Doesn't it still make sense to hold bonds in tax advantaged?

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FIby45
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Doesn't it still make sense to hold bonds in tax advantaged?

Post by FIby45 »

I have seen some comments on the forum that this perhaps is no longer the case due to extremely low interest rates and yields on stocks being more than bonds.

Does this consider TLH?

Do the TLH opportunities of keeping stocks in taxable accounts and bonds in tax advantaged outweigh the tax advantages over the opposite placement?
Tingting1013
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Re: Doesn't it still make sense to hold bonds in tax advantaged?

Post by Tingting1013 »

You can TLH bonds too. They just need to be the right kind of bonds.

viewtopic.php?t=322058
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FIby45
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Re: Doesn't it still make sense to hold bonds in tax advantaged?

Post by FIby45 »

Tingting1013 wrote: Mon Sep 21, 2020 10:27 am You can TLH bonds too. They just need to be the right kind of bonds.

viewtopic.php?t=322058
I will check out the link, but unless it is an ultra risky bond, the type that I typically do not invest in, I wouldn't think the opportunity for tax loss harvesting could be nearly as great as equities.
Greenman72
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Re: Doesn't it still make sense to hold bonds in tax advantaged?

Post by Greenman72 »

Last I heard, the yield on the ten-year Treasury was 0.68%.

So if you're in the highest of all possible tax brackets, and you have a $1m Treasury portfolio, you will save about $2500 by putting your bonds in an IRA, which is less than most people spend on ice cream in a year.

My point--at 0.68% expected return, it's just not enough return to worry about.

And I've never heard of TLH-ing fixed income. I guess it's theoretically possible, but not something I would spend a lot of time worrying about.
Tingting1013
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Re: Doesn't it still make sense to hold bonds in tax advantaged?

Post by Tingting1013 »

FIby45 wrote: Mon Sep 21, 2020 10:57 am
Tingting1013 wrote: Mon Sep 21, 2020 10:27 am You can TLH bonds too. They just need to be the right kind of bonds.

viewtopic.php?t=322058
I will check out the link, but unless it is an ultra risky bond, the type that I typically do not invest in, I wouldn't think the opportunity for tax loss harvesting could be nearly as great as equities.
It is theoretically optimal to hold bonds with a duration that matches your time horizon for the money. This means long term bonds for long term needs.

But many Bogleheads do not hold long term bonds because they are afraid of interim volatility.

Being able to TLH your long term bonds offers both a financial and psychological benefit - think of it as the grape flavoring that makes your medicine easier to go down.
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FIby45
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Re: Doesn't it still make sense to hold bonds in tax advantaged?

Post by FIby45 »

Greenman72 wrote: Mon Sep 21, 2020 10:58 am Last I heard, the yield on the ten-year Treasury was 0.68%.

So if you're in the highest of all possible tax brackets, and you have a $1m Treasury portfolio, you will save about $2500 by putting your bonds in an IRA, which is less than most people spend on ice cream in a year.

My point--at 0.68% expected return, it's just not enough return to worry about.

And I've never heard of TLH-ing fixed income. I guess it's theoretically possible, but not something I would spend a lot of time worrying about.
To be clear here, I am not talking about TLH fixed income. I'm talking about having my bonds in tax advantaged and therefore increasing proportion of equities in taxable and increasing my ability to tlh losses from those equities. The cost of that being more taxes on the higher yields on the stocks in taxable.
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Re: Doesn't it still make sense to hold bonds in tax advantaged?

Post by Northern Flicker »

The appropriate question is where do you want to hold stocks? Once that is answered, hold bonds in the remaining space.
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Re: Doesn't it still make sense to hold bonds in tax advantaged?

Post by FIREchief »

FIby45 wrote: Mon Sep 21, 2020 9:48 am I have seen some comments on the forum that this perhaps is no longer the case due to extremely low interest rates and yields on stocks being more than bonds.
Please clarify what you mean by "tax advantaged." Both traditional and Roth IRAs are considered tax advantaged, and the answers might be very different.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
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Re: Doesn't it still make sense to hold bonds in tax advantaged?

Post by retiredjg »

FIby45 wrote: Mon Sep 21, 2020 9:48 am I have seen some comments on the forum that this perhaps is no longer the case due to extremely low interest rates and yields on stocks being more than bonds.

