In taxable, why are bond funds "discouraged" but not money market funds?

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LifelongDebtor
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In taxable, why are bond funds "discouraged" but not money market funds?

Post by LifelongDebtor » Thu May 21, 2020 2:17 pm

I understand that bond funds are somewhat discouraged in a taxable account, but then why are money market funds not discouraged also? Don't they both provide the majority of their returns through ordinary dividends, which are taxed the same?

The possibility of using some ultra short bond ETFs in place of near zero yield money market funds in taxable account is what sparked this. The extremely tiny increase in "risk" of a tiny & temporary drawdown seem perfectly acceptable to me.

rkhusky
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Re: In taxable, why are bond funds "discouraged" but not money market funds?

Post by rkhusky » Thu May 21, 2020 2:23 pm

Because bond funds typically pay more than MM funds and people usually hold less in MM funds than in bond funds. An ultrashort bond fund is not much different than a MM fund - it’s a sliding scale, not a binary decision. In a low yield environment, longer term bonds are okay in taxable too.
Last edited by rkhusky on Thu May 21, 2020 2:34 pm, edited 2 times in total.

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Clever_Username
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Re: In taxable, why are bond funds "discouraged" but not money market funds?

Post by Clever_Username » Thu May 21, 2020 2:24 pm

A money market fund, when used, is often in place of a savings account or for future expenses, where the ultra low volatility is the main goal.

Whether or not bond funds are discouraged from taxable depends on many factors. I have far more bonds in taxable than stocks, even if you don't count my Series I bonds in that category.
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Phineas J. Whoopee
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Re: In taxable, why are bond funds "discouraged" but not money market funds?

Post by Phineas J. Whoopee » Thu May 21, 2020 2:35 pm

Who, specifically, discourages bond mutual funds but not money market mutual funds in taxable accounts? Is there a URL we can look at to see the reasoning?
PJW

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Re: In taxable, why are bond funds "discouraged" but not money market funds?

Post by petulant » Thu May 21, 2020 2:58 pm

Clever_Username wrote:
Thu May 21, 2020 2:24 pm
A money market fund, when used, is often in place of a savings account or for future expenses, where the ultra low volatility is the main goal.

Whether or not bond funds are discouraged from taxable depends on many factors. I have far more bonds in taxable than stocks, even if you don't count my Series I bonds in that category.
I think this is right. It doesn't come up because it's a portfolio/asset allocation issue, and MMFs are generally not in the main portfolio.

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Re: In taxable, why are bond funds "discouraged" but not money market funds?

Post by White Coat Investor » Thu May 21, 2020 3:00 pm

LifelongDebtor wrote:
Thu May 21, 2020 2:17 pm
I understand that bond funds are somewhat discouraged in a taxable account, but then why are money market funds not discouraged also? Don't they both provide the majority of their returns through ordinary dividends, which are taxed the same?

The possibility of using some ultra short bond ETFs in place of near zero yield money market funds in taxable account is what sparked this. The extremely tiny increase in "risk" of a tiny & temporary drawdown seem perfectly acceptable to me.
They're both fine in taxable at these low rates, especially for high earners using munis.

But the main reason why it's "ok" is that short term money is best kept in taxable and is best kept in MMFs. It's a good marriage. That doesn't mean you can't put your e-fund in your 401(k) in a MMF and stocks in taxable and then if you need cash sell the taxable stocks and swap MMF for stocks in the 401(k), but that adds an additional layer of complexity.
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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Nate79
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Re: In taxable, why are bond funds "discouraged" but not money market funds?

Post by Nate79 » Thu May 21, 2020 3:02 pm

I have no problem holding bonds in taxable. The tax cost is just a cost on the return of part of my emergency fund. It's a minor detail.

Ferdinand2014
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Re: In taxable, why are bond funds "discouraged" but not money market funds?

Post by Ferdinand2014 » Thu May 21, 2020 3:14 pm

Interest rate.
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Re: In taxable, why are bond funds "discouraged" but not money market funds?

Post by UpperNwGuy » Thu May 21, 2020 3:20 pm

Bond funds are fine in taxable. So are money market funds.

I hold a mix of municipal, treasury, and corporate bond funds in taxable. I also held some money market funds until early March when I moved those funds to a mix of high yield savings and certificates of deposit.

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Re: In taxable, why are bond funds "discouraged" but not money market funds?

Post by arcticpineapplecorp. » Thu May 21, 2020 3:56 pm

to the OP, did you see this link on tax efficient investing at the wiki:

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

if you look halfway down that page you find:

Image

so bond funds may be efficient, moderately inefficient or very inefficient...depending upon which bond fund you're using.
"May you live as long as you want and never want as long as you live" -- Irish Blessing | "Invest we must" -- Jack Bogle

jasuus
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Re: In taxable, why are bond funds "discouraged" but not money market funds?

Post by jasuus » Thu May 21, 2020 4:14 pm

White Coat Investor wrote:
Thu May 21, 2020 3:00 pm
LifelongDebtor wrote:
Thu May 21, 2020 2:17 pm
I understand that bond funds are somewhat discouraged in a taxable account, but then why are money market funds not discouraged also? Don't they both provide the majority of their returns through ordinary dividends, which are taxed the same?

