Can only invest in Taxable and Roth IRA - most tax efficient place to hold bonds?

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31andlearning
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Joined: Sun Dec 03, 2017 4:18 pm

Can only invest in Taxable and Roth IRA - most tax efficient place to hold bonds?

Post by 31andlearning » Sun Jan 07, 2018 10:27 pm

Looking to hold VBMFX - does it make sense to keep this in the Roth IRA or in the taxable account?

From everything I've read it sounds like the roth IRA would be the best place but wanted to get advice to be sure for long term - thanks!


Emergency funds: 1 year in savings acct.
Debt: None!
Tax Filing Status: Single
Tax Rate: 22% Federal, 5.53% State
State of Residence: NJ
Age: 31
Current Asset allocation: 80% stocks / 20% bonds
Portfolio Size: low six figures

Current retirement assets

Contributions
$5500 each yr in Roth IRA
$10,000 or more if possible taxable (for retirement, not short term goals)

Current Assets

Taxable
Mutual Funds
VTSAX - Vanguard Total US Stock Market Index Fund Expense Ratio: .04%
AGDAX - AB High Income Fund Class A Expense Ratio: .86%
LFRAX - Lord Abbett Floating Rate Fund Class A Expense Ratio: .80%
LALDX - Lord Abbett Short Duration Income Fund Class A Expense Ratio: .60%
NFRAX - Nuveen Symphony Floating Rate Income Fund Class A Expense Ratio: 1.00%
PRSNX - T. Rowe Price Global Multi-Sector Bond Fund Expense Ratio: .81%

Tax Advantaged
Roth IRA
VTSMX US Total Stock Index (VTSMX)

401k
No access to 401k

Desired Asset allocation: 80% stocks / 20% bonds
Last edited by 31andlearning on Thu Jan 11, 2018 5:20 pm, edited 1 time in total.

drk
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Location: Seattle

Re: Can only invest in Taxable and Roth IRA - most tax efficient place to hold bonds?

Post by drk » Sun Jan 07, 2018 10:33 pm

Have you seen the wiki article Tax-efficient fund placement?

kerplunk
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Re: Can only invest in Taxable and Roth IRA - most tax efficient place to hold bonds?

Post by kerplunk » Sun Jan 07, 2018 10:33 pm

For tax efficiency, it makes the most sense to hold bonds in a tax advantaged account.

However, you generally want to hold your investment with the most growth potential in Roth accounts because you’ll never be taxed on that account again.

31andlearning
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Joined: Sun Dec 03, 2017 4:18 pm

Re: Can only invest in Taxable and Roth IRA - most tax efficient place to hold bonds?

Post by 31andlearning » Sun Jan 07, 2018 10:40 pm

I've read the wiki on tax efficient fund placement and understand putting VBMFX in the roth makes sense for tax purposes....but holding the investment with the most growth potential in the Roth is also ideal because I won't be taxed on that account again.

It would take a few years of roth IRA contributions to build it to the proper asset allocation so this process would take time.

Would it make sense to exchange the current roth IRA from VTSAX to VBMFX, deposit $5500 contribution for 2018 into VBMFX.....convert to admiral shares....and over the next few years get the roth to the proper allocation of bonds for my full portfolio...then start contributing future contributions in a few years into VTSAX once I'm there?

drk
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Re: Can only invest in Taxable and Roth IRA - most tax efficient place to hold bonds?

Post by drk » Sun Jan 07, 2018 10:48 pm

31andlearning wrote:
Sun Jan 07, 2018 10:40 pm
I've read the wiki on tax efficient fund placement and understand putting VBMFX in the roth makes sense for tax purposes....but holding the investment with the most growth potential in the Roth is also ideal because I won't be taxed on that account again.

It would take a few years of roth IRA contributions to build it to the proper asset allocation so this process would take time.

