Puzzled: How to add more bonds+international after running out of tax-advantaged room?

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CalculatedRisk
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Puzzled: How to add more bonds+international after running out of tax-advantaged room?

Post by CalculatedRisk » Thu Mar 07, 2019 9:19 pm

For my situation, how do I add more bonds and international since I have run out of tax-advantaged room? Would moving around funds in my tax-exempt accounts free up more space? More specifically:

1. How should I add more bonds funds for retirement?
  1. Series I bonds? I think the $10k/year limit will be a problem.
  2. Add to taxable: Vanguard Intermediate-Term Tax-Exempt (VWIUX - 0.09% ER)
  3. Split evenly in taxable account between: (1) Vanguard California Long-Term Tax-Exempt (VCLAX - 0.09% ER) and (2) Vanguard Intermediate-Term Tax-Exempt (VWIUX - 0.09% ER)
  4. Add to taxable: Vanguard Intermediate-Term Treasury Fund (VFIUX - 0.10% ER)
  5. Add to taxable: Vanguard Intermediate-Term Treasury Index Fund (VSIGX - 0.07% ER)
  6. Add to taxable: Vanguard Limited-Term Tax-Exempt Fund (VMLUX - 0.09% ER)
  7. Something else?
2. How can I add more international funds for retirement?
  1. Buy more Vanguard Total International (VTIAX - 0.11% ER) in my taxable account?
  2. Buy Vanguard Developed Markets Index Fund Admiral Shares (VTMGX - 0.07% ER) in my taxable account? (Is this Vanguard's tax-managed international?)
  3. Something else?
Personal Details
Emergency funds: Have six months of expenses
Debt: None (practically)
Tax Filing Status: Single
Tax Rate: 35% Federal, 11.3% State
State of Residence: CA
Age: 38 (plan to retire around 65)
Annual income: $500k/year
Desired Asset allocation: 58% US, 20% international, 22% bonds
Current Asset allocation: 61% US, 18% international, 21% bonds

Savings Summary
Emergency funds for 6 months
~$500k in Vanguard Treasury MM Fund (VUSXX) - first home down payment (want to buy within 1 year)

Retirement Summary
~$700k in retirement assets (taxable and tax-advantaged)

Taxable at Vanguard - 49%
41% - Vanguard Total US (VTSAX - 0.04% ER)
8% - Vanguard Total International (VTIAX - 0.11% ER)
0% - Vanguard Total Bond Market (VBTLX - 0.05% ER)

Trad 401k at Schwab (current job) - 9%
8% - Schwab U.S. Aggregate Bond (SWAGX - 0.04% ER)
1% - Schwab Total Stock Market (SWTSX - 0.03% ER)
0% - Schwab International (SWISX - 0.06% ER)

Trad 401k at Schwab (old job) - 14%
13% - Schwab U.S. Aggregate Bond (SWAGX - 0.04% ER)
1% - Vanguard Total International (VTIAX - 0.11% ER)
0% - Schwab Total Stock Market (SWTSX - 0.03% ER)
0% - Schwab International (SWISX - 0.06% ER)

Roth 401k at Schwab (old job) - 4%
4% - Schwab Total Stock Market (SWTSX - 0.03% ER)
0% - Schwab U.S. Aggregate Bond (SWAGX - 0.04% ER)
0% - Schwab International (SWISX - 0.06% ER)

Trad 401k at Fidelity (old job) - 9%
9% - Fidelity Total International (FTIHX - 0.06% ER)
0% - Fidelity ZERO Total Market (FZROX - 0.00% ER)
0% - Fidelity US Bond (FXNAX - 0.02% ER)

Roth IRA at ETrade - 13%
13% - Schwab Total Stock Market (SWTSX - 0.03% ER)
0% - Vanguard Total Stock Market Institutional (VSMPX - 0.02% ER)
0% - Schwab U.S. Aggregate Bond (SWAGX - 0.04% ER)
0% - Vanguard Total Bond (VBTLX - 0.05% ER)
0% - Schwab International (SWISX - 0.06% ER)
0% - Vanguard Total International (VTSNX - 0.08% ER)

HSA at Fidelity - 2%
2% - Fidelity ZERO Total Market (FZROX - 0.00% ER)
0% - Fidelity Total International (FTIHX - 0.06% ER)
0% - Fidelity US Bond (FXNAX - 0.02% ER)

miket29
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Re: Puzzled: How to add more bonds+international after running out of tax-advantaged room?

Post by miket29 » Thu Mar 07, 2019 9:39 pm

international index funds can be tax efficient to hold in a regular account. You may be able to get a direct tax credit for the foreign taxes paid by the fund. See https://www.bogleheads.org/wiki/Foreign_tax_credit I use turbotax, it makes the computation and form completion easy.

