Tax Efficient Schwab Bond Fund

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SimpleRob
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Tax Efficient Schwab Bond Fund

Post by SimpleRob » Thu Sep 27, 2018 7:54 pm

Any suggestions for a tax efficient Schwab bond fund for a taxable account? Thanks, Rob

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grabiner
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Re: Tax Efficient Schwab Bond Fund

Post by grabiner » Thu Sep 27, 2018 8:25 pm

Tax efficiency of a bond fund is determined by the bonds it holds. Almost all of the gain from a bond fund comes from the dividends, which are always taxable (or never taxable for municipal bonds). The main thing a mutual fund company can do to reduce the tax cost of holding bonds is to have a high-expense fund which keeps dividends for the fund company; you don't want such a fund. (In contrast, stocks get much of their gains from price appreciation, and thus some stock funds, particularly index funds and ETFs, are more tax-efficient because they avoid selling stocks for a capital gain.)

So your first decision needs to be what type of bonds to hold. If you are in the 32% tax bracket, or possibly in the 24% bracket, you should hold a municipal-bond fund. If you are in a lower bracket, you should hold a taxable bond fund; it will lead to a higher tax bill, but with the lower yield of munis, you will probably still get more after tax in the same tax bracket.

Schwab doesn't have a low-cost muni fund, so if you want munis, you would be better with a non-Schwab ETF. (If you are in a high-tax state, there aren't even low-cost single-state ETFs; the only low-cost options are Vanguard's mutual funds, which you would prefer hold in a Schwab account.)

Schwab does have low-cost taxable bond funds and ETFs. The natural choice would be Schwab Aggregate Bond Index Fund, or Core Bond ETF if you prefer ETFs; both have very low costs and provide broad exposure to the bond market.
Wiki David Grabiner

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SimpleRob
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Re: Tax Efficient Schwab Bond Fund

Post by SimpleRob » Thu Sep 27, 2018 10:48 pm

grabiner wrote:
Thu Sep 27, 2018 8:25 pm
Tax efficiency of a bond fund is determined by the bonds it holds. Almost all of the gain from a bond fund comes from the dividends, which are always taxable (or never taxable for municipal bonds). The main thing a mutual fund company can do to reduce the tax cost of holding bonds is to have a high-expense fund which keeps dividends for the fund company; you don't want such a fund. (In contrast, stocks get much of their gains from price appreciation, and thus some stock funds, particularly index funds and ETFs, are more tax-efficient because they avoid selling stocks for a capital gain.)

So your first decision needs to be what type of bonds to hold. If you are in the 32% tax bracket, or possibly in the 24% bracket, you should hold a municipal-bond fund. If you are in a lower bracket, you should hold a taxable bond fund; it will lead to a higher tax bill, but with the lower yield of munis, you will probably still get more after tax in the same tax bracket.

Schwab doesn't have a low-cost muni fund, so if you want munis, you would be better with a non-Schwab ETF. (If you are in a high-tax state, there aren't even low-cost single-state ETFs; the only low-cost options are Vanguard's mutual funds, which you would prefer hold in a Schwab account.)

Schwab does have low-cost taxable bond funds and ETFs. The natural choice would be Schwab Aggregate Bond Index Fund, or Core Bond ETF if you prefer ETFs; both have very low costs and provide broad exposure to the bond market.
Thanks grabiner for the thorough response. I do hold the Schwab Aggregate Bond Index Fund in my retirement accounts. I am in the higher tax bracket so I will take a look at the Vanguard bond fund options for the taxable account. Thanks for your time.