Does this consider TLH?

Do the TLH opportunities of keeping stocks in taxable accounts and bonds in tax advantaged outweigh the tax advantages over the opposite placement?
The fact that interest rates are low simply makes it more palatable now to hold bonds in taxable than it used to be. It does not mean that taxable is the perfect place or the best place to hold bonds. It does not mean that bonds should be held in taxable instead of elsewhere. It does not mean that stocks should not be held in taxable. It just means that bonds are not as bad in taxable as when interest rates are high.

If you are interested in actively pursuing tax loss harvesting, you should hold as large an allocation to stocks in taxable as is reasonable for your situation.

So yes, it still makes sense to hold bonds in your tax-deferred accounts, for this reason and maybe some others.
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Re: Doesn't it still make sense to hold bonds in tax advantaged?

Post by Doc »

Greenman72 wrote: Mon Sep 21, 2020 10:58 am And I've never heard of TLH-ing fixed income. I guess it's theoretically possible, but not something I would spend a lot of time worrying about.
Now you have. :D

Sold Vanguard Short Corp VCSH for a $3K loss in March.

But worrying is not an issue.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.
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Re: Doesn't it still make sense to hold bonds in tax advantaged?

Post by KlangFool »

FIby45 wrote: Mon Sep 21, 2020 9:48 am I have seen some comments on the forum that this perhaps is no longer the case due to extremely low interest rates and yields on stocks being more than bonds.

Does this consider TLH?

Do the TLH opportunities of keeping stocks in taxable accounts and bonds in tax advantaged outweigh the tax advantages over the opposite placement?
FIby45,

<<due to extremely low interest rates and yields on stocks being more than bonds.
>>

They are not the same.


A) Interest income from the bond are taxed as ordinary income.


B) Dividend from the stock are taxed as

i) Qualified dividend are taxed at long term capital gain

ii) Non-qualified dividend are taxed as ordinary income


For many stock index fund, up to 90+% of the dividend are qualified dividend.


So, even if the interest income from the bond may be less than the dividend of the stock, you may still pay more taxes with the bond in your taxable account.


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Re: Doesn't it still make sense to hold bonds in tax advantaged?

Post by KlangFool »

FIby45 wrote: Mon Sep 21, 2020 9:48 am I have seen some comments on the forum that this perhaps is no longer the case due to extremely low interest rates and yields on stocks being more than bonds.

Does this consider TLH?

Do the TLH opportunities of keeping stocks in taxable accounts and bonds in tax advantaged outweigh the tax advantages over the opposite placement?
FIby45,

The second problem with this approach is the assumption that the interest rate will stay low. I know that I know nothing. So, I do not assume that the interest may stay low in the long term.

Assuming that the interest rate will stay low for the next 10 years is "market timing".

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Re: Doesn't it still make sense to hold bonds in tax advantaged?

Post by Soon2BXProgrammer »

KlangFool wrote: Mon Sep 21, 2020 5:01 pm
FIby45 wrote: Mon Sep 21, 2020 9:48 am I have seen some comments on the forum that this perhaps is no longer the case due to extremely low interest rates and yields on stocks being more than bonds.

Does this consider TLH?

Do the TLH opportunities of keeping stocks in taxable accounts and bonds in tax advantaged outweigh the tax advantages over the opposite placement?
FIby45,

<<due to extremely low interest rates and yields on stocks being more than bonds.
>>

They are not the same.


A) Interest income from the bond are taxed as ordinary income.


B) Dividend from the stock are taxed as

i) Qualified dividend are taxed at long term capital gain

ii) Non-qualified dividend are taxed as ordinary income


For many stock index fund, up to 90+% of the dividend are qualified dividend.


So, even if the interest income from the bond may be less than the dividend of the stock, you may still pay more taxes with the bond in your taxable account.


KlangFool
Where to put ones bonds is very very complex. My bonds are all in pretax, setting aside the rest of the commonly talked about issues around taxation, because I'm approaching my pretax accounts being too large to stay in a low tax bracket the rest of my life. Therefore, I'm using the low return of bonds to sabotage my pretax returns to allow me more room to take pretax deductions at a high tax bracket.
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Re: Doesn't it still make sense to hold bonds in tax advantaged?

