Bonds in Both 401K and Taxable?

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WentzWagon
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Bonds in Both 401K and Taxable?

Post by WentzWagon » Wed Oct 04, 2017 9:44 am

Quite simply..

Would it ever make sense to keep a portion of Bonds in a 401K and then a portion of Muni's in Taxable (VTEB). In 33% Tax Bracket.

It give me exposure to Tax Exempt Muni's in Taxable Account and Government Bonds in the 401K. So lets say 60-70% Bonds in 401K and then 40-30% Muni in Taxable.
Last edited by WentzWagon on Wed Oct 04, 2017 10:19 am, edited 1 time in total.

clydewolf
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Re: Bonds in Both 401K and Taxable?

Post by clydewolf » Wed Oct 04, 2017 10:17 am

Why would you want tax exempt munis in a 401k?
Distributions from the 401k will be taxed as ordinary income removing the tax exempt feature of the muni.

Here is more: http://www.bankrate.com/retirement/why- ... gh-a-401k/

renue74
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Re: Bonds in Both 401K and Taxable?

Post by renue74 » Wed Oct 04, 2017 10:21 am

I have bonds in my taxable account....simply because I've maxed out all my bond allocation space in my tax deferred accounts and still need addition bonds to meet my asset allocation.

So yes...at some point, bonds in taxable may be necessary.

dbr
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Re: Bonds in Both 401K and Taxable?

Post by dbr » Wed Oct 04, 2017 10:27 am

The usual answer is that one buys munis in a taxable account only because one is forced to due to lack of space elsewhere and then munis because the tax situation so indicates.

Are you asking if one should hold some munis as a diversification of assets? If so, that would not be a common view.

WentzWagon
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Re: Bonds in Both 401K and Taxable?

Post by WentzWagon » Wed Oct 04, 2017 10:31 am

clydewolf wrote:
Wed Oct 04, 2017 10:17 am
Why would you want tax exempt munis in a 401k?
Distributions from the 401k will be taxed as ordinary income removing the tax exempt feature of the muni.
I don't...I want a portion of my total bond portfolio in Taxable account and a portion in my 401K.

For instance, lets say I have $140,000 I need to hit for Bond allocation in my portfolio (20%). I already have 90K allocated to a Bond fund PTTAX in 401K
http://www.morningstar.com/funds/xnas/pttax/quote.html

I then need to hit the other 50K and would put VTEB in my taxable http://www.morningstar.com/etfs/arcx/vteb/quote.html

WentzWagon
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Re: Bonds in Both 401K and Taxable?

Post by WentzWagon » Wed Oct 04, 2017 10:33 am

dbr wrote:
Wed Oct 04, 2017 10:27 am
The usual answer is that one buys munis in a taxable account only because one is forced to due to lack of space elsewhere and then munis because the tax situation so indicates.

Are you asking if one should hold some munis as a diversification of assets? If so, that would not be a common view.
I ask as I only have access to PTTAX with ER .85 which I have had for a long while but at the end of the day it might be even with VTEB in taxable or small difference in my tax bracket.

PTTAX in 401K
http://www.morningstar.com/funds/xnas/pttax/quote.html

mega317
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Re: Bonds in Both 401K and Taxable?

Post by mega317 » Wed Oct 04, 2017 10:59 am

I believe, but am not sure, that grabiner has recommended munis in taxable for people in very high brackets, at least in high-tax states, because their stock distributions will end up being taxed pretty highly and thus attenuate the tax-efficiency most of us have from stocks in taxable. I am not sure about this and can't find a relevant thread at the moment.

mhalley
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Re: Bonds in Both 401K and Taxable?

Post by mhalley » Wed Oct 04, 2017 11:11 am

I chose to have munis in taxable and taxable bonds in tax deferred. With the yields so low, it is not the clear no no it used to be. Check out wci take on it here

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

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grabiner
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Re: Bonds in Both 401K and Taxable?

Post by grabiner » Wed Oct 04, 2017 9:06 pm

mega317 wrote:
Wed Oct 04, 2017 10:59 am
I believe, but am not sure, that grabiner has recommended munis in taxable for people in very high brackets, at least in high-tax states, because their stock distributions will end up being taxed pretty highly and thus attenuate the tax-efficiency most of us have from stocks in taxable. I am not sure about this and can't find a relevant thread at the moment.
This is correct. In When to prefer low-rate bonds to stocks in taxable, I estimate that bonds and stocks in taxable are close to break-even if muni yields and stock yields are equal, which they are now (1.75% on Admiral shares of Intermediate-Term Tax-Exempt, 1.89% on Tax-Exempt Bond Index, 1.85% on Total Stock Market Index).

But this is assuming a typical tax rate of 15% on qualified dividends. If you are in the top tax bracket and pay 23.8% on your qualified dividends and capital gains but no more on munis, this makes munis more attractive. And if you are in a high-tax state and can use a muni fund from your state, you may pay 21% on qualified dividends and nothing on munis, so you get a similar advantage.

And the OP has another reason to hold munis in taxable; his 401(k) bond fund is expensive. If the 401(k) has a low-cost stock fund, the extra cost of holding a bond fund there is greater than any tax difference for holding bonds in one account or the other.
David Grabiner

WentzWagon
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Re: Bonds in Both 401K and Taxable?

Post by WentzWagon » Mon Oct 09, 2017 9:17 am

grabiner wrote:
Wed Oct 04, 2017 9:06 pm
mega317 wrote:
Wed Oct 04, 2017 10:59 am
I believe, but am not sure, that grabiner has recommended munis in taxable for people in very high brackets, at least in high-tax states, because their stock distributions will end up being taxed pretty highly and thus attenuate the tax-efficiency most of us have from stocks in taxable. I am not sure about this and can't find a relevant thread at the moment.
This is correct. In When to prefer low-rate bonds to stocks in taxable, I estimate that bonds and stocks in taxable are close to break-even if muni yields and stock yields are equal, which they are now (1.75% on Admiral shares of Intermediate-Term Tax-Exempt, 1.89% on Tax-Exempt Bond Index, 1.85% on Total Stock Market Index).

But this is assuming a typical tax rate of 15% on qualified dividends. If you are in the top tax bracket and pay 23.8% on your qualified dividends and capital gains but no more on munis, this makes munis more attractive. And if you are in a high-tax state and can use a muni fund from your state, you may pay 21% on qualified dividends and nothing on munis, so you get a similar advantage.

And the OP has another reason to hold munis in taxable; his 401(k) bond fund is expensive. If the 401(k) has a low-cost stock fund, the extra cost of holding a bond fund there is greater than any tax difference for holding bonds in one account or the other.
My 401K does have BSPIX which is ER .11 and tracks SP500. If I shift all my Bonds over to that in the 401K and then purchase VTEB in Taxable I would need to deploy a ton of cash to even out the ratio.

This get back to my questions of having a portion of bonds in 401K and portion in Taxable.

Example of portfolio

Taxable
$150,581 - FSTVX
$112,432 - FTIPX
$58,500 - VTEB

Roth
$23,143 - FSITX

401k
$239,556 - BSPIX (ER .11)
$58,500 - PTTAX (ER .85)

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