See also https://www.bogleheads.org/wiki/Tax-eff ... _placement

I assume you are maxing out your 401k at your current job. Check to see if your plan allows after-tax contributions and in-plan conversions to Roth. This is becoming more common. So instead of contributing to your taxable Vanguard fund you'd put the exact same dollars into the 401K as after-tax and then convert them to Roth a few times a year; in this way the money will never be taxed again. You would want to hold high-growth potential funds in such a Roth, not bonds.

As a side note, you might want to consider rolling the 401K from your previous employers into your current 401k if the plan allows. This would make management simpler.

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Watty
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Re: Puzzled: How to add more bonds+international after running out of tax-advantaged room?

Post by Watty » Thu Mar 07, 2019 10:10 pm

CalculatedRisk wrote:
Thu Mar 07, 2019 9:19 pm
~$500k in Vanguard Treasury MM Fund (VUSXX) - first home down payment (want to buy within 1 year)
Since you are in such a high tax bracket I would take a hard look at using any additional money and the funds in the taxable account to pay more on the house. That could get you to the point where you not have to hold any bonds in the taxable account. A tax free risk free 4.5%(ish) return is not all that shabby.

Having a larger mortage at 4.5% while buying bonds that are paying a lower interest rate makes it hard to come out ahead.
miket29 wrote:
Thu Mar 07, 2019 9:39 pm
international index funds can be tax efficient to hold in a regular account.
+1

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CalculatedRisk
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Re: Puzzled: How to add more bonds+international after running out of tax-advantaged room?

Post by CalculatedRisk » Thu Mar 07, 2019 10:22 pm

miket29 wrote:
Thu Mar 07, 2019 9:39 pm
I assume you are maxing out your 401k at your current job. Check to see if your plan allows after-tax contributions and in-plan conversions to Roth. This is becoming more common. So instead of contributing to your taxable Vanguard fund you'd put the exact same dollars into the 401K as after-tax and then convert them to Roth a few times a year; in this way the money will never be taxed again. You would want to hold high-growth potential funds in such a Roth, not bonds.

As a side note, you might want to consider rolling the 401K from your previous employers into your current 401k if the plan allows. This would make management simpler.
I’m adding about $60k tax advantaged/year, but I want to contribute closer to $150k/year total to retirement, so I need to use taxable accounts.

I have the general guidance down, I need specific guidance, as in “this fund for this reason.”

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emlowe
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Re: Puzzled: How to add more bonds+international after running out of tax-advantaged room?

Post by emlowe » Fri Mar 08, 2019 12:20 am

Bonds:
I would do (a) and (c) - but at your savings amount, I-bonds may not really make much dent because of the limits. FYI, you can buy more using trusts, but then things just get more complicated with lots of accounts.

I would also consider using the Vanguard Intermediate-Term CA fund - VCAIX, rather than the long term fund.

HSA:
This is not tax-free in CA - so you will be paying taxes on the dividends/cap gains from FZROX.
One technique at Fidelity is to roll T-bills, which are state tax-free. Your HSA then becomes part of your bond portfolio.
This is what I do. Again, at your savings rate, this isn't going to be a major effect on your bond allocation though

pdavi21
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Re: Puzzled: How to add more bonds+international after running out of tax-advantaged room?

Post by pdavi21 » Fri Mar 08, 2019 12:30 am

If you are in the 32% or higher bracket, INTL funds may not cut it in taxable. The dividends are just too high currently. Tax efficient bonds (i.e. treasuries or municipal bonds) may do better, and large cap US stocks will do well too.
"We spend a great deal of time studying history, which, let's face it, is mostly the history of stupidity." -Stephen Hawking

Lou354
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Re: Puzzled: How to add more bonds+international after running out of tax-advantaged room?

Post by Lou354 » Fri Mar 08, 2019 12:38 am

In your traditional 401k accounts sell the stock funds and buy more of the bond fund. Invest in tax exempt bonds, total international stock fund VTIAX and total US stock fund VTSAX in your taxable account (1c and 2a). The reason is tax efficiency. And you could buy I bonds (1a) if you don’t mind managing an additional account.
Last edited by Lou354 on Fri Mar 08, 2019 12:45 am, edited 2 times in total.

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Re: Puzzled: How to add more bonds+international after running out of tax-advantaged room?

Post by Lou354 » Fri Mar 08, 2019 12:39 am

[DELETED: duplicate]

AlohaJoe
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Re: Puzzled: How to add more bonds+international after running out of tax-advantaged room?