Post by KlangFool »

Soon2BXProgrammer wrote: Mon Sep 21, 2020 5:05 pm

Where to put ones bonds is very very complex. My bonds are all in pretax, setting aside the rest of the commonly talked about issues around taxation, because I'm approaching my pretax accounts being too large to stay in a low tax bracket the rest of my life. Therefore, I'm using the low return of bonds to sabotage my pretax returns to allow me more room to take pretax deductions at a high tax bracket.

Soon2BXProgrammer,

I disagreed. I have 500K of stock in my taxable account.

<<Therefore, I'm using the low return of bonds to sabotage my pretax returns to allow me more room to take pretax deductions at a high tax bracket.>>

I do not see how that is relevant. You can decide when to sell and generate your gain with the stock. You can't with the bond.


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Re: Doesn't it still make sense to hold bonds in tax advantaged?

Post by Tingting1013 »

KlangFool wrote: Mon Sep 21, 2020 5:05 pm
FIby45 wrote: Mon Sep 21, 2020 9:48 am I have seen some comments on the forum that this perhaps is no longer the case due to extremely low interest rates and yields on stocks being more than bonds.

Does this consider TLH?

Do the TLH opportunities of keeping stocks in taxable accounts and bonds in tax advantaged outweigh the tax advantages over the opposite placement?
FIby45,

The second problem with this approach is the assumption that the interest rate will stay low. I know that I know nothing. So, I do not assume that the interest may stay low in the long term.

Assuming that the interest rate will stay low for the next 10 years is "market timing".

KlangFool
OP is not assuming anything.

In fact if OP puts bonds in taxable and the interest rate rises, that leads to a TLH opportunity.
absolute zero
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Re: Doesn't it still make sense to hold bonds in tax advantaged?

Post by absolute zero »

The answer to this question is far more complex than most realize. If you build a spreadsheet to compare bonds in taxable vs tax deferred, you’ll find the main “levers” aka variables/inputs/assumptions are

- current tax rate
- tax rate in retirement
- bond yields
- stock returns
- time horizon

My best estimate is that for a majority of people (although certainly not a *vast* majority) bonds in tax-advantaged makes more sense. But the problems are that:
(A) there are too many unknown variables (see list above)
(B) the solution of where to put bonds is extremely sensitive to small changes in the variables/assumptions. It's virtually impossible to know which will yield the best outcome.

I have a mix of bonds in taxable and tax-advantaged, but I own few bonds so it makes little difference. Even if I owned more bonds, I wouldn't sweat it much.
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Re: Doesn't it still make sense to hold bonds in tax advantaged?

Post by absolute zero »

KlangFool wrote: Mon Sep 21, 2020 5:05 pm
FIby45 wrote: Mon Sep 21, 2020 9:48 am I have seen some comments on the forum that this perhaps is no longer the case due to extremely low interest rates and yields on stocks being more than bonds.

Does this consider TLH?

Do the TLH opportunities of keeping stocks in taxable accounts and bonds in tax advantaged outweigh the tax advantages over the opposite placement?
FIby45,

The second problem with this approach is the assumption that the interest rate will stay low. I know that I know nothing. So, I do not assume that the interest may stay low in the long term.

Assuming that the interest rate will stay low for the next 10 years is "market timing".

KlangFool
If yields go higher then one can just move his bonds from taxable to tax advantaged. It takes a few clicks, maybe 5 or 10 minutes of work...
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Re: Doesn't it still make sense to hold bonds in tax advantaged?

Post by KlangFool »

absolute zero wrote: Mon Sep 21, 2020 5:21 pm
KlangFool wrote: Mon Sep 21, 2020 5:05 pm
FIby45 wrote: Mon Sep 21, 2020 9:48 am I have seen some comments on the forum that this perhaps is no longer the case due to extremely low interest rates and yields on stocks being more than bonds.

Does this consider TLH?

Do the TLH opportunities of keeping stocks in taxable accounts and bonds in tax advantaged outweigh the tax advantages over the opposite placement?
FIby45,

The second problem with this approach is the assumption that the interest rate will stay low. I know that I know nothing. So, I do not assume that the interest may stay low in the long term.

Assuming that the interest rate will stay low for the next 10 years is "market timing".

KlangFool
If yields go higher then one can just move his bonds from taxable to tax advantaged. It takes a few clicks, maybe 5 or 10 minutes of work...

absolute zero,

1) You pay taxes when you generate more transactions.


