxable assets to heirs, give them to charity, or spend them themselves. Pretty hard to predict. I think it's important to realize that you might just be better off with bonds in taxable, but there is no way to know for sure.
My own situation involves high current taxes (about 43% marginal combined), then expected low taxes in retirement (maybe zero) due mostly because the vast majority of my holdings are basis (sadly) and I anticipate doing t401K to Roth conversions during early retirement. Is there a spreadsheet floating around that addresses where bonds should go based on my particular assumptions?
Not that I know of, and if there was it would need more inputs than you've listed, like whether you plan to leave most of your taxable account to charity, to heirs, or spend it.
Certainly. But to your example - spend it!

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Re: Bonds in Taxable

Post by White Coat Investor » Tue Jul 31, 2018 3:13 pm

billthecat wrote:
Mon Jul 30, 2018 9:47 pm
White Coat Investor wrote:
Mon Jul 30, 2018 9:43 pm
billthecat wrote:
Sun Jul 29, 2018 10:30 am
White Coat Investor wrote:
Sun Aug 14, 2016 10:14 am
Doc wrote:
People should try to understand the concepts behind this discussion and apply it to their own situation. There is just too much chance of "bias of the familiar" in any broad statements that relate to the tax code.
That's an excellent point. One also must keep this in mind when reading articles and blogs. For instance, the target audience for my blog is high-income professionals. If you are in the 15% bracket, you may not be my intended audience of any given article. For instance, I just got done writing an article about financial aid planning and how it's basically pointless. That's not true for most people, but it is for my readers.

I think the people who have looked at this subject and come away agnostic or without strong feelings one way or the other get it. The articles I wrote about it are mostly a reaction to the dogmatic (bonds go in tax-protected) way of thinking that I think most people get from places like this forum and many good books. But even the wiki has been updated and I think people are more aware now that it isn't as cut and dried as we'd all like it to be.

If you are actually trying to make a decision for your own portfolio, you need a crystal ball, not only about future tax rates but about whether you'll leave appreciated taxable assets to heirs, give them to charity, or spend them themselves. Pretty hard to predict. I think it's important to realize that you might just be better off with bonds in taxable, but there is no way to know for sure.
My own situation involves high current taxes (about 43% marginal combined), then expected low taxes in retirement (maybe zero) due mostly because the vast majority of my holdings are basis (sadly) and I anticipate doing t401K to Roth conversions during early retirement. Is there a spreadsheet floating around that addresses where bonds should go based on my particular assumptions?
Not that I know of, and if there was it would need more inputs than you've listed, like whether you plan to leave most of your taxable account to charity, to heirs, or spend it.
Certainly. But to your example - spend it!
Spending it is a factor that makes bonds in taxable a little more favorable.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

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Re: Bonds in Taxable

Post by billthecat » Tue Aug 14, 2018 2:40 pm

White Coat Investor wrote:
Tue Jul 31, 2018 3:13 pm
billthecat wrote:
Mon Jul 30, 2018 9:47 pm
White Coat Investor wrote:
Mon Jul 30, 2018 9:43 pm
billthecat wrote:
Sun Jul 29, 2018 10:30 am
White Coat Investor wrote:
Sun Aug 14, 2016 10:14 am


That's an excellent point. One also must keep this in mind when reading articles and blogs. For instance, the target audience for my blog is high-income professionals. If you are in the 15% bracket, you may not be my intended audience of any given article. For instance, I just got done writing an article about financial aid planning and how it's basically pointless. That's not true for most people, but it is for my readers.

I think the people who have looked at this subject and come away agnostic or without strong feelings one way or the other get it. The articles I wrote about it are mostly a reaction to the dogmatic (bonds go in tax-protected) way of thinking that I think most people get from places like this forum and many good books. But even the wiki has been updated and I think people are more aware now that it isn't as cut and dried as we'd all like it to be.

If you are actually trying to make a decision for your own portfolio, you need a crystal ball, not only about future tax rates but about whether you'll leave appreciated taxable assets to heirs, give them to charity, or spend them themselves. Pretty hard to predict. I think it's important to realize that you might just be better off with bonds in taxable, but there is no way to know for sure.
My own situation involves high current taxes (about 43% marginal combined), then expected low taxes in retirement (maybe zero) due mostly because the vast majority of my holdings are basis (sadly) and I anticipate doing t401K to Roth conversions during early retirement. Is there a spreadsheet floating around that addresses where bonds should go based on my particular assumptions?
Not that I know of, and if there was it would need more inputs than you've listed, like whether you plan to leave most of your taxable account to charity, to heirs, or spend it.
Certainly. But to your example - spend it!
Spending it is a factor that makes bonds in taxable a little more favorable.
How did you calculate the cumulative dividends paid by the stock fund over the 30 years? (To exclude from the capital gains calculation.) The formula wasn't detailed and it's a missing piece to adapting the calculations to current dividend rates. Thanks!

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White Coat Investor
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Re: Bonds in Taxable

Post by White Coat Investor » Tue Aug 21, 2018 7:22 am

billthecat wrote:
Tue Aug 14, 2018 2:40 pm
White Coat Investor wrote:
Tue Jul 31, 2018 3:13 pm
billthecat wrote:
Mon Jul 30, 2018 9:47 pm
White Coat Investor wrote:
Mon Jul 30, 2018 9:43 pm
billthecat wrote:
Sun Jul 29, 2018 10:30 am


My own situation involves high current taxes (about 43% marginal combined), then expected low taxes in retirement (maybe zero) due mostly because the vast majority of my holdings are basis (sadly) and I anticipate doing t401K to Roth conversions during early retirement. Is there a spreadsheet floating around that addresses where bonds should go based on my particular assumptions?
Not that I know of, and if there was it would need more inputs than you've listed, like whether you plan to leave most of your taxable account to charity, to heirs, or spend it.
Certainly. But to your example - spend it!
Spending it is a factor that makes bonds in taxable a little more favorable.
How did you calculate the cumulative dividends paid by the stock fund over the 30 years? (To exclude from the capital gains calculation.) The formula wasn't detailed and it's a missing piece to adapting the calculations to current dividend rates. Thanks!
Don't recall, it's been years since I wrote the article. Probably used 2% per year as a simplification.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

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Re: Bonds in Taxable

Post by billthecat » Thu Aug 23, 2018 11:44 pm

White Coat Investor wrote:
Tue Aug 21, 2018 7:22 am
billthecat wrote:
Tue Aug 14, 2018 2:40 pm
White Coat Investor wrote:
Tue Jul 31, 2018 3:13 pm
billthecat wrote:
Mon Jul 30, 2018 9:47 pm
White Coat Investor wrote:
Mon Jul 30, 2018 9:43 pm


Not that I know of, and if there was it would need more inputs than you've listed, like whether you plan to leave most of your taxable account to charity, to heirs, or spend it.
Certainly. But to your example - spend it!
Spending it is a factor that makes bonds in taxable a little more favorable.
How did you calculate the cumulative dividends paid by the stock fund over the 30 years? (To exclude from the capital gains calculation.) The formula wasn't detailed and it's a missing piece to adapting the calculations to current dividend rates. Thanks!
Don't recall, it's been years since I wrote the article. Probably used 2% per year as a simplification.
I think it was a “future value of a growing annuity” calculation where the annuity is the dividend and it’s growing at the rate of growth of the underlying asset (8% minus the 15% tax on the 1.86% dividends).

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