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BigFoot48
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Re: Tax Efficient Schwab Bond Fund

Post by BigFoot48 » Fri Sep 28, 2018 12:39 am

In recent years I've been buying the Vanguard Intermediate Tax Exempt bond fund in my mother-in-laws Schwab taxable account with her RMD proceeds. She also holds Vanguard Total Bond fund there. I look at the returns on each and the impact of her 25% marginal rate on the dividends. In 2017 Tax Exempt returned at a 2.73% dividend rate while Total Bond had a 2.48% rate. Applying the marginal rate results in a net after-tax Total Bond rate of 1.86%, or 0.87% lower than Tax Exempt. So the Tax Exempt has a significant advantage for high marginal rate taxpayers, although I am reluctant to put all her bond funds into it as I like the diversity of Total Bond.
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UpperNwGuy
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Re: Tax Efficient Schwab Bond Fund

Post by UpperNwGuy » Fri Sep 28, 2018 4:59 am

BigFoot48 wrote:
Fri Sep 28, 2018 12:39 am
In recent years I've been buying the Vanguard Intermediate Tax Exempt bond fund in my mother-in-laws Schwab taxable account with her RMD proceeds. She also holds Vanguard Total Bond fund there. I look at the returns on each and the impact of her 25% marginal rate on the dividends. In 2017 Tax Exempt returned at a 2.73% dividend rate while Total Bond had a 2.48% rate. Applying the marginal rate results in a net after-tax Total Bond rate of 1.86%, or 0.87% lower than Tax Exempt. So the Tax Exempt has a significant advantage for high marginal rate taxpayers, although I am reluctant to put all her bond funds into it as I like the diversity of Total Bond.
I, too, have noticed that Intermediate Term Tax Exempt has been returning more than Total Bond, but, like you, I am reluctant to put all my bond funds in it.

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billthecat
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Re: Tax Efficient Schwab Bond Fund

Post by billthecat » Fri Sep 28, 2018 7:32 am

BigFoot48 wrote:
Fri Sep 28, 2018 12:39 am
In recent years I've been buying the Vanguard Intermediate Tax Exempt bond fund in my mother-in-laws Schwab taxable account with her RMD proceeds.
Aren’t there commissions when buying Vanguard at Schwab?
Last edited by billthecat on Fri Sep 28, 2018 11:26 am, edited 1 time in total.

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BigFoot48
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Re: Tax Efficient Schwab Bond Fund

Post by BigFoot48 » Fri Sep 28, 2018 7:46 am

billthecat wrote:
Fri Sep 28, 2018 7:32 am
Aren’t there commissions when buying Vanguard ar Schwab?
Yes there is. In the case of Vanguard Inter-Term Tax Exempt VWITX it's $76 and $0 to sell. This is one of the reason to use Schwab funds wherever possible and do sales as infrequently as possible, such as once-a-year in my MIL's case.
Retired | Two-time in top-10 in Bogleheads S&P500 contest; 13-time loser

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billthecat
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Re: Tax Efficient Schwab Bond Fund

Post by billthecat » Fri Sep 28, 2018 9:34 am

BigFoot48 wrote:
Fri Sep 28, 2018 7:46 am
billthecat wrote:
Fri Sep 28, 2018 7:32 am
Aren’t there commissions when buying Vanguard at Schwab?
Yes there is. In the case of Vanguard Inter-Term Tax Exempt VWITX it's $76 and $0 to sell. This is one of the reason to use Schwab funds wherever possible and do sales as infrequently as possible, such as once-a-year in my MIL's case.
Yeah. It’s a hassle to split holdings but I intend to hold tax exempt bond funds (VCADX) and money market (VCTXX) at Vanguard, equity (SCHB and SCHF) at Schwab. I may hold taxable bonds (SCHZ) at Schwab but that’s to be determined.
Last edited by billthecat on Fri Sep 28, 2018 11:26 am, edited 1 time in total.

latesaver
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Re: Tax Efficient Schwab Bond Fund

Post by latesaver » Fri Sep 28, 2018 10:47 am

BigFoot48 wrote:
Fri Sep 28, 2018 7:46 am
billthecat wrote:
Fri Sep 28, 2018 7:32 am
Aren’t there commissions when buying Vanguard ar Schwab?
Yes there is. In the case of Vanguard Inter-Term Tax Exempt VWITX it's $76 and $0 to sell. This is one of the reason to use Schwab funds wherever possible and do sales as infrequently as possible, such as once-a-year in my MIL's case.
I have this dilemma as well. I could tax loss harvest $1500 in VWAHX but the cost to get into the fund ($75) has me hesitating.

