Do Bonds Go in Taxable?

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inbox788
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Re: Do Bonds Go in Taxable?

Post by inbox788 » Tue Oct 02, 2018 2:03 am

billthecat wrote:
Mon Oct 01, 2018 10:35 pm
Having looked at this and your linked comment, and the comment on international funds too, I find the whole thing exasperating and may yet go back to using the Schwab robo, and a target date in my 401k, and just forget about it.
grabiner wrote:
Sun Jun 03, 2012 6:00 pm
if you have an unusually good bond option in the 401(k) such as the TSP G fund, then you should hold your bonds there. (The TSP G fund currently yields about 2% with the same risk as a money-market fund, so the effective tax cost for a government employee to hold bonds in taxable is 2%.)
I do have a good option in my 401K - Vanguard total bond, .03% ER. In fact, you can assume my 401K has good options for everything - US large (Vanguard .01 ER), US mid (Vanguard extended .04 ER), international (Vanguard total .06 ER), bonds, target date funds (.05 ER). There are some bad ones too but lots of low-cost options. But the vast majority of my assets are in taxable. And I'm in a high tax bracket, in CA, but won't be retiring in CA.
I've felt the same way at times, but given the 3 choices, Schwab robo vs. optimal bonds vs. less optimal bonds, the robo may still be the inferior choice mainly because of the fixed aum fees involved. I had to dig, but is it not 0.30? And if you are worried about making a wrong choice bonds in taxable vs. deferred, hedging your bets by diversifying tax location winds up somewhere in the middle. All 3 are actually excellent choices, so there isn't really a bad choice, but I prefer to try to optimize and maintain some control if I can.

FWIW, I've got bonds in tax deferred with the aim to reduce RMD in retirement and equities in taxable where I believe I have more control over funds usage.

jclear
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Re: Do Bonds Go in Taxable?

Post by jclear » Tue Oct 02, 2018 4:26 am

MotoTrojan wrote:
Mon Oct 01, 2018 6:50 pm
UpsetRaptor wrote:
Mon Oct 01, 2018 1:16 pm

All other things being equal (which granted they're often not), tIRA vs Roth IRA theoretically doesn't matter for bond placement, if you're re-adjusting to your AA as you go along, and incorporating the tax deferred aspect of the tIRA into your AA calculations. Here's a good explanation:
https://www.whitecoatinvestor.com/what- ... friday-qa/

Also, here's another, somewhat mathy, discussion of bonds in taxable vs IRA from this forum that may be useful:
viewtopic.php?f=10&t=234117&start=50
What about RMDs? Bonds will grow less, thus less RMDs/taxes.
I plan to make the tIRA portion of assets relatively bond heavy in preparation for RMD. The reason simply being that it will smooth out the withdrawals and help maintain my tax bracket. I’ll have a window of about 1x to 1.5x that I’ll want withdrawals to be in each year. Being heavy in stocks in a bull market can quickly take that 1x RMD up past 1.5x even when making 1.5x withdrawals.

rkhusky
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Re: Do Bonds Go in Taxable?

Post by rkhusky » Tue Oct 02, 2018 7:10 am

billthecat wrote:
Mon Oct 01, 2018 10:31 am
rkhusky wrote:
Mon Oct 01, 2018 6:55 am
I keep most bonds in tax-deferred because I will pay income tax rates on all withdrawals. I keep mostly stocks in taxable because I plan to pay 0% on all gains of withdrawals. I keep mostly high expected return stocks in Roth because I will pay 0% on all withdrawals. I plan to convert most tax-deferred to tax-exempt before age 70.
But as White Coat Investor points out, your tax-deferred is really a Roth plus a government account. So by limiting your growth to limit the taxes paid, you area also limiting the growth for your portion.

Here's what I do (or plan):

Tax-advantaged accounts (traditional/Roth, 401/IRA/HSA/whatever)
- US stocks

Taxable accounts
- US stocks
- International stocks
- Municipal bonds (planned)
- Cash/MM
Bonds have to go somewhere. I am not replacing stocks with bonds just for the sake of low taxation, that would be crazy. I have an asset allocation that calls for a certain amount of bonds. For me, mostly bonds in tax-deferred is best (I have some bonds in my Roth and a MM in taxable). I won't put my whole bond allocation into muni bonds, because I value diversification. I like tax efficient stocks in taxable because I can tax loss harvest and pay 0% on gains.

