Debunking Bonds in Taxable

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stocknoob4111
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Re: Debunking Bonds in Taxable

Post by stocknoob4111 » Mon Nov 11, 2019 12:49 pm

To highlight my own personal example here. I hold my entire bond allocation in taxable and I am actually ahead the last 2 years. The primary reason is that my 401k bond fund has weaker performance and a higher expense ratio. Also CA, the state where I live, does not have a concept of qualified dividends and taxes equity income at the full rate which narrows the gap even more. If I swapped my holding of bonds into my tax deferred space I would have to put a similar amount of my equities in my taxable paying taxes on those dividends at 24.3% instead of the 33.3% on the bond income.

Amount invested at start of 2019: $90,000

Current balance as of 10/31 -
VBILX: $99,645, Income: $2,228, Taxes @ 29.48%: $657 (VBILX is 41% deductible at CA state)
JCBUX: $98,116, Income: $2,310, Taxes: None (Tax deferred)
VFIAX: Income: $1,622, Taxes @ 24.3%: $394

Increased performance of VBILX over JCBUX: $1,529 - $263 (Extra tax) = $1,266 (NET POSITIVE by holding the fund in taxable)

So, I clearly came out AHEAD by holding my bonds in taxable even with the extra tax, every situation is unique. Before the went this route I backtested VBILX vs JCBUX in many rolling periods and VBILX always outperformed the latter probably due to the high expense ratio.

There is also the Tax loss harvesting benefit, I TLH'd in 2018 since bonds dropped and paid no tax at all on the bond income. If interest rates rise significantly and I mean 3+%, which I doubt very much that they will anytime soon, then I will definitely re-consider moving the position to my Tax deferred.
Last edited by stocknoob4111 on Mon Nov 11, 2019 1:40 pm, edited 1 time in total.

stocknoob4111
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Re: Debunking Bonds in Taxable

Post by stocknoob4111 » Mon Nov 11, 2019 1:31 pm

One other thing I forgot to add - over the long term, say 10-20 years, your equity position will be growing much faster than your bond position. This means that the income that is generated from that position will also grow much faster and so will the tax liability. Having those equities in your tax deferred may be beneficial in this regard due to the rate of growth.

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Re: Debunking Bonds in Taxable

Post by Broken Man 1999 » Mon Nov 11, 2019 2:32 pm

Exercises like these only point out if the forum is asked, "Should I do this, or that.....", the most correct answer should be, "It depends" OR "For many investors this would be a good idea."

The personal situations of the investors can color the usefulness of the standard answers so often offered. We are a diverse group, for sure. Not everyone is a 44 Long.

Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven than I shall not go. " -Mark Twain

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Re: Debunking Bonds in Taxable

Post by Random Musings » Mon Nov 11, 2019 9:26 pm

I though that it usually makes sense to have tax efficient equity funds in taxable and bonds in tax deferred. Equities have higher expected returns, so in taxable they will be taxed at lower cap gains rate, especially when drawing off them during retirement (if you need to) before dipping into traditional or rollover IRA's Those you can wait, hopefully until 70 1/2, before paying income taxes on them.

Even in the early 80's, looking back, both longer term bonds and equities had similar returns, but it would have made more sense even then to hold bonds in tax deferred as more income being generated by the high yields.

Of course, personal tax rates must be considered, but in most cases keep tax efficient index/passive funds in taxable if one has taxable accounts.

RM
I figure the odds be fifty-fifty I just might have something to say. FZ

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Re: Debunking Bonds in Taxable

Post by JBTX » Mon Nov 11, 2019 9:55 pm

Random Musings wrote:
Mon Nov 11, 2019 9:26 pm
I though that it usually makes sense to have tax efficient equity funds in taxable and bonds in tax deferred. Equities have higher expected returns, so in taxable they will be taxed at lower cap gains rate, especially when drawing off them during retirement (if you need to) before dipping into traditional or rollover IRA's Those you can wait, hopefully until 70 1/2, before paying income taxes on them.

Even in the early 80's, looking back, both longer term bonds and equities had similar returns, but it would have made more sense even then to hold bonds in tax deferred as more income being generated by the high yields.