Post by AlohaJoe » Fri Mar 08, 2019 12:49 am

CalculatedRisk wrote:
Thu Mar 07, 2019 9:19 pm
  1. Buy more Vanguard Total International (VTIAX - 0.11% ER) in my taxable account?
  2. Buy Vanguard Developed Markets Index Fund Admiral Shares (VTMGX - 0.07% ER) in my taxable account? (Is this Vanguard's tax-managed international?)
Get the spreadsheet from this:
viewtopic.php?t=242137

Put in your federal marginal rate, your QDI rate, and your state tax rate.

But generally they are going to be pretty close to identical in tax costs.

You should just go with total international, since it is "total" -- it includes emerging markets -- and you don't have to worry in 5 or 10 or 15 years about what to do as China or India or whatever becomes more economically prominent.

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Re: Puzzled: How to add more bonds+international after running out of tax-advantaged room?

Post by AlohaJoe » Fri Mar 08, 2019 12:58 am

pdavi21 wrote:
Fri Mar 08, 2019 12:30 am
If you are in the 32% or higher bracket, INTL funds may not cut it in taxable. The dividends are just too high currently. Tax efficient bonds (i.e. treasuries or municipal bonds) may do better, and large cap US stocks will do well too.
If you're in a 32% tax bracket, then $10,000 in Total US would cost you $42 in taxes and $10,000 in Total International would cost you $65. A cost of 0.23% to diversify outside of the US.

If you're in the 24% tax bracket, then the difference is 0.12% to get the diversification benefit.

What calculation did you use to decide that 0.12% is an acceptable cost to pay for diversification but 0.23% isn't? What's the breakeven point? 0.15%? 0.18%?

pdavi21
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Re: Puzzled: How to add more bonds+international after running out of tax-advantaged room?

Post by pdavi21 » Fri Mar 08, 2019 1:05 am

AlohaJoe wrote:
Fri Mar 08, 2019 12:58 am
pdavi21 wrote:
Fri Mar 08, 2019 12:30 am
If you are in the 32% or higher bracket, INTL funds may not cut it in taxable. The dividends are just too high currently. Tax efficient bonds (i.e. treasuries or municipal bonds) may do better, and large cap US stocks will do well too.
If you're in a 32% tax bracket, then $10,000 in Total US would cost you $42 in taxes and $10,000 in Total International would cost you $65. A cost of 0.23% to diversify outside of the US.

If you're in the 24% tax bracket, then the difference is 0.12% to get the diversification benefit.

What calculation did you use to decide that 0.12% is an acceptable cost to pay for diversification but 0.23% isn't? What's the breakeven point? 0.15%? 0.18%?
I was more saying pick bonds first to fill taxable. AA is AA mostly regardless of tax. Try compounding 0.23% over 20-30 years...it's more than it looks like. I also think your numbers are out of date. Last I checked, VXUS, was significantly worse than VTI even in the 22% bracket (not accounting for state tax).

EDIT: Now if OP's state taxes QDI but not foreign income, that's potentially an entirely different ball game.
"We spend a great deal of time studying history, which, let's face it, is mostly the history of stupidity." -Stephen Hawking

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Duckie
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Re: Puzzled: How to add more bonds+international after running out of tax-advantaged room?

Post by Duckie » Fri Mar 08, 2019 6:10 pm

CalculatedRisk wrote:For my situation, how do I add more bonds and international since I have run out of tax-advantaged room?
You have not run out of room.
Would moving around funds in my tax-exempt accounts free up more space?
Yes.
How should I add more bonds funds for retirement?
Unless there is a reason you haven't mentioned for putting bonds in taxable, don't. Put them in your tax-sheltered accounts.
How can I add more international funds for retirement?
International works in taxable, Roth, and pre-tax accounts.

Find out if your current 401k at Schwab will take incoming rollovers. If it will, roll your old Schwab 401k and old Fidelity 401k into your current 401k. Also roll your old Roth 401k into your Roth IRA at E*Trade. That would massively simplify your portfolio.

You have a desired AA of 58% US stocks, 20% international stocks, and 22% bonds. 22% bonds is low for age 38 but I'll work with it. The first example has all the accounts you currently have. The second example is after the possible rollovers. You could have:

Portfolio #1

Taxable at Vanguard -- 49%
41% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.04%)
8% (VTIAX) Vanguard Total International Stock Index Fund Admiral Shares (0.11%)

401k at Schwab -- 9%
9% (SWAGX) Schwab U.S. Aggregate Bond Index Fund (0.04%)

Former 401k at Schwab -- 14%
14% (SWTSX) Schwab Total Stock Market Index Fund (0.03%)

Former 401k at Fidelity -- 9%
9% (FXNAX) Fidelity U.S. Bond Index Fund (0.025%)