Would it make sense to exchange the current roth IRA from VTSAX to VBMFX, deposit $5500 contribution for 2018 into VBMFX.....convert to admiral shares....and over the next few years get the roth to the proper allocation of bonds for my full portfolio...then start contributing future contributions in a few years into VTSAX once I'm there?
Are you 31 as your username indicates? If so, I would say no because that space is far too valuable to waste on bonds. Which tax bracket are you in? Are you averse to using VTEB in taxable for your bond allocation?

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Noobvestor
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Re: Can only invest in Taxable and Roth IRA - most tax efficient place to hold bonds?

Post by Noobvestor » Sun Jan 07, 2018 10:53 pm

I am probably going against the grain on this one, but: I would hold stocks in Roth, tax-exempt (and/or I/EE) bonds in taxable.

Based on the way yields are these days, tax-exempt does pretty well. On top of that, if you change your mind later, or find you have other kinds of space available or whatever, the NAV doesn't move around that much - won't be high gains to realize if you want to sell bonds in taxable.

I also hold and recommend I and EE Bonds in taxable (tax-deferred, state tax exempt - one tracks inflation, other doubles in 20 years). I Bonds in particular can be cashed out when you're in a low-tax year anytime (after one year) in the next 30 years - can come in handy.
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

aristotelian
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Re: Can only invest in Taxable and Roth IRA - most tax efficient place to hold bonds?

Post by aristotelian » Sun Jan 07, 2018 10:59 pm

Noobvestor wrote:
Sun Jan 07, 2018 10:53 pm
I am probably going against the grain on this one, but: I would hold stocks in Roth, tax-exempt (and/or I/EE) bonds in taxable.

Based on the way yields are these days, tax-exempt does pretty well. On top of that, if you change your mind later, or find you have other kinds of space available or whatever, the NAV doesn't move around that much - won't be high gains to realize if you want to sell bonds in taxable.

I also hold and recommend I and EE Bonds in taxable (tax-deferred, state tax exempt - one tracks inflation, other doubles in 20 years). I Bonds in particular can be cashed out when you're in a low-tax year anytime (after one year) in the next 30 years - can come in handy.
I agree, depending on your situation. Between I Bonds, EE Bonds, and muni bonds, you can put together a pretty diversified bond allocation without taking up space in Roth.
viewtopic.php?f=10&t=236650&p=3705497#p3705497

31andlearning
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Re: Can only invest in Taxable and Roth IRA - most tax efficient place to hold bonds?

Post by 31andlearning » Sun Jan 07, 2018 11:00 pm

drk wrote:
Sun Jan 07, 2018 10:48 pm
31andlearning wrote:
Sun Jan 07, 2018 10:40 pm
I've read the wiki on tax efficient fund placement and understand putting VBMFX in the roth makes sense for tax purposes....but holding the investment with the most growth potential in the Roth is also ideal because I won't be taxed on that account again.

It would take a few years of roth IRA contributions to build it to the proper asset allocation so this process would take time.

Would it make sense to exchange the current roth IRA from VTSAX to VBMFX, deposit $5500 contribution for 2018 into VBMFX.....convert to admiral shares....and over the next few years get the roth to the proper allocation of bonds for my full portfolio...then start contributing future contributions in a few years into VTSAX once I'm there?
Are you 31 as your username indicates? If so, I would say no because that space is far too valuable to waste on bonds. Which tax bracket are you in? Are you averse to using VTEB in taxable for your bond allocation?
I am 31 - will fall into the 22% tax bracket for 2018. I currently have bond funds in my taxable (AGDAX, JDBAX, LFRAX, LALDX, NFRAX, PRSNX) but want to sell them and buy vanguard bond funds to make them more tax efficient long term.

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Noobvestor
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Re: Can only invest in Taxable and Roth IRA - most tax efficient place to hold bonds?

Post by Noobvestor » Sun Jan 07, 2018 11:09 pm

31andlearning wrote:
Sun Jan 07, 2018 11:00 pm
I am 31 - will fall into the 22% tax bracket for 2018. I currently have bond funds in my taxable (AGDAX, JDBAX, LFRAX, LALDX, NFRAX, PRSNX) but want to sell them and buy vanguard bond funds to make them more tax efficient long term.
The simplest would be to sell them all and buy Vanguard Intermediate-Term Tax Exempt. I have that plus I and EE bonds plus some TIPS, but the TIPS are only in my SEP IRA (equivalent of a traditional 401k) - 100% stocks in my Roth.
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

drk
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Re: Can only invest in Taxable and Roth IRA - most tax efficient place to hold bonds?

