Bonds in taxable account

[dergon]

Hi there -

I just sat down to my annual meet with my advisor at Schwab (Don't worry ... they provide the service for free). I do as part of a portfolio review ahead of my annual rebalancing. I usually take the meetings for the purpose of overview but generally don't act on any advice because he is usually talking about "plays", either market timing or some narrowly focused investment to "beat the market".


This year we got a bit more into actual asset allocation.



I have been looking to start getting some bonds into my porftfolio. My advisor now thinks the same.

So this time I listen when I get his recommendation for some bonds but it seems a bit atypical and wanted to bounce.

In addition to moving 5% of my portfolio in my IRA into a low cost bond fund he also wants me to move 5% of in my taxable account to a tax free bond fund. (Vanguard Ohio Long Term Tax Exempt Fund - VOHIX)

I had always thought I would only put tax-free bonds into taxable account when all of the tax-exempt account were filled up with tax-inefficient stuff. That is not the case currently. I have IRAs and other tax favorable account that are still entirely equities.

Can someone help me wrap my brain around all this?

Thanks -



(ps-A bit of my personal: I'm 47 years old am currently 94% equities invested, 5% REITS, no bonds. I have an estimate 15 year horizon to actually using any retirement saving. Total porftolio low-mid 7 figures. Highest tax bracket. )
(pps -- If I left out any important info I'm happy to edit)

[mnvalue]

This might be of interest: http://whitecoatinvestor.com/asset-loca ... n-taxable/

[Pizzasteve510]

I guess we would need to know your target asset allocations and also the relative sizes of your taxable vs tax deferred investments available to allocate.

+1 to the wiki link above. I am not a pro, but some thoughts...

For example, I am also slowly converting to more income vs equity, but my taxable assets are roughly 3x tax deferred. So hypothetically, if I wanted to be 50 pct bonds, I would have to have some bonds in my taxable account. Generally it makes sense to have hight interest bond-like things in the tax deferred account, like high yield corporates, REITs. Stuff spitting out a lot of taxable income might better use the tax shield. Perhaps also any dividend paying stocks or dividend oriented ETFs might do well in the tax deferred or tax free accounts. In the taxable account you might seek growth stocks w/o divs and some tax free munis if you need to fill up the 'safer' bucket.

That said, I also want my ROTH to grow, so some stocks in there is nice too. Partly it gets really complicated with regular 401ks and IRAs due to minimum distribution requirements. Deferred does not always mean lower bracket when spent.

[bhsince87]

If you're ever going to re-balance in taxable, and/or use some of those assets any time soon, you're going to want to have some of it in cash or bonds.

I personally like the flexibility of having a nice chunk of immediately liquid funds in my taxable account. This can be used for re-balancing, emergencies, or whatever. I tapped some this year to pay off my mortgage.

So I'm left with the choice of cash/money market account, savings account/CD's, or a bond fund.

The double tax free funds are nice, but I'm not comfortable with their duration right now. So I use a short term bond fund. I give up a little yield and pay some taxes, but the taxes are pretty minimal right now. And I consider the extra liquidity worth the cost, but that's a personal choice.

[SGM]

Jack uses Vanguard's intermediate term tax free bond fund in his taxable account. He does not like the large amount of treasuries in Vanguard's total bond fund. Others have suggested using the total bond fund which is 70% treasuries for safety and not to worry about the taxes because payouts are low. I go with tax free bond funds including some that are tax free to my home state. I have some corporate bond funds and equities in my Roth. Others feel that Tips and total bond market are appropriate for IRAs.

Some people get very worked up over the safety of muni and corporate bond funds. Others think that corporate bond funds act too much like stock funds. I can tolerate the risk.