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UpsetRaptor
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Re: Do Bonds Go in Taxable?

Post by UpsetRaptor » Tue Oct 02, 2018 8:37 am

MotoTrojan wrote:
Mon Oct 01, 2018 6:50 pm
UpsetRaptor wrote:
Mon Oct 01, 2018 1:16 pm

All other things being equal (which granted they're often not), tIRA vs Roth IRA theoretically doesn't matter for bond placement, if you're re-adjusting to your AA as you go along, and incorporating the tax deferred aspect of the tIRA into your AA calculations. Here's a good explanation:
https://www.whitecoatinvestor.com/what- ... friday-qa/

Also, here's another, somewhat mathy, discussion of bonds in taxable vs IRA from this forum that may be useful:
viewtopic.php?f=10&t=234117&start=50
What about RMDs? Bonds will grow less, thus less RMDs/taxes.
True.

The wiki phrases it well: If all else is equal (and it often isn't, because you may have different options in your 401(k) and your Roth IRA), it is slightly better to have the fund with the highest expected return in your Roth, because the Roth is free from Required Minimum Distributions (RMDs), is not counted as income for making Social Security taxable, and probably is less subject to the risk of changing tax rates.

I was addressing the fallacy often seen that higher returning assets in tax free is more gainz bro.

billthecat
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Re: Do Bonds Go in Taxable?

Post by billthecat » Tue Oct 02, 2018 9:23 am

inbox788 wrote:
Tue Oct 02, 2018 2:03 am
billthecat wrote:
Mon Oct 01, 2018 10:35 pm
Having looked at this and your linked comment, and the comment on international funds too, I find the whole thing exasperating and may yet go back to using the Schwab robo, and a target date in my 401k, and just forget about it.
grabiner wrote:
Sun Jun 03, 2012 6:00 pm
if you have an unusually good bond option in the 401(k) such as the TSP G fund, then you should hold your bonds there. (The TSP G fund currently yields about 2% with the same risk as a money-market fund, so the effective tax cost for a government employee to hold bonds in taxable is 2%.)
I do have a good option in my 401K - Vanguard total bond, .03% ER. In fact, you can assume my 401K has good options for everything - US large (Vanguard .01 ER), US mid (Vanguard extended .04 ER), international (Vanguard total .06 ER), bonds, target date funds (.05 ER). There are some bad ones too but lots of low-cost options. But the vast majority of my assets are in taxable. And I'm in a high tax bracket, in CA, but won't be retiring in CA.
I've felt the same way at times, but given the 3 choices, Schwab robo vs. optimal bonds vs. less optimal bonds, the robo may still be the inferior choice mainly because of the fixed aum fees involved. I had to dig, but is it not 0.30? And if you are worried about making a wrong choice bonds in taxable vs. deferred, hedging your bets by diversifying tax location winds up somewhere in the middle. All 3 are actually excellent choices, so there isn't really a bad choice, but I prefer to try to optimize and maintain some control if I can.

FWIW, I've got bonds in tax deferred with the aim to reduce RMD in retirement and equities in taxable where I believe I have more control over funds usage.
That's the Schwab Intelligent Advisory. The robo, Schwab Intelligent Portfolio, has no fees, nor trade commissions, but:

- some criticize the size of the cash portion, which folks say Schwab uses to lend out via Schwab Bank. It's counterbalanced by high yield bonds, but there's risk associated with that. But then again maybe that risk is mitigated from the large cash portion!

- if you want the cash to be that portion anyway, as an emergency fund, you can't withdraw just the cash and avoid selling securities. If you withdraw the cash, say during a downturn, it will rebalance to maintain the cash portion.

- some of the funds have higher ERs. Not high, but higher than the index funds.

- there are a lot of allocations that are very small percentages which some folks say is unnecessarily complicated and does not affect the overall portfolio because it's small.

inbox788
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Re: Do Bonds Go in Taxable?

