Bonds in taxable for TLH purposes

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midnightrun
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Bonds in taxable for TLH purposes

Post by midnightrun » Sun Feb 04, 2018 11:50 pm

There were a number of threads this week where folks are freaking out about intermediate term bond fund experiencing a NAV drop of 5% or less. These seem to pop up at regular intervals multiple times a year when bond fund NAV's drop slightly.

This got me thinking....couldn't this be a desired feature if one wants to ensure regular TLH opportunities? The past 5 years of stock runup has afforded limited options for TLH in equities. In contrast, there seem to be regular, albeit modest, bond fund options. In addition, since most of the total return for bond funds comes from dividend reinvestment, it's not like the total return suffers.

Currently, I keep equities primarily in Roth and taxable with bonds in tax deferred. Rationale is to limit current taxes and minimize growth in tax deferred with an eye on efficient future roth conversion. Should I be rethinking?

WCI made a decent argument for bonds in taxable without even considering TLH potential in this post:

https://www.whitecoatinvestor.com/asset ... n-taxable/

Given that one could count on 2-5% TLH episodes a few times a year, would that shift the calculus fully to bonds in taxable, assuming one held intermediate term or longer duration for their bond portfolio? Anyone looked at this quantitatively?

If so, any thoughts on the best specific options (muni funds vs TBM vs ITT vs LTT vs corporates)?

aristotelian
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Re: Bonds in taxable for TLH purposes

Post by aristotelian » Mon Feb 05, 2018 12:01 am

I am planning to TLH my muni bond fund tomorrow if it goes down any more. I have about 1/3 of my bonds in taxable although I would like to have more. The problem is, if you go with a conventional bond fund, the dividends will be taxable and you generally won't have enough capital losses to keep up.

stlutz
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Re: Bonds in taxable for TLH purposes

Post by stlutz » Mon Feb 05, 2018 12:03 am

I have a lot of bonds in taxable but they haven't dropped enough to warrant TLH yet in my opinion. Assuming you aren't selling and buying something following the same index (such as VGIT->SCHR or VTEB->MUB), then random return differences between the fund you are selling and the one you are buying will be larger than the net tax benefit of the TLH.

I've learned this from prior experience of TLHing bonds in taxable.

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Dale_G
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Re: Bonds in taxable for TLH purposes

Post by Dale_G » Mon Feb 05, 2018 1:14 am

when I first bought VWUIX - Intermediate Term TE on 01/24/11 @13.09 and VWLUX - Long Term TE on 12/27/12 @ 10.80, I fully expected to tax loss in the future. The current NAVs are 13.90 and 11.42 respectively, so not much action. I do have some tax lots at higher than current NAVs, but the losses only amounts to a few thousand dollars.

Since I still have significant tax losses carried forward from 2009/2010, increasing my tax loss carry-forward isn't important to me. If you don't have significant TLH carry-forwards, by all means take the loss and invest the proceeds in something similar. You may be able to TLH the replacement fund too.

I am patient. I plan to wait until the losses are significant for me. Given that the Federal Reserve Board and FOMC believe that price stability requires 2% inflation, I expect that I will be able to take losses in due time.

Dale
Volatility is my friend

mega317
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Re: Bonds in taxable for TLH purposes

Post by mega317 » Mon Feb 05, 2018 5:55 am

Yes but when stocks do drop you would have more losses to harvest. Be patient, stay the course even in these challenging times. They call this the lost decade for tax loss harvesters.

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House Blend
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Re: Bonds in taxable for TLH purposes

Post by House Blend » Mon Feb 05, 2018 10:30 am

midnightrun wrote:
Sun Feb 04, 2018 11:50 pm
This got me thinking....couldn't this be a desired feature if one wants to ensure regular TLH opportunities? The past 5 years of stock runup has afforded limited options for TLH in equities.
The TLH potential for bonds compared to stocks is minuscule. There may be good arguments for putting bonds in taxable, but this is not one of them.

Just be patient. Eventually there will be a market crash, and you'll have very large losses to cash in.

For those new to taxable investing I suppose it is annoying to not have had the opportunity to deduct $3000 per year on taxes. But seeing bond losses occurring now is a sign that you've already missed that boat.