Former Roth 401k at Schwab -- 4%
4% (SWTSX) Schwab Total Stock Market Index Fund (0.03%)

Roth IRA at E*Trade -- 13%
13% (VTIAX) Vanguard Total International Stock Index Fund Admiral Shares (0.11%)

HSA at Fidelity -- 2%
2% (FUAMX) Fidelity Intermediate Treasury Bond Index Fund (0.03%)

or

Portfolio #2

Taxable at Vanguard -- 49%
41% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.04%)
8% (VTIAX) Vanguard Total International Stock Index Fund Admiral Shares (0.11%)

401k at Schwab --32%
12% (SWTSX) Schwab Total Stock Market Index Fund (0.03%)
20% (SWAGX) Schwab U.S. Aggregate Bond Index Fund (0.04%)

Roth IRA at E*Trade -- 17%
5% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.04%)
12% (VTIAX) Vanguard Total International Stock Index Fund Admiral Shares (0.11%)

HSA at Fidelity -- 2%
2% (FUAMX) Fidelity Intermediate Treasury Bond Index Fund (0.03%)

My comments:
  • The treasury fund is in the HSA is because you live in California and HSAs are taxed in California, but treasury bonds are not state taxed. They are federally taxed but not inside an HSA.
  • By putting all your international stock not at Schwab you get the total international in one fund, not just developed markets.
Something to think about.

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Re: Puzzled: How to add more bonds+international after running out of tax-advantaged room?

Post by grabiner » Fri Mar 08, 2019 6:46 pm

CalculatedRisk wrote:
Thu Mar 07, 2019 9:19 pm
For my situation, how do I add more bonds and international since I have run out of tax-advantaged room? Would moving around funds in my tax-exempt accounts free up more space?

Tax Rate: 35% Federal, 11.3% State
In that tax bracket, the most tax-efficient holding is CA municipal bonds. You pay 15%+3.8%+11.3%=30.1% tax on qualified dividends and long-term gains (and it might go up to 20%+3.8%+11.3%=35.1% soon), which means you have double the tax cost on taxable stock that other taxpayers have. However, you pay the same tax on CA municipal bonds as anyone else. This makes CA municipal bonds particularly attractive for you in a taxable account. You probably don't want to use them for all of your bond holdings because of diversification, but I would suggest using those for some of your taxable holdings.

The normal recommendation to hold stocks in taxable assumes a smaller gap between taxable stock and muni tax rates. For example, I pay 15% federal + 8.2% MD = 23.2% tax on my qualified dividends and long-term gains, but I would also pay 8.2% on munis because there is no low-cost MD muni fund. With only a 15% difference, I would prefer stocks in my taxable account, which is all stock.
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Re: Puzzled: How to add more bonds+international after running out of tax-advantaged room?

Post by maximuum » Sat Mar 09, 2019 3:47 pm

At what difference is it worthwhile to hold federal muni bonds in taxable instead of stocks in a state with no muni bond fund? Ie at 20% + 3.8% in the highest tax bracket with a high state tax (like Maryland) would you place your bonds in an intermediate tax exempt bond fund and stocks in tax deferred preferentially? Or still stick with stocks in taxable?

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Re: Puzzled: How to add more bonds+international after running out of tax-advantaged room?

Post by grabiner » Sat Mar 09, 2019 4:49 pm

maximuum wrote:
Sat Mar 09, 2019 3:47 pm
At what difference is it worthwhile to hold federal muni bonds in taxable instead of stocks in a state with no muni bond fund? Ie at 20% + 3.8% in the highest tax bracket with a high state tax (like Maryland) would you place your bonds in an intermediate tax exempt bond fund and stocks in tax deferred preferentially? Or still stick with stocks in taxable?
It also depends on the yield on the bonds; you can work out your own tax costs for bonds and stocks. At current yields, I believe it would be better to put munis in taxable in the top tax bracket even with no state tax break, whether the tax difference is 23.8% versus 0 (no state tax) or 33.75% versus 8.95% (MD top tax rate).
Wiki David Grabiner

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Re: Puzzled: How to add more bonds+international after running out of tax-advantaged room?

Post by CalculatedRisk » Thu Mar 14, 2019 12:01 am

Duckie wrote:
Fri Mar 08, 2019 6:10 pm
My comments:
  • The treasury fund is in the HSA is because you live in California and HSAs are taxed in California, but treasury bonds are not state taxed. They are federally taxed but not inside an HSA.
  • By putting all your international stock not at Schwab you get the total international in one fund, not just developed markets.
Something to think about.
Thanks for this and all the other comments. I’ll use a variation of these suggestions, including moving more international funds to my taxable.

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