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SimpleRob
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Re: Tax Efficient Schwab Bond Fund

Post by SimpleRob » Fri Sep 28, 2018 3:19 pm

Thanks for all the insight on this issue. I am trying to simply dilute the risk in my taxable account in the most cost efficient way. My wife and I have all our accounts at Schwab and would prefer to keep them there for simplicity. We may need to just cough up $76 for the Vanguard bond fund. Then we will let some cash accumulate instead of buying the fund on a monthly basis as the monthly amounts deposited will not be that much.

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vineviz
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Re: Tax Efficient Schwab Bond Fund

Post by vineviz » Fri Sep 28, 2018 4:31 pm

SimpleRob wrote:
Fri Sep 28, 2018 3:19 pm
Thanks for all the insight on this issue. I am trying to simply dilute the risk in my taxable account in the most cost efficient way. My wife and I have all our accounts at Schwab and would prefer to keep them there for simplicity. We may need to just cough up $76 for the Vanguard bond fund. Then we will let some cash accumulate instead of buying the fund on a monthly basis as the monthly amounts deposited will not be that much.
The Vanguard Tax-Exempt Bond ETF (VTEB) or iShares National Muni Bond ETF (MUB) would cost only $5 in commission at Schwab. Both have an attractive ER and an intermediate average duration.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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BigFoot48
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Re: Tax Efficient Schwab Bond Fund

Post by BigFoot48 » Fri Sep 28, 2018 4:44 pm

vineviz wrote:
Fri Sep 28, 2018 4:31 pm

The Vanguard Tax-Exempt Bond ETF (VTEB) or iShares National Muni Bond ETF (MUB) would cost only $5 in commission at Schwab. Both have an attractive ER and an intermediate average duration.
That's indeed a good way to avoid the high fee on Vanguard funds. I converted my three Vanguard funds in Schwab to ETFs a few years ago for that very reason.
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grabiner
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Re: Tax Efficient Schwab Bond Fund

Post by grabiner » Fri Sep 28, 2018 6:51 pm

BigFoot48 wrote:
Fri Sep 28, 2018 12:39 am
In recent years I've been buying the Vanguard Intermediate Tax Exempt bond fund in my mother-in-laws Schwab taxable account with her RMD proceeds. She also holds Vanguard Total Bond fund there. I look at the returns on each and the impact of her 25% marginal rate on the dividends. In 2017 Tax Exempt returned at a 2.73% dividend rate while Total Bond had a 2.48% rate. Applying the marginal rate results in a net after-tax Total Bond rate of 1.86%, or 0.87% lower than Tax Exempt. So the Tax Exempt has a significant advantage for high marginal rate taxpayers, although I am reluctant to put all her bond funds into it as I like the diversity of Total Bond.
The proper comparison is the SEC yield, not the annual returns; the annual returns are subject to changes in the market for different types of bonds. The current yields on Admiral shares are 3.23% for Total Bond Market, 2.69% for Intermediate-Term Tax-Exempt, which gives the muni fund a higher yield even in a 22% bracket if you have the $50K for Admiral shares.
Wiki David Grabiner

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BigFoot48
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Re: Tax Efficient Schwab Bond Fund

Post by BigFoot48 » Fri Sep 28, 2018 6:59 pm

grabiner wrote:
Fri Sep 28, 2018 6:51 pm

The proper comparison is the SEC yield, not the annual returns; the annual returns are subject to changes in the market for different types of bonds. The current yields on Admiral shares are 3.23% for Total Bond Market, 2.69% for Intermediate-Term Tax-Exempt, which gives the muni fund a higher yield even in a 22% bracket if you have the $50K for Admiral shares.
I was just doing a calculation of actual dividends received for the two funds for the year divided by an average of each fund's balances.
Retired | Two-time in top-10 in Bogleheads S&P500 contest; 13-time loser

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Nestegg_User
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Re: Tax Efficient Schwab Bond Fund