Random Walker
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Re: Bonds in taxable for TLH purposes

Post by Random Walker » Mon Feb 05, 2018 4:04 pm

I think this is possibly a potential advantage of a ladder of individual bonds. One can potentially TLH at the individual bond level in a taxable account.

Dave

midnightrun
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Re: Bonds in taxable for TLH purposes

Post by midnightrun » Tue Feb 06, 2018 12:32 am

Timing for this post probably wasn't great given the drop in equities over the past few days. However, VTI is still above prices from late last year so very limited equity harvesting options depending on your holdings.

My question was less about trying to find any opportunity to TLH and more about whether the small, albeit regular TLH opportunities provided by bonds is enough to tip the calculus towards bonds in taxable. I understood the rationale put forth by WCI in his article:

https://www.whitecoatinvestor.com/asset ... n-taxable/

However, at the time I decided that any potential benefits of bonds in taxable would likely be minimal so stuck with the conventional wisdom of bonds in pre-tax to limit the growth of these spaces and maximize Roth conversions/minimize RMDs. Now recognizing that there are likely regular but small TLH options with bonds in taxable, is that enough to tip the scales towards bonds in taxable and has anyone taken a quantitative look that accounts for different TLH options?

For my specific case, I'm 80/20 slice and dice portfolio with a high 6 figure balance. bonds are split between TBM and LTT. Max backdoor roth/HSA + $12k/yr 529 for posttax space and max 403b/457 ($18.5 each) + 401a ($42.5 including employer match) + solo 401k (~$10k/yr) in pretax each year. I typically have another $30-60k for taxable investing each year. Likely will consider early retirement or cutting back significantly in 10 years or so (late 40's with $3-4 million). Should have a decade or more for Roth conversions and plan to keep a high equity allocation. Upper middle class/upper class - will be in the 24% marginal bracket for the near future. Live in Colorado with a flat 4.63% state rate. Not sure how much specifics matter in determining optimal placement.

Finally, Random Walker mentioned laddering individual bonds and TLH selected ones. How would that be superior to using a bond fund?

Da5id
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Re: Bonds in taxable for TLH purposes

Post by Da5id » Tue Feb 06, 2018 9:42 am

Random Walker wrote:
Mon Feb 05, 2018 4:04 pm
I think this is possibly a potential advantage of a ladder of individual bonds. One can potentially TLH at the individual bond level in a taxable account.

Dave
At least historically don't you take a moderate hit on the bid/ask spread selling individual bonds? Not sure of that, I only own I-bonds and bond mutual funds myself.

On the thread topic, I have some VFSUX (short term investment grade) which I could harvest but isn't a big enough loss to seem worth it. And I think that ability to TLH is far down the list in placement of bond funds myself.

Random Walker
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Re: Bonds in taxable for TLH purposes

Post by Random Walker » Tue Feb 06, 2018 10:00 am

Da5id,
Yes the bid ask spread is potential problem. I use an advisor who manages the bond ladder. They have the potential to exchange bonds between clients at I think no cost or miniscule cost, thus avoiding the bid ask spread issue.

Dave

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House Blend
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Re: Bonds in taxable for TLH purposes

Post by House Blend » Tue Feb 06, 2018 10:01 am

midnightrun wrote:
Tue Feb 06, 2018 12:32 am
My question was less about trying to find any opportunity to TLH and more about whether the small, albeit regular TLH opportunities provided by bonds is enough to tip the calculus towards bonds in taxable. I understood the rationale put forth by WCI in his article:
And the answer is no.

If you are going to take into account TLH opportunities in bonds as an argument for bonds in taxable, then you also have to take into account TLH opportunities in stocks as an argument for stocks in taxable.

And it's not even remotely a contest. The TLH factor favors stocks.

Random Walker
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Re: Bonds in taxable for TLH purposes

Post by Random Walker » Tue Feb 06, 2018 10:39 am

Potentially can have it both ways. I agree stocks more volatile, so more TLH opportunities for stocks. But perhaps there is a better use for tax advantaged space than bonds. How about stocks in taxable and use municipal bonds in taxable as one’s bond allocation? That could leave tax advantaged space available for tax inefficient alternatives like the AQR and Stone Ridge funds mentioned many times on the forum. This is what I have done.

Dave

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