Post by drk » Sun Jan 07, 2018 11:10 pm

31andlearning wrote:
Sun Jan 07, 2018 11:00 pm
drk wrote:
Sun Jan 07, 2018 10:48 pm
31andlearning wrote:
Sun Jan 07, 2018 10:40 pm
I've read the wiki on tax efficient fund placement and understand putting VBMFX in the roth makes sense for tax purposes....but holding the investment with the most growth potential in the Roth is also ideal because I won't be taxed on that account again.

It would take a few years of roth IRA contributions to build it to the proper asset allocation so this process would take time.

Would it make sense to exchange the current roth IRA from VTSAX to VBMFX, deposit $5500 contribution for 2018 into VBMFX.....convert to admiral shares....and over the next few years get the roth to the proper allocation of bonds for my full portfolio...then start contributing future contributions in a few years into VTSAX once I'm there?
Are you 31 as your username indicates? If so, I would say no because that space is far too valuable to waste on bonds. Which tax bracket are you in? Are you averse to using VTEB in taxable for your bond allocation?
I am 31 - will fall into the 22% tax bracket for 2018. I currently have bond funds in my taxable (AGDAX, JDBAX, LFRAX, LALDX, NFRAX, PRSNX) but want to sell them and buy vanguard bond funds to make them more tax efficient long term.
It's not yet updated to reflect the new tax law, but be sure to check out Vanguard's tax-equivalent bond yield calculator. I really think that holding bonds in your taxable account is going to be your best option, and it's just a question of which fund to hold, be it Total Bond or munis.

31andlearning
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Re: Can only invest in Taxable and Roth IRA - most tax efficient place to hold bonds?

Post by 31andlearning » Thu Jan 11, 2018 2:50 pm

Ok so help me out here.

Looking to put $ into bond funds - either VBTLX (total us bond index) or VWITX (Intermediate-Term Tax-Exempt)

My 2018 fed tax rate will be 22%

NJ Tax is 5.53%

VBTLX yield is 2.60%

VWITX yield is 2.02%

Which is better?

mega317
Posts: 2013
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Re: Can only invest in Taxable and Roth IRA - most tax efficient place to hold bonds?

Post by mega317 » Thu Jan 11, 2018 3:07 pm

C'mon, you can do that math, can't you?
Of course those funds have other differences so strictly looking at the after-tax yield would be a mistake.

31andlearning
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Re: Can only invest in Taxable and Roth IRA - most tax efficient place to hold bonds?

Post by 31andlearning » Thu Jan 11, 2018 3:17 pm

mega317 wrote:
Thu Jan 11, 2018 3:07 pm
C'mon, you can do that math, can't you?
Of course those funds have other differences so strictly looking at the after-tax yield would be a mistake.
I've spent about a week researching and bonds confuse me. Was hoping to tap into the Boglehead community to get some clarity :)

mega317
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Re: Can only invest in Taxable and Roth IRA - most tax efficient place to hold bonds?

Post by mega317 » Thu Jan 11, 2018 3:33 pm

Maybe we can do this step-wise.
Pretend you hold $100 each in VBTLX and VWITX. At the yields you posted, how much money will you get from each before taxes?

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dratkinson
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Re: Can only invest in Taxable and Roth IRA - most tax efficient place to hold bonds?

Post by dratkinson » Thu Jan 11, 2018 4:05 pm

Since you are in NJ, you might be able to use a Vanguard NJ muni bond fund in taxable. It depends upon how the muni TEY (taxable-equivalent yield) calculation turns out. (The muni TEY tells you the yield of the taxable investment that would produce the same after-tax yield as the muni fund.)


For national muni funds, the muni TEY = muni SEC yield / (1 - your fed tax bracket).