Post by Nestegg_User » Sat Sep 29, 2018 1:55 am

BigFoot48 wrote:
Fri Sep 28, 2018 7:46 am
billthecat wrote:
Fri Sep 28, 2018 7:32 am
Aren’t there commissions when buying Vanguard ar Schwab?
Yes there is. In the case of Vanguard Inter-Term Tax Exempt VWITX it's $76 and $0 to sell. This is one of the reason to use Schwab funds wherever possible and do sales as infrequently as possible, such as once-a-year in my MIL's case.
If you have enough holdings in Schwab, you can designate a fund (or two) company purchase to not have to pay the commission; I’ve got ours set for Vanguard... so costs to purchase = $0

charis23
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Re: Tax Efficient Schwab Bond Fund

Post by charis23 » Mon Apr 08, 2019 12:45 pm

Nestegg_User wrote:
Sat Sep 29, 2018 1:55 am
BigFoot48 wrote:
Fri Sep 28, 2018 7:46 am
billthecat wrote:
Fri Sep 28, 2018 7:32 am
Aren’t there commissions when buying Vanguard ar Schwab?
Yes there is. In the case of Vanguard Inter-Term Tax Exempt VWITX it's $76 and $0 to sell. This is one of the reason to use Schwab funds wherever possible and do sales as infrequently as possible, such as once-a-year in my MIL's case.
If you have enough holdings in Schwab, you can designate a fund (or two) company purchase to not have to pay the commission; I’ve got ours set for Vanguard... so costs to purchase = $0
How do you go about doing this designation? And what is "enough holdings"?

Jmh04j
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Re: Tax Efficient Schwab Bond Fund

Post by Jmh04j » Mon Apr 08, 2019 1:12 pm

vineviz wrote:
Fri Sep 28, 2018 4:31 pm
SimpleRob wrote:
Fri Sep 28, 2018 3:19 pm
Thanks for all the insight on this issue. I am trying to simply dilute the risk in my taxable account in the most cost efficient way. My wife and I have all our accounts at Schwab and would prefer to keep them there for simplicity. We may need to just cough up $76 for the Vanguard bond fund. Then we will let some cash accumulate instead of buying the fund on a monthly basis as the monthly amounts deposited will not be that much.
The Vanguard Tax-Exempt Bond ETF (VTEB) or iShares National Muni Bond ETF (MUB) would cost only $5 in commission at Schwab. Both have an attractive ER and an intermediate average duration.
MUB is now commission free at Schwab

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Nestegg_User
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Re: Tax Efficient Schwab Bond Fund

Post by Nestegg_User » Fri Apr 12, 2019 11:24 am

Charis23

Schwab doesn't really point it out, but once you have enough they put you into different group ( Signature ( unless they've changed it), differentiated into (at that time) Pinnacle and other classes by amount invested.... usually half mil, mil plus, and some class above that (3 or 5 mil?)). I think you needed over a mil to get those benefits then. I haven't looked into recent differences since we've been with them long enough and have long ago been sufficiently high enough assets to qualify.

tenkuky
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Re: Tax Efficient Schwab Bond Fund

Post by tenkuky » Fri Apr 12, 2019 11:32 am

I didn't know about secret designations, but find that cust service is tops there. I've politely requested and gotten free trades by virtue of being a long-time customer, even without huge balances.
Another great way is the regional/local Schwab rep who can do this for you and is more personal, no charge.
I second the recommendation above, I use VTEB in taxable acct for muni investing and haven't paid a commission in last 3 years, but even if you did, it's only $5.

charis23
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Re: Tax Efficient Schwab Bond Fund

Post by charis23 » Mon Apr 15, 2019 2:04 pm

Nestegg_User wrote:
Fri Apr 12, 2019 11:24 am
Charis23

Schwab doesn't really point it out, but once you have enough they put you into different group ( Signature ( unless they've changed it), differentiated into (at that time) Pinnacle and other classes by amount invested.... usually half mil, mil plus, and some class above that (3 or 5 mil?)). I think you needed over a mil to get those benefits then. I haven't looked into recent differences since we've been with them long enough and have long ago been sufficiently high enough assets to qualify.
Thanks for the heads up. Will reach out when I reach that level of assets :D

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