The possibility of using some ultra short bond ETFs in place of near zero yield money market funds in taxable account is what sparked this. The extremely tiny increase in "risk" of a tiny & temporary drawdown seem perfectly acceptable to me.
They're both fine in taxable at these low rates, especially for high earners using munis.

But the main reason why it's "ok" is that short term money is best kept in taxable and is best kept in MMFs. It's a good marriage. That doesn't mean you can't put your e-fund in your 401(k) in a MMF and stocks in taxable and then if you need cash sell the taxable stocks and swap MMF for stocks in the 401(k), but that adds an additional layer of complexity.
Can you explain what you mean by putting your emergency fund inside your 401k and then putting stocks in taxable? If you needed to use emergency fund, wouldnt you be forced to sell the stocks, possibly at a big loss?

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Re: In taxable, why are bond funds "discouraged" but not money market funds?

Post by abuss368 » Thu May 21, 2020 7:28 pm

LifelongDebtor wrote:
Thu May 21, 2020 2:17 pm
I understand that bond funds are somewhat discouraged in a taxable account, but then why are money market funds not discouraged also? Don't they both provide the majority of their returns through ordinary dividends, which are taxed the same?

The possibility of using some ultra short bond ETFs in place of near zero yield money market funds in taxable account is what sparked this. The extremely tiny increase in "risk" of a tiny & temporary drawdown seem perfectly acceptable to me.
You can place taxable or tax exempt bonds in a taxable account if need be based on your personal tax situation.
John C. Bogle: Two Fund Portfolio - Total Stock & Total Bond - “Simplicity is the master key to financial success."

MrJedi
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Re: In taxable, why are bond funds "discouraged" but not money market funds?

Post by MrJedi » Thu May 21, 2020 7:52 pm

jasuus wrote:
Thu May 21, 2020 4:14 pm
White Coat Investor wrote:
Thu May 21, 2020 3:00 pm
LifelongDebtor wrote:
Thu May 21, 2020 2:17 pm
I understand that bond funds are somewhat discouraged in a taxable account, but then why are money market funds not discouraged also? Don't they both provide the majority of their returns through ordinary dividends, which are taxed the same?

The possibility of using some ultra short bond ETFs in place of near zero yield money market funds in taxable account is what sparked this. The extremely tiny increase in "risk" of a tiny & temporary drawdown seem perfectly acceptable to me.
They're both fine in taxable at these low rates, especially for high earners using munis.

But the main reason why it's "ok" is that short term money is best kept in taxable and is best kept in MMFs. It's a good marriage. That doesn't mean you can't put your e-fund in your 401(k) in a MMF and stocks in taxable and then if you need cash sell the taxable stocks and swap MMF for stocks in the 401(k), but that adds an additional layer of complexity.
Can you explain what you mean by putting your emergency fund inside your 401k and then putting stocks in taxable? If you needed to use emergency fund, wouldnt you be forced to sell the stocks, possibly at a big loss?
You simply sell the stocks in taxable and then rebalance by buying stocks with the money you have in MMF in 401k.

This also gives you an opportunity to TLH the taxable account. There is no TLH opportunity inside the 401k.

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Re: In taxable, why are bond funds "discouraged" but not money market funds?

Post by grabiner » Thu May 21, 2020 9:10 pm

arcticpineapplecorp. wrote:
Thu May 21, 2020 3:56 pm
to the OP, did you see this link on tax efficient investing at the wiki:

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

if you look halfway down that page you find:

Image

so bond funds may be efficient, moderately inefficient or very inefficient...depending upon which bond fund you're using.
And equally important, it depends on the yield. With the current yield on Vanguard Total Bond Market Index at 1.49%, it is tax-efficient; there isn't much income to be taxed. Vanguard Intermediate-Term Corporate Bond ETF, the riskiest Vanguard fund suitable as a core bond holding, is probably better in tax-deferred at 2.62% yield. Vanguard High-Yield Corporate Bond Fund, at 5.94%, should only be held in tax-deferred.

The same principle applies to munis; while you don't pay tax on munis, they yield less than taxable bonds of comparable risk. My rule of thumb is that the hidden tax on a muni fund is 1/3 of the yield, so that munis and corporate bonds of the same risk level are break-even at a 25% tax rate. Thus, rather than holding Vanguard Intermediate-Term Tax-Exempt, with a 1.83% yield, you could hold corporate bonds in an IRA with a 2.44% yield, and stocks in taxable; that is a close decision in a moderate bracket, but the muni fund would be better in a high bracket in which qualified dividends are taxed at 18.8% or 23.8%.
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Re: In taxable, why are bond funds "discouraged" but not money market funds?

Post by White Coat Investor » Fri May 22, 2020 8:25 am

jasuus wrote:
Thu May 21, 2020 4:14 pm
White Coat Investor wrote:
Thu May 21, 2020 3:00 pm
LifelongDebtor wrote:
Thu May 21, 2020 2:17 pm
I understand that bond funds are somewhat discouraged in a taxable account, but then why are money market funds not discouraged also? Don't they both provide the majority of their returns through ordinary dividends, which are taxed the same?