For single-state muni funds, the muni TEY* = muni SEC yield / (1 - (your fed + state tax brackets)). (* This version of the formula assumes you do not take the state tax deduction on your fed tax return. You'll need to find the other one if you do take the state tax deduction.)


Example of using TEY in 22% fed tax bracket. Assume...
--CD APY = 1.5%
--Total bond market fund = 2% SEC yield
--National muni bond fund = 1.7% SEC yield = 1.7 / (1-.22) = 2.18% TEY

In this case the muni would produce more after-tax yield than the other alternatives. Menaing you could use a muni fund in taxable, and save your IRA for equities.

Compare the muni TEY to the taxable alternatives: CD APY and taxable bond SEC yield. Do not use any other stated yields.


We could provide better advice if we knew more about your financial situation. To that end, please edit your OP (original post, original poster) to include all of the information requested in the sticky "Asking Portfolio Questions".


Your required due diligence. Find Wiki topic on "books" and read both recommended bond books. Why? So you know what bonds to avoid. So you know the universe of acceptable bonds.

From the universe of acceptable bonds, where recommended authors agree, that is the central route. Where they disagree, those are alternate routes. More due diligence is required to take an alternate route. Using munis in less than the highest tax bracket is an alternate route.

There's more information in the books than we can repeat for you here, so you've got to do the reading.


Action steps.
--Read both bond books.
--Post your financial situation as requested by the sticky "Asking Portfolio Questions".
--Formulate your investing game plan from the forum's replies to your questions about your situation and required reading.
--Execute your plan.


Disclosure. My situation is similar to yours (taxable, IRA, no 401k) so favor munis in taxable and equities in IRA. But... it has required >10 years of reading/tweaking to develop my current plan. And I'm still not done.
d.r.a, not dr.a. | I'm a novice investor, you are forewarned.

31andlearning
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Re: Can only invest in Taxable and Roth IRA - most tax efficient place to hold bonds?

Post by 31andlearning » Thu Jan 11, 2018 5:21 pm

dratkinson wrote:
Thu Jan 11, 2018 4:05 pm
Since you are in NJ, you might be able to use a Vanguard NJ muni bond fund in taxable. It depends upon how the muni TEY (taxable-equivalent yield) calculation turns out. (The muni TEY tells you the yield of the taxable investment that would produce the same after-tax yield as the muni fund.)


For national muni funds, the muni TEY = muni SEC yield / (1 - your fed tax bracket).

For single-state muni funds, the muni TEY* = muni SEC yield / (1 - (your fed + state tax brackets)). (* This version of the formula assumes you do not take the state tax deduction on your fed tax return. You'll need to find the other one if you do take the state tax deduction.)


Example of using TEY in 22% fed tax bracket. Assume...
--CD APY = 1.5%
--Total bond market fund = 2% SEC yield
--National muni bond fund = 1.7% SEC yield = 1.7 / (1-.22) = 2.18% TEY

In this case the muni would produce more after-tax yield than the other alternatives. Menaing you could use a muni fund in taxable, and save your IRA for equities.

Compare the muni TEY to the taxable alternatives: CD APY and taxable bond SEC yield. Do not use any other stated yields.


We could provide better advice if we knew more about your financial situation. To that end, please edit your OP (original post, original poster) to include all of the information requested in the sticky "Asking Portfolio Questions".


Your required due diligence. Find Wiki topic on "books" and read both recommended bond books. Why? So you know what bonds to avoid. So you know the universe of acceptable bonds.

From the universe of acceptable bonds, where recommended authors agree, that is the central route. Where they disagree, those are alternate routes. More due diligence is required to take an alternate route. Using munis in less than the highest tax bracket is an alternate route.

There's more information in the books than we can repeat for you here, so you've got to do the reading.


Action steps.
--Read both bond books.
--Post your financial situation as requested by the sticky "Asking Portfolio Questions".
--Formulate your investing game plan from the forum's replies to your questions about your situation and required reading.
--Execute your plan.