2) You have to buy more bonds.


3) The goal is to reduce the taxes that you pay in your tax-deferred account. When you put stock in your tax-deferred account, you will generate a bigger tax bill for the future.


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Re: Doesn't it still make sense to hold bonds in tax advantaged?

Post by KlangFool »

Tingting1013 wrote: Mon Sep 21, 2020 5:16 pm
KlangFool wrote: Mon Sep 21, 2020 5:05 pm
FIby45 wrote: Mon Sep 21, 2020 9:48 am I have seen some comments on the forum that this perhaps is no longer the case due to extremely low interest rates and yields on stocks being more than bonds.

Does this consider TLH?

Do the TLH opportunities of keeping stocks in taxable accounts and bonds in tax advantaged outweigh the tax advantages over the opposite placement?
FIby45,

The second problem with this approach is the assumption that the interest rate will stay low. I know that I know nothing. So, I do not assume that the interest may stay low in the long term.

Assuming that the interest rate will stay low for the next 10 years is "market timing".

KlangFool
OP is not assuming anything.

In fact if OP puts bonds in taxable and the interest rate rises, that leads to a TLH opportunity.
Tingting1013,

But, OP will pay more taxes every year due to the annual interest income. OP is assuming that the interest rate for the bond will stay low forever.

KlangFool
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Re: Doesn't it still make sense to hold bonds in tax advantaged?

Post by Tingting1013 »

KlangFool wrote: Mon Sep 21, 2020 5:27 pm
Tingting1013 wrote: Mon Sep 21, 2020 5:16 pm
KlangFool wrote: Mon Sep 21, 2020 5:05 pm
FIby45 wrote: Mon Sep 21, 2020 9:48 am I have seen some comments on the forum that this perhaps is no longer the case due to extremely low interest rates and yields on stocks being more than bonds.

Does this consider TLH?

Do the TLH opportunities of keeping stocks in taxable accounts and bonds in tax advantaged outweigh the tax advantages over the opposite placement?
FIby45,

The second problem with this approach is the assumption that the interest rate will stay low. I know that I know nothing. So, I do not assume that the interest may stay low in the long term.

Assuming that the interest rate will stay low for the next 10 years is "market timing".

KlangFool
OP is not assuming anything.

In fact if OP puts bonds in taxable and the interest rate rises, that leads to a TLH opportunity.
Tingting1013,

But, OP will pay more taxes every year due to the annual interest income. OP is assuming that the interest rate for the bond will stay low forever.

KlangFool
It is a trade off:

Put bonds in tax-advantaged, save 0.1% to 0.2% in interest income tax annually but lose out on the ability to TLH bonds if interest rates rise.

Put bonds in taxable, pay taxes on interest income but gain the ability to TLH
Last edited by Tingting1013 on Mon Sep 21, 2020 6:04 pm, edited 1 time in total.
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Re: Doesn't it still make sense to hold bonds in tax advantaged?

Post by Noobvestor »

I hold some bonds and stocks in taxable, and some in tax-advantaged - it's helpful to be able to rebalance in tax-advantaged accounts.
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Re: Doesn't it still make sense to hold bonds in tax advantaged?

Post by KlangFool »

Tingting1013 wrote: Mon Sep 21, 2020 5:35 pm

It is a trade off:

Put bonds in tax-advantaged, save 0.1% to 0.2% in interest income tax annually but lose out on the ability to TLH bonds if interest rates rise.

Put bonds in taxable, pay taxes on interest income but gain the ability to TLH

Tingting1013,

I know that I know nothing. I would not assume that the bond's interest rate would stay at 0.1% to 0.2%. What if the bonds' interest rate goes up to 5%? 10%?

<<but lose out on the ability to TLH bonds if interest rates rise.>>


This is not a good argument. Stocks are more volatile than the bond. For TLH purposes, you get bigger and more opportunities with the stock than the bond.


KlangFool
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Re: Doesn't it still make sense to hold bonds in tax advantaged?

Post by Tingting1013 »

KlangFool wrote: Mon Sep 21, 2020 6:11 pm
Tingting1013 wrote: Mon Sep 21, 2020 5:35 pm

It is a trade off:

Put bonds in tax-advantaged, save 0.1% to 0.2% in interest income tax annually but lose out on the ability to TLH bonds if interest rates rise.