Post by inbox788 » Tue Oct 02, 2018 10:02 am

billthecat wrote:
Tue Oct 02, 2018 9:23 am
That's the Schwab Intelligent Advisory. The robo, Schwab Intelligent Portfolio, has no fees, nor trade commissions, but:

- some criticize the size of the cash portion, which folks say Schwab uses to lend out via Schwab Bank. It's counterbalanced by high yield bonds, but there's risk associated with that. But then again maybe that risk is mitigated from the large cash portion!

- if you want the cash to be that portion anyway, as an emergency fund, you can't withdraw just the cash and avoid selling securities. If you withdraw the cash, say during a downturn, it will rebalance to maintain the cash portion.

- some of the funds have higher ERs. Not high, but higher than the index funds.

- there are a lot of allocations that are very small percentages which some folks say is unnecessarily complicated and does not affect the overall portfolio because it's small.
Thanks for the clarification and point out some of the pitfalls. Those are concerning enough I'd be cautious, especially if there are simpler (i.e. more passive) options available. Extricating yourself from a bunch of positions placed by a robot may be tedious and expensive, especially in a taxable account. It's at Schwab, so I'd give them the benefit of the doubt. If fees are truly zeroed out as is advertised by these new Fidelity funds, maybe a prospective heads up comparison between them is due. Maybe someone out there is already starting it, but everyone's situation is a little different (risk, taxes, exit strategy, etc.) so results will vary.

FYI, I'm suspect with these zero fee arrangements and how they're sustainable. No free lunch and they've got to pay their bills. When I went to the disclosures and totally misread (i.e. quick scaned) their Fees and Compensation section. It's clear as mud.
Fees and Compensation
The Program includes the following services: (i) Schwab’s Program
administration services, as well as trade execution, custody and related
services; and (ii) CSIA’s portfolio management services. Clients are not
charged and will not be charged a Program fee for these services.
In similar programs, clients might expect to pay an annual fee of
0.30% of client assets to reflect the value and cost of these services.
While clients are not charged a Program fee for services, due to retirement
accounts in the Program, for purposes of IRS rules, Schwab
makes a nominal calculation that fully offsets in the amount of 0.30%
the compensation its affiliates receive from ETF transactions in clients’
accounts.
This includes advisory fees for managing Schwab
ETFs™ and fees earned for providing services to third-party ETFs
participating in the Schwab ETF OneSource™ program (“ETF
OneSource”), if CSIA selects them to include in Program accounts. If
this affiliate compensation ever exceeds 0.30% of client assets,
Schwab would refund the additional amount to client accounts or use
it to pay account administrative expenses. In all cases, the result is
that clients pay no Program fee.
https://www.schwab.com/public/file/CMS- ... 0-2018.pdf

And on one of the Intelligent Portfolio pages there's a blurb about "View important information about how we make money":
Schwab Intelligent Portfolios charges no advisory fee. Schwab affiliates do earn revenue from the underlying assets in Schwab Intelligent Portfolios accounts. This revenue comes from managing Schwab ETFs™ and providing services relating to certain third party ETFs that can be selected for the portfolio, and from the cash feature on the accounts. Revenue may also be received from the market centers where ETF trade orders are routed for execution.

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BuyAndHoldOn
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Re: Do Bonds Go in Taxable?

Post by BuyAndHoldOn » Sat Oct 06, 2018 12:12 pm

PFInterest wrote:
Sun Sep 30, 2018 10:59 am
BuyAndHoldOn wrote:
Sat Sep 29, 2018 5:05 pm
I put 100% of my bonds in taxable so that they are accessible. I am in the 22% Tax Bracket (5% state), and I see the yields of Total Bond, treasuries (depending on maturity), and similar Munis (e.g., the MUB ETF) being comparable after taxes. So I invest in both taxable (like Treasuries) and non-taxable bonds for diversification purposes.

Note that Treasuries get a state tax deduction in most (all?) states. I am surprised when I see people reccomend a 1-year CD at a lower yield that a 1-year treasury, but logistics of setting up the CD may make the decision make sense. (I prefer the liquidity of treasuries).

But if I was going to hold A LOT of bonds - whatever that amount would be - I would think more about putting them in taxable. Because of the taxes on all that interest. But even then, it would depends on the tax bracket I was in and my timeframe for wanting to use the money etc.
ok, but can you show why that is beneficial in your scenario? it sounds like you could change the tax drag.
Accessibility to both interest and principle; bonds are typically stable and countercyclical to stocks.