Of course, personal tax rates must be considered, but in most cases keep tax efficient index/passive funds in taxable if one has taxable accounts.

RM
If stocks earn 10% a year and taxed at 15% and bonds earn 2% and taxed at 22%, which would you rather have in taxable?

If that seems extreme, then do 8% and 3%, 7% and 3.5%. etc etc.

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Re: Debunking Bonds in Taxable

Post by Random Musings » Mon Nov 11, 2019 10:07 pm

JBTX wrote:
Mon Nov 11, 2019 9:55 pm
Random Musings wrote:
Mon Nov 11, 2019 9:26 pm
I though that it usually makes sense to have tax efficient equity funds in taxable and bonds in tax deferred. Equities have higher expected returns, so in taxable they will be taxed at lower cap gains rate, especially when drawing off them during retirement (if you need to) before dipping into traditional or rollover IRA's Those you can wait, hopefully until 70 1/2, before paying income taxes on them.

Even in the early 80's, looking back, both longer term bonds and equities had similar returns, but it would have made more sense even then to hold bonds in tax deferred as more income being generated by the high yields.

Of course, personal tax rates must be considered, but in most cases keep tax efficient index/passive funds in taxable if one has taxable accounts.

RM
If stocks earn 10% a year and taxed at 15% and bonds earn 2% and taxed at 22%, which would you rather have in taxable?

If that seems extreme, then do 8% and 3%, 7% and 3.5%. etc etc.
Stocks, in my case, tax efficient index/passive equity funds in taxable. With higher expected returns, I'll have more money taxed at the lower 15% rate, plus with step up if transferred to heirs. I will also withdrawal monies out of taxable first, unless the tax situation changes. Finally, there are typically better tax loss harvesting opportunities having equities in taxable as they are usually more volatile than bonds.

Everyone's situation is different.

RM
I figure the odds be fifty-fifty I just might have something to say. FZ

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Re: Debunking Bonds in Taxable

Post by JBTX » Mon Nov 11, 2019 11:07 pm

Random Musings wrote:
Mon Nov 11, 2019 10:07 pm
JBTX wrote:
Mon Nov 11, 2019 9:55 pm
Random Musings wrote:
Mon Nov 11, 2019 9:26 pm
I though that it usually makes sense to have tax efficient equity funds in taxable and bonds in tax deferred. Equities have higher expected returns, so in taxable they will be taxed at lower cap gains rate, especially when drawing off them during retirement (if you need to) before dipping into traditional or rollover IRA's Those you can wait, hopefully until 70 1/2, before paying income taxes on them.

Even in the early 80's, looking back, both longer term bonds and equities had similar returns, but it would have made more sense even then to hold bonds in tax deferred as more income being generated by the high yields.

Of course, personal tax rates must be considered, but in most cases keep tax efficient index/passive funds in taxable if one has taxable accounts.

RM
If stocks earn 10% a year and taxed at 15% and bonds earn 2% and taxed at 22%, which would you rather have in taxable?

If that seems extreme, then do 8% and 3%, 7% and 3.5%. etc etc.
Stocks, in my case tax efficient index/passive equity funds in taxable. With the higher expected returns, I'll have more money taxed at the lower 15% rate, plus with step up if transferred to heirs. Also, there are better tax loss harvesting opportunities with equities in taxable.

RM
Wouldn't you rather have the much higher rate of return tax free?

15% of 10% return = 1.5 tax

22% of 2.0% is 0.4% tax. Which would you rather pay in tax, 1.5 or 0.4?

But you may argue : I'm not taxed on the entire stock balance every year since I'm not selling every year. Sure, but eventually you will sell it, and unless you sell it at 0%, it's mostly a timing of when you pay the tax. Would you rather pay 0.4% now, or defer and pay 1.5 later?

Plus you are going to pay tax on dividends at about 2%. Yes that is only at 15% tax. Or 0.3. Which is less than 0.4 of bonds in taxable in that example. But at 10% growth your value doubles in 7 years. Then your tax on stocks will be 0.6, vs 4.5 on taxable bonds.