Disclosure. My situation is similar to yours (taxable, IRA, no 401k) so favor munis in taxable and equities in IRA. But... it has required >10 years of reading/tweaking to develop my current plan. And I'm still not done.
Thank you - I just updated my original post with more information.

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grabiner
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Re: Can only invest in Taxable and Roth IRA - most tax efficient place to hold bonds?

Post by grabiner » Thu Jan 11, 2018 9:39 pm

Noobvestor wrote:
Sun Jan 07, 2018 11:09 pm
31andlearning wrote:
Sun Jan 07, 2018 11:00 pm
I am 31 - will fall into the 22% tax bracket for 2018. I currently have bond funds in my taxable (AGDAX, JDBAX, LFRAX, LALDX, NFRAX, PRSNX) but want to sell them and buy vanguard bond funds to make them more tax efficient long term.
The simplest would be to sell them all and buy Vanguard Intermediate-Term Tax Exempt. I have that plus I and EE bonds plus some TIPS, but the TIPS are only in my SEP IRA (equivalent of a traditional 401k) - 100% stocks in my Roth.
In the 22% tax bracket, a muni fund probably isn't worthwhile. However, Treasuries or TIPS are good in a taxable account in NJ, as NJ doesn't even tax capital gains on those funds. (And max out your I-Bonds every year; those can be held in a taxable account and gains are tax-deferred.)
mega317 wrote:
Thu Jan 11, 2018 3:33 pm
Maybe we can do this step-wise.
Pretend you hold $100 each in VBTLX and VWITX. At the yields you posted, how much money will you get from each before taxes?
This isn't quite the correct question, because there are differences in risk. At the current yield, in a 22% tax bracket, the after-tax yields are 2.03% and 2.02%. However, I believe the muni fund is slightly riskier; if expenses were equal, the after-tax yields would be 2.07% and 2.21%.

The risk is more of an issue if you are considering NJ Long-Term Tax-Exempt. The difference between the 2.69% yield of that fund and 2.41% of Long-Term Tax-Exempt is not a net benefit; bond traders believe that NJ bonds are riskier and demand higher yields to compensate. The tax savings on NJ Long-Term Tax-Exempt, which is 0.14% in your tax bracket, is a net benefit, but it must be weighed against the diversification loss.
Wiki David Grabiner

mega317
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Re: Can only invest in Taxable and Roth IRA - most tax efficient place to hold bonds?

Post by mega317 » Thu Jan 11, 2018 10:35 pm

grabiner wrote:
Thu Jan 11, 2018 9:39 pm
mega317 wrote:
Thu Jan 11, 2018 3:33 pm
Maybe we can do this step-wise.
Pretend you hold $100 each in VBTLX and VWITX. At the yields you posted, how much money will you get from each before taxes?
This isn't quite the correct question, because there are differences in risk. At the current yield, in a 22% tax bracket, the after-tax yields are 2.03% and 2.02%. However, I believe the muni fund is slightly riskier; if expenses were equal, the after-tax yields would be 2.07% and 2.21%.
To be fair, I did hint at that earlier in the thread
mega317 wrote:
Thu Jan 11, 2018 3:07 pm
Of course those funds have other differences so strictly looking at the after-tax yield would be a mistake.
and was trying to start a back-and-forth that OP didn't engage.

31andlearning
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Re: Can only invest in Taxable and Roth IRA - most tax efficient place to hold bonds?

Post by 31andlearning » Thu Jan 11, 2018 11:26 pm

mega317 wrote:
Thu Jan 11, 2018 10:35 pm
grabiner wrote:
Thu Jan 11, 2018 9:39 pm
mega317 wrote:
Thu Jan 11, 2018 3:33 pm
Maybe we can do this step-wise.
Pretend you hold $100 each in VBTLX and VWITX. At the yields you posted, how much money will you get from each before taxes?
This isn't quite the correct question, because there are differences in risk. At the current yield, in a 22% tax bracket, the after-tax yields are 2.03% and 2.02%. However, I believe the muni fund is slightly riskier; if expenses were equal, the after-tax yields would be 2.07% and 2.21%.
To be fair, I did hint at that earlier in the thread
mega317 wrote:
Thu Jan 11, 2018 3:07 pm
Of course those funds have other differences so strictly looking at the after-tax yield would be a mistake.
and was trying to start a back-and-forth that OP didn't engage.
I'm still confused and trying to figure out the correct answer :(

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dratkinson
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Re: Can only invest in Taxable and Roth IRA - most tax efficient place to hold bonds?