Put bonds in taxable, pay taxes on interest income but gain the ability to TLH

Tingting1013,

I know that I know nothing. I would not assume that the bond's interest rate would stay at 0.1% to 0.2%. What if the bonds' interest rate goes up to 5%? 10%?
The 0.1% to 0.2% I mentioned is not the yield of the bond fund, it is the difference in tax cost between stocks and bonds.

If bonds rise to 10% I will just TLH them, but instead of buying the replacement bond fund in taxable I will just buy them in tax-deferred.
KlangFool wrote: Mon Sep 21, 2020 6:11 pm
This is not a good argument. Stocks are more volatile than the bond. For TLH purposes, you get bigger and more opportunities with the stock than the bond.


KlangFool
The bonds that I hold are more volatile than stock.

https://www.portfoliovisualizer.com/fun ... chmark=SPY
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Re: Doesn't it still make sense to hold bonds in tax advantaged?

Post by KlangFool »

Tingting1013 wrote: Mon Sep 21, 2020 6:47 pm
KlangFool wrote: Mon Sep 21, 2020 6:11 pm
Tingting1013 wrote: Mon Sep 21, 2020 5:35 pm

It is a trade off:

Put bonds in tax-advantaged, save 0.1% to 0.2% in interest income tax annually but lose out on the ability to TLH bonds if interest rates rise.

Put bonds in taxable, pay taxes on interest income but gain the ability to TLH

Tingting1013,

I know that I know nothing. I would not assume that the bond's interest rate would stay at 0.1% to 0.2%. What if the bonds' interest rate goes up to 5%? 10%?
The 0.1% to 0.2% I mentioned is not the yield of the bond fund, it is the difference in tax cost between stocks and bonds.

If bonds rise to 10% I will just TLH them, but instead of buying the replacement bond fund in taxable I will just buy them in tax-deferred.
KlangFool wrote: Mon Sep 21, 2020 6:11 pm
This is not a good argument. Stocks are more volatile than the bond. For TLH purposes, you get bigger and more opportunities with the stock than the bond.


KlangFool
The bonds that I hold are more volatile than stock.

https://www.portfoliovisualizer.com/fun ... chmark=SPY

Tingting1013,

That is based on your marginal tax rate which may or may not be the same as OP.

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Re: Doesn't it still make sense to hold bonds in tax advantaged?

Post by Tingting1013 »

KlangFool wrote: Mon Sep 21, 2020 6:58 pm
Tingting1013 wrote: Mon Sep 21, 2020 6:47 pm
KlangFool wrote: Mon Sep 21, 2020 6:11 pm
Tingting1013 wrote: Mon Sep 21, 2020 5:35 pm

It is a trade off:

Put bonds in tax-advantaged, save 0.1% to 0.2% in interest income tax annually but lose out on the ability to TLH bonds if interest rates rise.

Put bonds in taxable, pay taxes on interest income but gain the ability to TLH

Tingting1013,

I know that I know nothing. I would not assume that the bond's interest rate would stay at 0.1% to 0.2%. What if the bonds' interest rate goes up to 5%? 10%?
The 0.1% to 0.2% I mentioned is not the yield of the bond fund, it is the difference in tax cost between stocks and bonds.

If bonds rise to 10% I will just TLH them, but instead of buying the replacement bond fund in taxable I will just buy them in tax-deferred.
KlangFool wrote: Mon Sep 21, 2020 6:11 pm
This is not a good argument. Stocks are more volatile than the bond. For TLH purposes, you get bigger and more opportunities with the stock than the bond.


KlangFool
The bonds that I hold are more volatile than stock.

https://www.portfoliovisualizer.com/fun ... chmark=SPY

Tingting1013,

That is based on your marginal tax rate which may or may not be the same as OP.

KlangFool
Right now BND is yielding 1.2% and VTI is yielding 1.5%.

After applying ordinary income tax rates to BND and LTCG rates to VTI, BND has a maximum 0.14% higher tax cost than VTI at the highest tax bracket.
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Re: Doesn't it still make sense to hold bonds in tax advantaged?

Post by Taylor Larimore »

Bogleheads:

Our Bogleheads Wiki can help answer this question:

Tax Efficient Fund Placement.