The possibility of using some ultra short bond ETFs in place of near zero yield money market funds in taxable account is what sparked this. The extremely tiny increase in "risk" of a tiny & temporary drawdown seem perfectly acceptable to me.
They're both fine in taxable at these low rates, especially for high earners using munis.

But the main reason why it's "ok" is that short term money is best kept in taxable and is best kept in MMFs. It's a good marriage. That doesn't mean you can't put your e-fund in your 401(k) in a MMF and stocks in taxable and then if you need cash sell the taxable stocks and swap MMF for stocks in the 401(k), but that adds an additional layer of complexity.
Can you explain what you mean by putting your emergency fund inside your 401k and then putting stocks in taxable? If you needed to use emergency fund, wouldnt you be forced to sell the stocks, possibly at a big loss?
Yes, but you're also buying the exact same amount of stocks at a discount. Plus you captured the loss in taxable.
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: In taxable, why are bond funds "discouraged" but not money market funds?

Post by mouth » Fri May 22, 2020 8:43 am

White Coat Investor wrote:
Fri May 22, 2020 8:25 am
jasuus wrote:
Thu May 21, 2020 4:14 pm
White Coat Investor wrote:
Thu May 21, 2020 3:00 pm
LifelongDebtor wrote:
Thu May 21, 2020 2:17 pm
I understand that bond funds are somewhat discouraged in a taxable account, but then why are money market funds not discouraged also? Don't they both provide the majority of their returns through ordinary dividends, which are taxed the same?

The possibility of using some ultra short bond ETFs in place of near zero yield money market funds in taxable account is what sparked this. The extremely tiny increase in "risk" of a tiny & temporary drawdown seem perfectly acceptable to me.
They're both fine in taxable at these low rates, especially for high earners using munis.

But the main reason why it's "ok" is that short term money is best kept in taxable and is best kept in MMFs. It's a good marriage. That doesn't mean you can't put your e-fund in your 401(k) in a MMF and stocks in taxable and then if you need cash sell the taxable stocks and swap MMF for stocks in the 401(k), but that adds an additional layer of complexity.
Can you explain what you mean by putting your emergency fund inside your 401k and then putting stocks in taxable? If you needed to use emergency fund, wouldnt you be forced to sell the stocks, possibly at a big loss?
Yes, but you're also buying the exact same amount of stocks at a discount. Plus you captured the loss in taxable.
I think the answer jasuus probably needed was this link https://www.bogleheads.org/wiki/Placing ... ed_account

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Re: In taxable, why are bond funds "discouraged" but not money market funds?

Post by White Coat Investor » Wed May 27, 2020 10:37 am

mouth wrote:
Fri May 22, 2020 8:43 am
White Coat Investor wrote:
Fri May 22, 2020 8:25 am
jasuus wrote:
Thu May 21, 2020 4:14 pm
White Coat Investor wrote:
Thu May 21, 2020 3:00 pm
LifelongDebtor wrote:
Thu May 21, 2020 2:17 pm
I understand that bond funds are somewhat discouraged in a taxable account, but then why are money market funds not discouraged also? Don't they both provide the majority of their returns through ordinary dividends, which are taxed the same?

The possibility of using some ultra short bond ETFs in place of near zero yield money market funds in taxable account is what sparked this. The extremely tiny increase in "risk" of a tiny & temporary drawdown seem perfectly acceptable to me.
They're both fine in taxable at these low rates, especially for high earners using munis.

But the main reason why it's "ok" is that short term money is best kept in taxable and is best kept in MMFs. It's a good marriage. That doesn't mean you can't put your e-fund in your 401(k) in a MMF and stocks in taxable and then if you need cash sell the taxable stocks and swap MMF for stocks in the 401(k), but that adds an additional layer of complexity.
Can you explain what you mean by putting your emergency fund inside your 401k and then putting stocks in taxable? If you needed to use emergency fund, wouldnt you be forced to sell the stocks, possibly at a big loss?
Yes, but you're also buying the exact same amount of stocks at a discount. Plus you captured the loss in taxable.
I think the answer jasuus probably needed was this link https://www.bogleheads.org/wiki/Placing ... ed_account
Good idea!
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: In taxable, why are bond funds "discouraged" but not money market funds?

Post by abuss368 » Wed May 27, 2020 1:48 pm

arcticpineapplecorp. wrote:
Thu May 21, 2020 3:56 pm
to the OP, did you see this link on tax efficient investing at the wiki:

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

if you look halfway down that page you find:

Image

so bond funds may be efficient, moderately inefficient or very inefficient...depending upon which bond fund you're using.
I am not sure how accurate that chart may be in terms of REITs. Since the Trump Tax Act of 2017, REITs not qualify for the additional QBI deduction. While their tax efficiency may not be the best, it is definitely not the same as years ago.
John C. Bogle: Two Fund Portfolio - Total Stock & Total Bond - “Simplicity is the master key to financial success."

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