Post by dratkinson » Fri Jan 12, 2018 2:33 am

BH Can only invest in Taxable and Roth IRA - most tax efficient place to hold bonds
31andlearning wrote:
Sun Jan 07, 2018 10:27 pm
Taxable
Mutual Funds
VTSAX - Vanguard Total US Stock Market Index Fund Expense Ratio: .04%
AGDAX - AB High Income Fund Class A Expense Ratio: .86% expensive, tax inefficient
LFRAX - Lord Abbett Floating Rate Fund Class A Expense Ratio: .80% ditto
LALDX - Lord Abbett Short Duration Income Fund Class A Expense Ratio: .60% ditto
NFRAX - Nuveen Symphony Floating Rate Income Fund Class A Expense Ratio: 1.00% ditto
PRSNX - T. Rowe Price Global Multi-Sector Bond Fund Expense Ratio: .81% ditto

Tax Advantaged
Roth IRA
VTSMX US Total Stock Index (VTSMX)


Retirement investing.

See Wiki topic: https://www.bogleheads.org/wiki/Princip ... _placement

See Wiki topic: https://www.bogleheads.org/wiki/Three-fund_portfolio
See forum discussion: viewtopic.php?f=10&t=88005



3-fund portfolio. The 3-fund portfolio is recommended for all account types (self-
employed, employer, personal, tax-free, tax-deferred, and taxable). It can be replicated in each account, or spread across all guided by your investment options’ availability/costs. However you get to an age-appropriate 3-fund portfolio is fine: individual funds/ETFs, or an all-in-one fund.



Suggest investments

Taxable
--VTSAX - Vanguard Total US Stock Market Index Fund.

--VMLTX – Vanguard limited-term municipal bond fund (fed tax exempt), and/or,
--VWITX - Vanguard intermediate-term municipal bond fund (fed tax exempt), and/or,
--VWLTX - Vanguard long-term national municipal bond fund (fed tax exempt), and/or,
--VNJTX - Vanguard NJ Long-Term Municipal bond fund (more risk, but double-tax exempt: fed + state).

--VNJXX - Vanguard NJ municipal money mkt fund (double-tax exempt, can replace part of savings EF).


Why these suggestions?
--Cheaper and more tax efficient than your current holdings.
--I suggested many bond fund options. You’ll want to winnow that down to 1-2 bond funds to use.
--VWLTX and VNJTX should produce more after-tax income than TBM (total bond market index fund). However, they come with more risk.
--Some suggest pairing a LT single-state muni fund with VMLTX, 50/50. Why? It reduces total risk, while having most of your income double tax-exempt.
--Check the TEY on VWITX. If it’s better than your CD APYs, then it can be used to (partially) replace CDs, if you don’t worry about NAV fluctuations.


Tax Advantaged
--VFINX - Vanguard S&P 500 Index fund (80%)
--VEXMX - Vanguard Extended Market Index fund (20%)

Why?
--TSM (100%) = S&P500 (80%) + Ext Mkt index (20%).
--Why? With only one fund in your IRA, its distributions will be reinvested. So to avoid the issue of your IRA distributions causing the “replacement shares / wash sale” issue if you want to TLH (tax loss harvest) in your taxable account, you should not use TSM in your IRA. But you can use a combination that produces the equivalent of the TSM (but is not “substantially identical”: IRS words).