Tax drag is an issue depending on tax rates and goals for investing. I will probably emphasize Municipal bonds more as my portfolio grows.

My main concern is stability, and then after that: Try (try) to keep up with inflation. Might get easier as the Fed raises rates.

SpideyIndexer
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Re: Do Bonds Go in Taxable?

Post by SpideyIndexer » Wed Oct 10, 2018 2:18 am

marcopolo wrote:
Sat Sep 29, 2018 5:06 pm
MN-Investor wrote:
Sat Sep 29, 2018 4:02 pm
I'm trying to figure out the whole where to put bonds and where to put stocks myself.

My thought is that, in retirement, you need cash and bonds in taxable accounts to cover expenses for 1 or 5 or 10 years, depending on your comfort level. In other words, you don't want to sell stocks during a down market.

Otherwise, bonds - which grow more slowly than stocks - go in a tax-deferred retirement account. That minimizes your RMDs in future years.

Stocks are great to have in a taxable account, as long as you don't have to sell them in a down market. Having stocks in a taxable account allows you to be taxed at long term capital gains rates if you have gains, and allows you to do tax loss harvesting if you have stock losses.
There are different reason to favor bonds in taxable vs tax-deferred (see WCI post), but this is not a reason that needs to affect the decision.
If you decide that bonds in tax-deferred makes the most sense in your situation, that does not force you to sell stocks in a down market.

When it comes time to sell in down market, and you want to sell bonds, instead of stocks, you simply sell the stocks in your taxable account AND sell an equal amount of bonds in your tax-deferred account, and use that money to purchase the same/similar stock in the tax-deferred account. By doing this you have effectively withdrawn the money from bonds, without "selling low" from your stock position. If it is a severe down turn, you may also get the advantage of Tax-loss harvesting (if stock purchased in tax-deferred is not "substantially equivalent').
I just want to explicitly state what marcopolo alludes to when using the wording not "substantially equivalent".) When selling an investment in taxable at a loss and replacing it with a purchase in tax-deferred, be careful to avoid making a wash sale. Either wait more than 30 days, which has risks, or pick a replacement is not "substantially equivalent" if you want to claim the capital loss (which you should.) For details see "TLH partners."

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corn18
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Re: Do Bonds Go in Taxable?

Post by corn18 » Wed Oct 10, 2018 4:38 am

This is my AA across accounts:

Taxable 88% / 6% / 6%
401k/TSP 28% / 72% / 0%
Roth 100% / 0% / 0%

I a 52, plan to retire at 55/56. If the rule of 55 did not exist, I might be hold more bonds in taxable, but otherwise I am happy with a few munis and some cash in my taxable account. I use my taxable account to fund on going expenses, so I need some liquidity in there.

MotoTrojan
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Re: Do Bonds Go in Taxable?

Post by MotoTrojan » Wed Oct 10, 2018 10:37 am

SpideyIndexer wrote:
Wed Oct 10, 2018 2:18 am
marcopolo wrote:
Sat Sep 29, 2018 5:06 pm
MN-Investor wrote:
Sat Sep 29, 2018 4:02 pm
I'm trying to figure out the whole where to put bonds and where to put stocks myself.

My thought is that, in retirement, you need cash and bonds in taxable accounts to cover expenses for 1 or 5 or 10 years, depending on your comfort level. In other words, you don't want to sell stocks during a down market.

Otherwise, bonds - which grow more slowly than stocks - go in a tax-deferred retirement account. That minimizes your RMDs in future years.

Stocks are great to have in a taxable account, as long as you don't have to sell them in a down market. Having stocks in a taxable account allows you to be taxed at long term capital gains rates if you have gains, and allows you to do tax loss harvesting if you have stock losses.
There are different reason to favor bonds in taxable vs tax-deferred (see WCI post), but this is not a reason that needs to affect the decision.
If you decide that bonds in tax-deferred makes the most sense in your situation, that does not force you to sell stocks in a down market.