Best wishes
Taylor
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Re: Doesn't it still make sense to hold bonds in tax advantaged?

Post by Tingting1013 »

Here is the math:

Image

First column is “MFJ taxable income”
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Re: Doesn't it still make sense to hold bonds in tax advantaged?

Post by whodidntante »

There is a lot of talk about the taxation of distributions, which is valid, but kind of misses the forest for the trees. You want your stocks in taxable or Roth accounts because it's not unusual for investors to see capital gains of 100%, 200%, 500% or more over a lifetime. So the worst possible tax treatment for a lot of us will come from experiencing that growth in a tax-deferred account. Similarly, bonds currently have expected real returns somewhere between pathetic and a loss, so you want to experience that "growth" in a tax-deferred account. Expected returns are even worse if you are buying short or intermediate term Treasuries like the Swedroe gang does.
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Re: Doesn't it still make sense to hold bonds in tax advantaged?

Post by Tingting1013 »

whodidntante wrote: Mon Sep 21, 2020 7:37 pm There is a lot of talk about the taxation of distributions, which is valid, but kind of misses the forest for the trees. You want your stocks in taxable or Roth accounts because it's not unusual for investors to see capital gains of 100%, 200%, 500% or more over a lifetime. So the worst possible tax treatment for a lot of us will come from experiencing that growth in a tax-deferred account. Similarly, bonds currently have expected real returns somewhere between pathetic and a loss, so you want to experience that "growth" in a tax-deferred account. Expected returns are even worse if you are buying short or intermediate term Treasuries like the Swedroe gang does.
Based on my math above, I agree that focusing on distributions is shortsighted.

My rule of thumb:

Roth: US Stocks
Traditional IRA or 401k: ex-US stocks or Bonds
Taxable: US Stocks or Bonds
Last edited by Tingting1013 on Mon Sep 21, 2020 8:09 pm, edited 1 time in total.
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Re: Doesn't it still make sense to hold bonds in tax advantaged?

Post by abuss368 »

I wonder how this works presently with Rick Ferri's advice of "equal location" rather than "asset location" as he has discussed on the forum.
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Re: Doesn't it still make sense to hold bonds in tax advantaged?

Post by aristotelian »

Yes, you want the lowest return asset in the highest tax account and vice versa. Whether nominal yield is low or high is irrelevant. It is true that bonds in taxable are less bad with low nominal yields, but aside from tax drag on dividends, the bigger issue is causing stock gains to be taxed as income.
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Capital Gains at Death

Post by Taylor Larimore »

Bogleheads:

It is important to understand that capital gains in taxable accounts are cancelled at the owner's death. This is the reason heirs should strongly consider selling unwanted inherited securities immediately.

Best wishes.
Taylor
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Re: Doesn't it still make sense to hold bonds in tax advantaged?

Post by Ruttiger »

Is it a contradiction to say we need bonds for ballast and because we can't predict the markets so bonds may outperform, but turn around and say we know bonds will not perform as well as stocks so put them in tax deferred? If we know this, why not 100% stocks for any accumulator?

R.
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Re: Doesn't it still make sense to hold bonds in tax advantaged?

Post by Taylor Larimore »

Ruttiger wrote: Mon Sep 21, 2020 8:42 pm Is it a contradiction to say we need bonds for ballast and because we can't predict the markets so bonds may outperform, but turn around and say we know bonds will not perform as well as stocks so put them in tax deferred? If we know this, why not 100% stocks for any accumulator?
Ruttiger:

No one knows what stocks or bonds are going to do tomorrow, next week, next month or next year. Accordingly, it is wise to hold stocks for higher return and bonds for safety.

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "Deep Down I remain absolutely confident that the vast majority of American families will be well served by owning their equity holding in an all-U.S. stock-market index portfolio and holding their bonds in an all-U.S. bond-market index portfolio."
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Re: Doesn't it still make sense to hold bonds in tax advantaged?

Post by Ruttiger »

That's my point, if we don't know, how do you prioritize one over the other?

By the way, I'm humbled with your response, I have all the respect in the world for you and h a very been sn as vid follower and student (though maybe from the back of the room😀)

R.
JBTX
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Re: Doesn't it still make sense to hold bonds in tax advantaged?

Post by JBTX »

FIby45 wrote: Mon Sep 21, 2020 9:48 am I have seen some comments on the forum that this perhaps is no longer the case due to extremely low interest rates and yields on stocks being more than bonds.