Emergency funds. Above suggests you could develop EF tiers.
1st-tier EF: Checking, savings, NJ mmkt,
2nd-tier EF (CD substitute): (least price fluctuations) [savings bonds (can’t be refilled)], VMLTX, VWITX,
3rd-tier EF: VWLTX, VNJTX, VTSMX (most price fluctuations)

Notice how all of your taxable investments fit into this EF structure.
--Your 1st-tier EFs do not require tax reporting to tap.
--Your 2nd-tier EFs require tax reporting to tap, but the tax consequences should be low.
--Your 3rd-tier EFs require tax reporting to tap, and the tax consequences will be higher.

Senior investors say, “…when we have enough, we don’t need a dedicated EF as all of our investments become our EF.” Above structure just identifies the most tax efficient way of tapping your taxable investments during a financial emergency.



Municipal bond funds.

See: https://www.bogleheads.org/wiki/Municipal_bonds

"Daily-accrual" muni fund. A daily-accrual muni fund (not ETF) is exempt from IRS 6mo holding period requirement to protect tax-exempt dividends. Meaning shares are easy to sell (only simple CG reporting required) so it can perform multiple duties:
--no contribution limit, so can skew tax-advantaged accounts to equities for more tax-sheltered growth,
--to save for short-term goals (home projects, vacation, new car,...) instead of taxable CDs/savings,
--as last/largest formal EF tier, less CG consequence and more immune to market noise than equities,
--as dry powder to use during market correction.

See "Loss on mutual fund shares held 6 months or less": https://www.bogleheads.org/wiki/Tax_los ... harvesting


Vanguard's daily accrual national muni funds are: VWSTX (ST), VMLTX (ltd-term), VWITX (IT), and VWLTX (LT).

You’ll need to read the prospectus for its NJ muni fund to see if it’s a daily accrual fund.



IT bond funds. An intermediate-term (taxable, or national muni) bond fund is reported to be the sweet sport for total return investing (= share price appreciation + distributions (dividends + capital gains)).
d.r.a, not dr.a. | I'm a novice investor, you are forewarned.

31andlearning
Posts: 22
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Re: Can only invest in Taxable and Roth IRA - most tax efficient place to hold bonds?

Post by 31andlearning » Fri Jan 12, 2018 12:15 pm

dratkinson wrote:
Fri Jan 12, 2018 2:33 am
BH Can only invest in Taxable and Roth IRA - most tax efficient place to hold bonds
31andlearning wrote:
Sun Jan 07, 2018 10:27 pm
Taxable
Mutual Funds
VTSAX - Vanguard Total US Stock Market Index Fund Expense Ratio: .04%
AGDAX - AB High Income Fund Class A Expense Ratio: .86% expensive, tax inefficient
LFRAX - Lord Abbett Floating Rate Fund Class A Expense Ratio: .80% ditto
LALDX - Lord Abbett Short Duration Income Fund Class A Expense Ratio: .60% ditto
NFRAX - Nuveen Symphony Floating Rate Income Fund Class A Expense Ratio: 1.00% ditto
PRSNX - T. Rowe Price Global Multi-Sector Bond Fund Expense Ratio: .81% ditto

Tax Advantaged
Roth IRA
VTSMX US Total Stock Index (VTSMX)


Retirement investing.

See Wiki topic: https://www.bogleheads.org/wiki/Princip ... _placement

See Wiki topic: https://www.bogleheads.org/wiki/Three-fund_portfolio
See forum discussion: viewtopic.php?f=10&t=88005



3-fund portfolio. The 3-fund portfolio is recommended for all account types (self-
employed, employer, personal, tax-free, tax-deferred, and taxable). It can be replicated in each account, or spread across all guided by your investment options’ availability/costs. However you get to an age-appropriate 3-fund portfolio is fine: individual funds/ETFs, or an all-in-one fund.



Suggest investments

Taxable
--VTSAX - Vanguard Total US Stock Market Index Fund.

--VMLTX – Vanguard limited-term municipal bond fund (fed tax exempt), and/or,
--VWITX - Vanguard intermediate-term municipal bond fund (fed tax exempt), and/or,
--VWLTX - Vanguard long-term national municipal bond fund (fed tax exempt), and/or,
--VNJTX - Vanguard NJ Long-Term Municipal bond fund (more risk, but double-tax exempt: fed + state).