When it comes time to sell in down market, and you want to sell bonds, instead of stocks, you simply sell the stocks in your taxable account AND sell an equal amount of bonds in your tax-deferred account, and use that money to purchase the same/similar stock in the tax-deferred account. By doing this you have effectively withdrawn the money from bonds, without "selling low" from your stock position. If it is a severe down turn, you may also get the advantage of Tax-loss harvesting (if stock purchased in tax-deferred is not "substantially equivalent').
I just want to explicitly state what marcopolo alludes to when using the wording not "substantially equivalent".) When selling an investment in taxable at a loss and replacing it with a purchase in tax-deferred, be careful to avoid making a wash sale. Either wait more than 30 days, which has risks, or pick a replacement is not "substantially equivalent" if you want to claim the capital loss (which you should.) For details see "TLH partners."
Or buy in your 401k (stirring up this convo).

wrongfunds
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Re: Do Bonds Go in Taxable?

Post by wrongfunds » Wed Oct 10, 2018 1:51 pm

What about RMDs? Bonds will grow less, thus less RMDs/taxes.
This I am not getting. If my portfolio grows less, then I will have less RMD. Why should I strive for that? What is the condition under which I am better off with my portfolio growing less than more? I mean even if (hypothetically) 90% off the gains were to be taxed, am I not better off having more gains than less gains?

I understand that there could be some cliffs in the tax structure and indeed getting an extra dollar in gain could end up costing more than a dollar in tax. However, to be able to accurately predict it precisely years in advance seems to be fool's errand.

Admiral
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Re: Do Bonds Go in Taxable?

Post by Admiral » Wed Oct 10, 2018 2:29 pm

wrongfunds wrote:
Wed Oct 10, 2018 1:51 pm
What about RMDs? Bonds will grow less, thus less RMDs/taxes.
This I am not getting. If my portfolio grows less, then I will have less RMD. Why should I strive for that? What is the condition under which I am better off with my portfolio growing less than more? I mean even if (hypothetically) 90% off the gains were to be taxed, am I not better off having more gains than less gains?

I understand that there could be some cliffs in the tax structure and indeed getting an extra dollar in gain could end up costing more than a dollar in tax. However, to be able to accurately predict it precisely years in advance seems to be fool's errand.
That's the tax tail wagging the investment dog, and it is wrong on many levels. I think the argument is more like keeping the same AA (so same amount of stocks vs equities) but trying to reduce RMDs via bonds. IMO this is not the purpose of holding bonds in tax deferred, nor should it be the goal. The purpose is to defer taxable earnings until such time as one is at a lower marginal rate and has more lower brackets to fill (i.e. retirement.)

One of the key Bh investment tenets is efficient fund placement. One can only control three things: AA, ER, and taxes. There is no good reason to pay taxes on bond distributions now if one can pay little or zero taxes later.

The reality is most investors (even ones with $1m portfolios in retirement) are not going to be somehow crippled by RMDs. Worst case, they pay some additional tax on distribution and re-invest what they don't need to live. There are many ways to potentially lower RMDs: Roth conversion, SEPP, even early withdrawal and a 10% penalty.

Facing a massive tax hit upon RMD is a problem very few people will have, and is not a good argument for trying to keep the account somehow smaller by retarding growth.

MotoTrojan
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Re: Do Bonds Go in Taxable?

Post by MotoTrojan » Wed Oct 10, 2018 2:30 pm

wrongfunds wrote:
Wed Oct 10, 2018 1:51 pm
What about RMDs? Bonds will grow less, thus less RMDs/taxes.
This I am not getting. If my portfolio grows less, then I will have less RMD. Why should I strive for that? What is the condition under which I am better off with my portfolio growing less than more? I mean even if (hypothetically) 90% off the gains were to be taxed, am I not better off having more gains than less gains?

I understand that there could be some cliffs in the tax structure and indeed getting an extra dollar in gain could end up costing more than a dollar in tax. However, to be able to accurately predict it precisely years in advance seems to be fool's errand.
You get to determine where you put your assets though.

$1 pre-tax into your 401k vs. $1 pre-tax into your Roth (say, $0.70 into the account) will be worth the same in retirement if you tax-rate doesn't change. But if your 401k grows more than your Roth, you could be forced to "withdraw" (via RMD) more than you'd normally have even spent, thus forcing you to pay higher taxes than intended. It is a very complicated (well, impossible) process to model/predict, but if you are already comfortable with your decision between how much to invest pre vs. post-tax, you will have more control by allowing the Roth to grow more.