Does this consider TLH?

Do the TLH opportunities of keeping stocks in taxable accounts and bonds in tax advantaged outweigh the tax advantages over the opposite placement?
From what I have seen, in most instances with low interest rates, 3% or below, it just doesn't make that much difference whether bonds go in taxable or tax advantaged, at least in the mid tax rates The higher tax rate 22/24 vs 15% is not enough to offset the tax benefit of tax advantaged stocks growth. It is mostly a timing difference, you pay interest right away, vs stocks where you only pay dividends right away, but capital gains down the road (note with interest rates so low now the actual dividends from funds in taxable may come close to the interest expense of bonds, especially after a few years of growth)

You can create scenarios where bonds in tax advantaged is better. If you aggressively TLH then you may be able to make that scenario work in your favor. However TLH works better if you have enough different securities/funds that behave differently, and/or you invest frequently enough and use specific identification such that you increase the probability that you actually have funds with a loss to harvest. TLH is most just tax deferral, unless you can recognize a small amount each year against ordinary income, or you can eventually recognize capital gains when you are in a lower tax bracket.

There is no doubt that there are people here who use it to their advantage. But it does take some work, and to a degree it decreases your flexibility on when you can buy and sell things, how you reinvest dividends, etc. For me I never saw it worth the effort, but at this point most of our assets are in tax advantaged anyway. If I had 7 figures of assets in taxable perhaps I'd feel differently.
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Doc
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Re: Doesn't it still make sense to hold bonds in tax advantaged?

Post by Doc »

Tingting1013 wrote: Mon Sep 21, 2020 5:35 pm
KlangFool wrote: Mon Sep 21, 2020 5:27 pm
Tingting1013 wrote: Mon Sep 21, 2020 5:16 pm
KlangFool wrote: Mon Sep 21, 2020 5:05 pm
FIby45 wrote: Mon Sep 21, 2020 9:48 am I have seen some comments on the forum that this perhaps is no longer the case due to extremely low interest rates and yields on stocks being more than bonds.

Does this consider TLH?

Do the TLH opportunities of keeping stocks in taxable accounts and bonds in tax advantaged outweigh the tax advantages over the opposite placement?
FIby45,

The second problem with this approach is the assumption that the interest rate will stay low. I know that I know nothing. So, I do not assume that the interest may stay low in the long term.

Assuming that the interest rate will stay low for the next 10 years is "market timing".

KlangFool
OP is not assuming anything.

In fact if OP puts bonds in taxable and the interest rate rises, that leads to a TLH opportunity.
Tingting1013,

But, OP will pay more taxes every year due to the annual interest income. OP is assuming that the interest rate for the bond will stay low forever.

KlangFool
It is a trade off:

Put bonds in tax-advantaged, save 0.1% to 0.2% in interest income tax annually but lose out on the ability to TLH bonds if interest rates rise.

Put bonds in taxable, pay taxes on interest income but gain the ability to TLH
I don't see it as even much of a tradeoff at least if you break up your FI into pieces.

Short Treasuries are earning next to nothing. Nothing taxed at you marginal rate is still nothing. If interest rates rise your Treasury's price will fall and you will have the opportunity to tax loss harvest and at that time move that FI to tax advantaged and equities back.

(I don't believe that I am actually taking the opposite view to KlangFool. :D )
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.
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grabiner
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Re: Doesn't it still make sense to hold bonds in tax advantaged?

Post by grabiner »

You have to compare the total costs. The lower the yield on bonds, the lower the tax cost, which makes bonds relatively more attractive. The optimal location of bonds depends on the yield, and on your tax situation (including state tax; in-state munis are particularly attractive).

The opportunity to harvest losses reduces the tax cost of stocks in a taxable account. On the other hand, the potential capital-gains tax increases the tax cost beyond the basic tax on dividends. If you are planning to spend your taxable account during your lifetime (rather than leaving it to your heirs or to charity), it is less attractive to hold stocks in a taxable account.

My rule of thumb is that in a moderate tax bracket, bonds in taxable are more attractive if muni yields are lower than stock yields, which they are now. If you can use in-state munis, or avoid the Net Investment Income Tax by using munis, that makes bonds in taxable even more attractive.
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