--VNJXX - Vanguard NJ municipal money mkt fund (double-tax exempt, can replace part of savings EF).


Why these suggestions?
--Cheaper and more tax efficient than your current holdings.
--I suggested many bond fund options. You’ll want to winnow that down to 1-2 bond funds to use.
--VWLTX and VNJTX should produce more after-tax income than TBM (total bond market index fund). However, they come with more risk.
--Some suggest pairing a LT single-state muni fund with VMLTX, 50/50. Why? It reduces total risk, while having most of your income double tax-exempt.
--Check the TEY on VWITX. If it’s better than your CD APYs, then it can be used to (partially) replace CDs, if you don’t worry about NAV fluctuations.


Tax Advantaged
--VFINX - Vanguard S&P 500 Index fund (80%)
--VEXMX - Vanguard Extended Market Index fund (20%)

Why?
--TSM (100%) = S&P500 (80%) + Ext Mkt index (20%).
--Why? With only one fund in your IRA, its distributions will be reinvested. So to avoid the issue of your IRA distributions causing the “replacement shares / wash sale” issue if you want to TLH (tax loss harvest) in your taxable account, you should not use TSM in your IRA. But you can use a combination that produces the equivalent of the TSM (but is not “substantially identical”: IRS words).



Emergency funds. Above suggests you could develop EF tiers.
1st-tier EF: Checking, savings, NJ mmkt,
2nd-tier EF (CD substitute): (least price fluctuations) [savings bonds (can’t be refilled)], VMLTX, VWITX,
3rd-tier EF: VWLTX, VNJTX, VTSMX (most price fluctuations)

Notice how all of your taxable investments fit into this EF structure.
--Your 1st-tier EFs do not require tax reporting to tap.
--Your 2nd-tier EFs require tax reporting to tap, but the tax consequences should be low.
--Your 3rd-tier EFs require tax reporting to tap, and the tax consequences will be higher.

Senior investors say, “…when we have enough, we don’t need a dedicated EF as all of our investments become our EF.” Above structure just identifies the most tax efficient way of tapping your taxable investments during a financial emergency.



Municipal bond funds.

See: https://www.bogleheads.org/wiki/Municipal_bonds

"Daily-accrual" muni fund. A daily-accrual muni fund (not ETF) is exempt from IRS 6mo holding period requirement to protect tax-exempt dividends. Meaning shares are easy to sell (only simple CG reporting required) so it can perform multiple duties:
--no contribution limit, so can skew tax-advantaged accounts to equities for more tax-sheltered growth,
--to save for short-term goals (home projects, vacation, new car,...) instead of taxable CDs/savings,
--as last/largest formal EF tier, less CG consequence and more immune to market noise than equities,
--as dry powder to use during market correction.

See "Loss on mutual fund shares held 6 months or less": https://www.bogleheads.org/wiki/Tax_los ... harvesting


Vanguard's daily accrual national muni funds are: VWSTX (ST), VMLTX (ltd-term), VWITX (IT), and VWLTX (LT).

You’ll need to read the prospectus for its NJ muni fund to see if it’s a daily accrual fund.



IT bond funds. An intermediate-term (taxable, or national muni) bond fund is reported to be the sweet sport for total return investing (= share price appreciation + distributions (dividends + capital gains)).
This is incredible and just what I needed to wrap my head around things! Thank you so so much for taking the time to compile this for me and the Boglehead community.

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dratkinson
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Location: Centennial CO

Re: Can only invest in Taxable and Roth IRA - most tax efficient place to hold bonds?

Post by dratkinson » Fri Jan 12, 2018 7:18 pm

Why do you not have access to an employer's plan? Is it because you are self-employed? If so then you can create your own self-employed retirement plan.

Self employed retirement plans.
See: https://www.irs.gov/retirement-plans/re ... yed-people
More information search: http://www.google.com/search?q=self+emp ... ment+plans
d.r.a, not dr.a. | I'm a novice investor, you are forewarned.

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