I max my pre-tax 401k and my post-tax Roth. I'll bias bonds towards the 401k, when I start to hold them.

wrongfunds
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Re: Do Bonds Go in Taxable?

Post by wrongfunds » Wed Oct 10, 2018 3:10 pm

MotoTrojan wrote:
Wed Oct 10, 2018 2:30 pm
...
$1 pre-tax into your 401k vs. $1 pre-tax into your Roth (say, $0.70 into the account) will be worth the same in retirement if you tax-rate doesn't change. But if your 401k grows more than your Roth, you could be forced to "withdraw" (via RMD) more than you'd normally have even spent, thus forcing you to pay higher taxes than intended.
....
But how is that a problem? You will be paying more taxes because your portfolio is bigger and barring cliffs, you will still have more money in the end as compared to smaller portfolio with less taxes. Minimizing asset/income so that you can minimize taxes just plainly makes no sense whichever way you look at it.

One really should look at the net and NOT at the taxes only. Would you give up a raise in your salary because it might mean your tax bracket could go up?

Admiral
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Re: Do Bonds Go in Taxable?

Post by Admiral » Wed Oct 10, 2018 3:18 pm

MotoTrojan wrote:
Wed Oct 10, 2018 2:30 pm
wrongfunds wrote:
Wed Oct 10, 2018 1:51 pm
What about RMDs? Bonds will grow less, thus less RMDs/taxes.
This I am not getting. If my portfolio grows less, then I will have less RMD. Why should I strive for that? What is the condition under which I am better off with my portfolio growing less than more? I mean even if (hypothetically) 90% off the gains were to be taxed, am I not better off having more gains than less gains?

I understand that there could be some cliffs in the tax structure and indeed getting an extra dollar in gain could end up costing more than a dollar in tax. However, to be able to accurately predict it precisely years in advance seems to be fool's errand.
You get to determine where you put your assets though.

$1 pre-tax into your 401k vs. $1 pre-tax into your Roth (say, $0.70 into the account) will be worth the same in retirement if you tax-rate doesn't change. But if your 401k grows more than your Roth, you could be forced to "withdraw" (via RMD) more than you'd normally have even spent, thus forcing you to pay higher taxes than intended. It is a very complicated (well, impossible) process to model/predict, but if you are already comfortable with your decision between how much to invest pre vs. post-tax, you will have more control by allowing the Roth to grow more.

I max my pre-tax 401k and my post-tax Roth. I'll bias bonds towards the 401k, when I start to hold them.
The OP was (or appeared to be) about taxable vs tax advantaged. Bonds in either T-Ira or Roth IRA are equally better than a taxable account, where one faces years of taxable coupons.

MotoTrojan
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Re: Do Bonds Go in Taxable?

Post by MotoTrojan » Wed Oct 10, 2018 4:02 pm

wrongfunds wrote:
Wed Oct 10, 2018 3:10 pm
MotoTrojan wrote:
Wed Oct 10, 2018 2:30 pm
...
$1 pre-tax into your 401k vs. $1 pre-tax into your Roth (say, $0.70 into the account) will be worth the same in retirement if you tax-rate doesn't change. But if your 401k grows more than your Roth, you could be forced to "withdraw" (via RMD) more than you'd normally have even spent, thus forcing you to pay higher taxes than intended.
....
But how is that a problem? You will be paying more taxes because your portfolio is bigger and barring cliffs, you will still have more money in the end as compared to smaller portfolio with less taxes. Minimizing asset/income so that you can minimize taxes just plainly makes no sense whichever way you look at it.

One really should look at the net and NOT at the taxes only. Would you give up a raise in your salary because it might mean your tax bracket could go up?
Please read my post again as you did not understand. In my example, someone has decided to invest some money in Roth and some in pre-tax, let's keep that ratio fixed regardless of allocation in each. RMDs will be higher if they put bonds in Roth and equities in pre-tax than the other way around. If they have more RMDs than the total amount they spend per year, that means they will likely be paying more in taxes on those excess dollars, and not being able to use their Roth effectively. They'll also be forced to reinvest in taxable, and incur that tax-drag moving forward. In this case I am not suggesting they take a smaller portfolio at all, but simply setting the portfolio up in away where RMDs are more likely to be less than the total spending for the year, at which point either Roth, pre-tax, or both can be withdrawn additionally in a tax-efficient manner.

