Is VG Total Bond Market in IRA wasting tax-free returns?

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DrDoodle
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Is VG Total Bond Market in IRA wasting tax-free returns?

Post by DrDoodle »

VTBLX currently holds 46% treasury/agency bonds, which I'm assuming are federalstate tax-free. If I'm wrong about that, stop here. But if so, then isn't it a waste to hold it in a tax-advantaged account, and shouldn't I split it into a tax-free portion in my taxable account and a taxable portion in my IRA? I know VG has plenty of tax-free bond funds to choose from, but what would be an appropriate taxable bond fund to hold in the IRA?
Last edited by DrDoodle on Tue Nov 22, 2022 1:29 pm, edited 1 time in total.
brawlrats
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Re: Is VG Total Bond Market in IRA wasting tax-free returns?

Post by brawlrats »

Treasury bonds are subject to federal tax. They are exempt from state and local tax.
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retired@50
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Re: Is VG Total Bond Market in IRA wasting tax-free returns?

Post by retired@50 »

DrDoodle wrote: Tue Nov 22, 2022 10:52 am VTBLX currently holds 46% treasury/agency bonds, which I'm assuming are federal tax-free. If I'm wrong about that, stop here. But if so, then isn't it a waste to hold it in a tax-advantaged account, and shouldn't I split it into a tax-free portion in my taxable account and a taxable portion in my IRA? I know VG has plenty of tax-free bond funds to choose from, but what would be an appropriate taxable bond fund to hold in the IRA?
Treasury bonds are only exempt from state income taxes, not Federal income taxes.

VBTLX is an appropriate bond fund in an IRA (for many investors, which might include you).

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This is one person's opinion. Nothing more.
Topic Author
DrDoodle
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Re: Is VG Total Bond Market in IRA wasting tax-free returns?

Post by DrDoodle »

retired@50 wrote: Tue Nov 22, 2022 10:55 am Treasury bonds are only exempt from state income taxes, not Federal income taxes.

VBTLX is an appropriate bond fund in an IRA (for many investors, which might include you).
Whoops, significant mistake there; thanks for the correction. I think about my bond investments so infrequently that I got backwards on that!
Hyperchicken
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Re: Is VG Total Bond Market in IRA wasting tax-free returns?

Post by Hyperchicken »

It depends on the state.

For example, California requires that at least 50% of the funds assets are in US government obligations, in order for the income produced by these assets to not be taxable by the state. Thus, all income produced by VBTLX is taxable by the state of California. That creates all the more incentive to split all-in-one bond funds into US GO and everything else.

Most states do not have this sort of a threshold.
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retiredjg
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Re: Is VG Total Bond Market in IRA wasting tax-free returns?

Post by retiredjg »

DrDoodle wrote: Tue Nov 22, 2022 10:52 am VTBLX currently holds 46% treasury/agency bonds, which I'm assuming are federalstate tax-free. If I'm wrong about that, stop here. But if so, then isn't it a waste to hold it in a tax-advantaged account, and shouldn't I split it into a tax-free portion in my taxable account and a taxable portion in my IRA? I know VG has plenty of tax-free bond funds to choose from, but what would be an appropriate taxable bond fund to hold in the IRA?
The only way to "optimize" what you are looking at (to avoid "waste") is to put corporate bonds in IRA/401k and treasuries in taxable. But that accomplishes nothing since it is not very tax-efficient in many (or maybe even most) situations.

So yes, the tax-freeness is wasted in IRA, but there is no solution that makes it better except just not holding government bonds (which I would not consider better myself).
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