Final word: Bonds in Tax-Deferred or Taxable?

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JustinR
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Final word: Bonds in Tax-Deferred or Taxable?

Post by JustinR » Mon Aug 07, 2017 8:03 pm

So the common advice here has always been to put Bonds in your retirement accounts, but I just read this article which says the exact opposite: https://www.whitecoatinvestor.com/asset ... n-taxable/
The important concept to understand here, of course, is that assets grow faster in the retirement account due to the lack of tax drag. So you will benefit from having a fast-growing asset (i.e. stocks) inside the retirement account. It expands your tax-protected space, increasing your tax benefit, estate planning benefit, and asset protection benefit as the years go by. You have to weigh that benefit against the additional tax drag of having a tax-inefficient asset class in the taxable account. At our current low interest rates, the first benefit dramatically outweighs the second.
At the bottom it even says that the Bogleheads have changed their wiki page about this.

So what's the consensus now? I'm now more confused than ever about this.
Last edited by JustinR on Mon Aug 07, 2017 8:23 pm, edited 1 time in total.

kd2008
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Re: Final word: Bonds in Tax-Deferred or Taxable?

Post by kd2008 » Mon Aug 07, 2017 8:08 pm

It depends on the bond yield and the nominal value of taxes in dollars not just tax rate. When yields are 2-3% it may very well be advantageous to hold them in taxable account.

WCI article is ok. Nothing new there.

For authorative article read this from 2012:
https://thefinancebuff.com/tax-efficien ... olute.html

gilgamesh
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Re: Final word: Bonds in Tax-Deferred or Taxable?

Post by gilgamesh » Mon Aug 07, 2017 8:11 pm


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whodidntante
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Re: Final word: Bonds in Tax-Deferred or Taxable?

Post by whodidntante » Mon Aug 07, 2017 8:25 pm

I put bonds in tax deferred.

jdilla1107
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Re: Final word: Bonds in Tax-Deferred or Taxable?

Post by jdilla1107 » Mon Aug 07, 2017 8:45 pm

My strategy is to minimize taxes for the current year and not a future year. Stock dividends are taxed at a lower rate than bond yield and stocks also yield less for the bonds I buy. This means bonds in tax deferred stocks in taxable. In the future, I will worry about minimizing taxes for a future year.

However, it depends on your current situation and what type of bonds we are talking about. Certainly bonds that yields 0.01% can likely go in taxable just fine. Also, munis work well in taxable. But, I don't want munis to be more than 20% of my bond allocation.

Note that this issue also doesn't matter much today, but I like the strategy of minimizing taxes each year as opposed to deferring for future tax savings, which may never come.

JustinR
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Re: Final word: Bonds in Tax-Deferred or Taxable?

Post by JustinR » Mon Aug 07, 2017 8:49 pm

kd2008 wrote:It depends on the bond yield and the nominal value of taxes in dollars not just tax rate. When yields are 2-3% it may very well be advantageous to hold them in taxable account.

WCI article is ok. Nothing new there.

For authorative article read this from 2012:
https://thefinancebuff.com/tax-efficien ... olute.html
So a typical Boglehead fund like Vanguard Total Bond Market could easily go in Taxable?

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grabiner
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Re: Final word: Bonds in Tax-Deferred or Taxable?

Post by grabiner » Mon Aug 07, 2017 9:00 pm

JustinR wrote:
kd2008 wrote:It depends on the bond yield and the nominal value of taxes in dollars not just tax rate. When yields are 2-3% it may very well be advantageous to hold them in taxable account.

WCI article is ok. Nothing new there.

For authorative article read this from 2012:
https://thefinancebuff.com/tax-efficien ... olute.html
So a typical Boglehead fund like Vanguard Total Bond Market could easily go in Taxable?
Whether to hold this particular fund is a separate issue from whether to hold bonds in taxable at all. If you are in the 25% tax bracket, then Total Bond Market in taxable is reasonable at current yields of 2.36%; the tax cost is 0.59%, which is about what you will lose on stocks to the tax on dividends and capital gains in the long term. If you are in the 28% or higher bracket (or the 25% bracket and Vanguard has a fund for your high-tax state) and hold bonds in taxable, you should hold munis. (And if you are in the 15% tax bracket, you should hold stocks in taxable since your tax rate on qualified dividends and long-term gains is zero.)

And often the decision of whether to hold bonds or stocks in taxable is determined by your 401(k) options. If you have the TSP or TIAA-CREF, you should hold fixed income in tax-deferred because the G fund and TIAA Traditional Annuity are better than any retail fixed-income option. If the only low-cost option in your 401(k) is an S&P 500 index, then you should use that fund and hold bonds in your IRA and taxable account.
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stlutz
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Re: Final word: Bonds in Tax-Deferred or Taxable?

Post by stlutz » Mon Aug 07, 2017 9:00 pm

I don't know that the wiki has changed all that much aside from becoming more nuanced.

https://www.bogleheads.org/wiki/Tax-eff ... _placement

As someone has has moved more toward satisficing than optimizing, I opt for an "equal location" approach--I'm 60/40 in my 401K, my Roth IRA, and my taxable account. The specific bonds I select to hold in each of course do vary--one wouldn't use munis in an IRA and high-yield bonds are best in an IRA or 401K since they are a wasting asset (trading income now for capital losses later).

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grabiner
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Re: Final word: Bonds in Tax-Deferred or Taxable?

Post by grabiner » Mon Aug 07, 2017 10:07 pm

stlutz wrote:I don't know that the wiki has changed all that much aside from becoming more nuanced.

https://www.bogleheads.org/wiki/Tax-eff ... _placement
What has happened is that yields have changed. When bonds yield 5%, which they did in the early days of these discussions, there aren't any low-yielding bond funds which are reasonable in a taxable account, and stocks yielding 2% have a big advantage. When bonds yield 2%-3%, the tax costs on bond and stock funds are comparable.

Here's a discussion from five years ago, when I first made this point: When to prefer low-rate bonds to stocks in taxable. My rule of thumb from that discussion is that the break-even point is when muni yields are equal to stock yields, unless there are other considerations. Currently, Admiral shares of Intermediate-Term Tax-Exempt yield 1.84%, and Admiral shares of Total Stock Market yield 1.85%. Thus, it's break-even now for most taxpayers, but munis in taxable are better if you can use a fund for your state, or if you pay the 3.8% Medicare surtax which is not applied to munis.
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livesoft
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Re: Final word: Bonds in Tax-Deferred or Taxable?

Post by livesoft » Mon Aug 07, 2017 10:31 pm

WCI changed his advice in a follow-on article. Did you read it?

Basically, the first was not about tax-deferred at all. It was Bonds in Roth or Taxable for High Income Taxpayer? And tax-exempt bonds go in taxable is good advice.

See also: viewtopic.php?t=181974
and
viewtopic.php?t=197035
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acanthurus
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Re: Final word: Bonds in Tax-Deferred or Taxable?

Post by acanthurus » Mon Aug 07, 2017 11:47 pm

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