Admiral
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Re: Do Bonds Go in Taxable?

Post by Admiral » Wed Oct 10, 2018 6:25 pm

MotoTrojan wrote:
Wed Oct 10, 2018 4:02 pm
wrongfunds wrote:
Wed Oct 10, 2018 3:10 pm
MotoTrojan wrote:
Wed Oct 10, 2018 2:30 pm
...
$1 pre-tax into your 401k vs. $1 pre-tax into your Roth (say, $0.70 into the account) will be worth the same in retirement if you tax-rate doesn't change. But if your 401k grows more than your Roth, you could be forced to "withdraw" (via RMD) more than you'd normally have even spent, thus forcing you to pay higher taxes than intended.
....
But how is that a problem? You will be paying more taxes because your portfolio is bigger and barring cliffs, you will still have more money in the end as compared to smaller portfolio with less taxes. Minimizing asset/income so that you can minimize taxes just plainly makes no sense whichever way you look at it.

One really should look at the net and NOT at the taxes only. Would you give up a raise in your salary because it might mean your tax bracket could go up?
Please read my post again as you did not understand. In my example, someone has decided to invest some money in Roth and some in pre-tax, let's keep that ratio fixed regardless of allocation in each. RMDs will be higher if they put bonds in Roth and equities in pre-tax than the other way around. If they have more RMDs than the total amount they spend per year, that means they will likely be paying more in taxes on those excess dollars, and not being able to use their Roth effectively. They'll also be forced to reinvest in taxable, and incur that tax-drag moving forward. In this case I am not suggesting they take a smaller portfolio at all, but simply setting the portfolio up in away where RMDs are more likely to be less than the total spending for the year, at which point either Roth, pre-tax, or both can be withdrawn additionally in a tax-efficient manner.
And how could one know this 10 or 20 or 30 years before turning age 70.5? There are numerous factors at play (not least of which is portfolio return) which might affect portfolio size, expected expenses, SS, et cetera. I could put all my bonds in Roth and then stocks could have years or poor returns in my T-IRA. There's simply no way to know ahead of time, it's all just predictions.

billthecat
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Re: Do Bonds Go in Taxable?

Post by billthecat » Wed Oct 10, 2018 8:24 pm

rkhusky wrote:
Tue Oct 02, 2018 7:10 am
billthecat wrote:
Mon Oct 01, 2018 10:31 am
rkhusky wrote:
Mon Oct 01, 2018 6:55 am
I keep most bonds in tax-deferred because I will pay income tax rates on all withdrawals. I keep mostly stocks in taxable because I plan to pay 0% on all gains of withdrawals. I keep mostly high expected return stocks in Roth because I will pay 0% on all withdrawals. I plan to convert most tax-deferred to tax-exempt before age 70.
But as White Coat Investor points out, your tax-deferred is really a Roth plus a government account. So by limiting your growth to limit the taxes paid, you area also limiting the growth for your portion.

Here's what I do (or plan):

Tax-advantaged accounts (traditional/Roth, 401/IRA/HSA/whatever)
- US stocks

Taxable accounts
- US stocks
- International stocks
- Municipal bonds (planned)
- Cash/MM
Bonds have to go somewhere. I am not replacing stocks with bonds just for the sake of low taxation, that would be crazy. I have an asset allocation that calls for a certain amount of bonds. For me, mostly bonds in tax-deferred is best (I have some bonds in my Roth and a MM in taxable). I won't put my whole bond allocation into muni bonds, because I value diversification. I like tax efficient stocks in taxable because I can tax loss harvest and pay 0% on gains.
I've continued to look at this, now calculating it distinguishing between Roth and traditional, factoring in taxes on withdrawal (edit: or conversion), and I feel it only fair to fess up that I've come to the same conclusions as your post above. Like you, I'll keep stocks in Roth, and bonds (total bond index) in tax-deferred. Basically, in my case, given my assumptions of returns, yield, and tax rates, stock should go in Roth and taxable bonds in tax-deferred.

There's not enough space in my tax-deferred to encompass all my bond allocation, so I'll supplement with national municipal bonds in taxable. And, as I convert traditional to Roth (like you) during early retirement leading up until SS, that space will shrink, so the national munis in taxable will grow.
Last edited by billthecat on Wed Oct 10, 2018 9:44 pm, edited 1 time in total.

MotoTrojan
Posts: 2279
Joined: Wed Feb 01, 2017 8:39 pm

Re: Do Bonds Go in Taxable?

Post by MotoTrojan » Wed Oct 10, 2018 9:08 pm

billthecat wrote:
Wed Oct 10, 2018 8:24 pm

There's not enough space in my tax-deferred to encompass all my bond allocation, so I'll supplement with national municipal bonds in taxable. And, as I convert traditional to Roth (like you) during early retirement leading up until SS, that space will shrink, so the national munis in taxable will grow.
How do you fund the national munis in taxable growing? Selling equities in a low tax-bracket (no tax due)? If not, I think it would be more efficient to just let the bonds carry-on in the Roth.

MotoTrojan
Posts: 2279
Joined: Wed Feb 01, 2017 8:39 pm

Re: Do Bonds Go in Taxable?

Post by MotoTrojan » Wed Oct 10, 2018 9:10 pm

Admiral wrote:
Wed Oct 10, 2018 6:25 pm
MotoTrojan wrote:
Wed Oct 10, 2018 4:02 pm
wrongfunds wrote:
Wed Oct 10, 2018 3:10 pm
MotoTrojan wrote:
Wed Oct 10, 2018 2:30 pm
...
$1 pre-tax into your 401k vs. $1 pre-tax into your Roth (say, $0.70 into the account) will be worth the same in retirement if you tax-rate doesn't change. But if your 401k grows more than your Roth, you could be forced to "withdraw" (via RMD) more than you'd normally have even spent, thus forcing you to pay higher taxes than intended.
....
But how is that a problem? You will be paying more taxes because your portfolio is bigger and barring cliffs, you will still have more money in the end as compared to smaller portfolio with less taxes. Minimizing asset/income so that you can minimize taxes just plainly makes no sense whichever way you look at it.

One really should look at the net and NOT at the taxes only. Would you give up a raise in your salary because it might mean your tax bracket could go up?
Please read my post again as you did not understand. In my example, someone has decided to invest some money in Roth and some in pre-tax, let's keep that ratio fixed regardless of allocation in each. RMDs will be higher if they put bonds in Roth and equities in pre-tax than the other way around. If they have more RMDs than the total amount they spend per year, that means they will likely be paying more in taxes on those excess dollars, and not being able to use their Roth effectively. They'll also be forced to reinvest in taxable, and incur that tax-drag moving forward. In this case I am not suggesting they take a smaller portfolio at all, but simply setting the portfolio up in away where RMDs are more likely to be less than the total spending for the year, at which point either Roth, pre-tax, or both can be withdrawn additionally in a tax-efficient manner.
And how could one know this 10 or 20 or 30 years before turning age 70.5? There are numerous factors at play (not least of which is portfolio return) which might affect portfolio size, expected expenses, SS, et cetera. I could put all my bonds in Roth and then stocks could have years or poor returns in my T-IRA. There's simply no way to know ahead of time, it's all just predictions.
The only factor at play in my example really is asset return. I specifically said in the underlined sentence "more likely to be", not certain to be. If you believe that equities are likely to return less than bonds in a 30+ year span, then start recommending a 100% bond portfolio to new-grads. I'll keep making my investing decisions based on risk-adjusted probabilities, which I still feel my explanation supports.

billthecat
Posts: 277
Joined: Tue Jan 24, 2017 2:50 pm

Re: Do Bonds Go in Taxable?

Post by billthecat » Wed Oct 10, 2018 9:46 pm

MotoTrojan wrote:
Wed Oct 10, 2018 9:08 pm
billthecat wrote:
Wed Oct 10, 2018 8:24 pm

There's not enough space in my tax-deferred to encompass all my bond allocation, so I'll supplement with national municipal bonds in taxable. And, as I convert traditional to Roth (like you) during early retirement leading up until SS, that space will shrink, so the national munis in taxable will grow.
How do you fund the national munis in taxable growing? Selling equities in a low tax-bracket (no tax due)? If not, I think it would be more efficient to just let the bonds carry-on in the Roth.
Fair point - I think I can defer determining that until I would do the reallocation, right after the conversions.

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