Sure, everybody thinks they will defer selling their taxable funds for decades, and tax harvest away any gains until they get to zero percent tax rates. And I'm sure a few will achieve that. But for most they will decide to sell/turnover the stocks for various different reasons.

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Re: Debunking Bonds in Taxable

Post by grabiner » Mon Nov 11, 2019 11:35 pm

JBTX wrote:
Mon Nov 11, 2019 11:07 pm
Random Musings wrote:
Mon Nov 11, 2019 10:07 pm
JBTX wrote:
Mon Nov 11, 2019 9:55 pm
If stocks earn 10% a year and taxed at 15% and bonds earn 2% and taxed at 22%, which would you rather have in taxable?

If that seems extreme, then do 8% and 3%, 7% and 3.5%. etc etc.
Stocks, in my case tax efficient index/passive equity funds in taxable. With the higher expected returns, I'll have more money taxed at the lower 15% rate, plus with step up if transferred to heirs. Also, there are better tax loss harvesting opportunities with equities in taxable.

RM
Wouldn't you rather have the much higher rate of return tax free?

15% of 10% return = 1.5 tax

22% of 2.0% is 0.4% tax. Which would you rather pay in tax, 1.5 or 0.4?

But you may argue : I'm not taxed on the entire stock balance every year since I'm not selling every year. Sure, but eventually you will sell it, and unless you sell it at 0%, it's mostly a timing of when you pay the tax. Would you rather pay 0.4% now, or defer and pay 1.5 later?
But the effective cost is much lower, because the tax you have not yet paid is more money you have invested until the tax is eventually paid.

My estimate from When to prefer low-rate bonds to stocks in taxable is that the tax costs for a long-term taxable stock investment, sold after 30 years, is slightly more than double the dividend tax; I estimated 0.67% on a stock investment. Therefore, you would prefer to hold stocks in taxable in a 22% bracket if bonds yield 3% or less, and in a higher bracket if munis yield 2% or less (estimating the tax cost on munis as 1/3 of the yield, so that munis break even with taxable bonds of comparable risk in a 25% bracket).

But this is based on an assumption that you expect to sell all the stocks; if you leave some to heirs or charity when returns are this high, then stocks in taxable will cost less if returns are high because you don't sell some of them, and cost less if returns are low because the capital gain will be lower. Thus, even at current yields, I recommend stocks in a taxable account except for investors subject to the 3.8% Medicare surtax, or in high-tax states if there is a low-cost muni fund for the state.
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Re: Debunking Bonds in Taxable

Post by Random Musings » Mon Nov 11, 2019 11:44 pm

JBTX wrote:
Mon Nov 11, 2019 11:07 pm
Random Musings wrote:
Mon Nov 11, 2019 10:07 pm
JBTX wrote:
Mon Nov 11, 2019 9:55 pm
Random Musings wrote:
Mon Nov 11, 2019 9:26 pm
I though that it usually makes sense to have tax efficient equity funds in taxable and bonds in tax deferred. Equities have higher expected returns, so in taxable they will be taxed at lower cap gains rate, especially when drawing off them during retirement (if you need to) before dipping into traditional or rollover IRA's Those you can wait, hopefully until 70 1/2, before paying income taxes on them.

Even in the early 80's, looking back, both longer term bonds and equities had similar returns, but it would have made more sense even then to hold bonds in tax deferred as more income being generated by the high yields.

Of course, personal tax rates must be considered, but in most cases keep tax efficient index/passive funds in taxable if one has taxable accounts.

RM
If stocks earn 10% a year and taxed at 15% and bonds earn 2% and taxed at 22%, which would you rather have in taxable?

If that seems extreme, then do 8% and 3%, 7% and 3.5%. etc etc.
Stocks, in my case tax efficient index/passive equity funds in taxable. With the higher expected returns, I'll have more money taxed at the lower 15% rate, plus with step up if transferred to heirs. Also, there are better tax loss harvesting opportunities with equities in taxable.

RM
Wouldn't you rather have the much higher rate of return tax free?

15% of 10% return = 1.5 tax

22% of 2.0% is 0.4% tax. Which would you rather pay in tax, 1.5 or 0.4?

But you may argue : I'm not taxed on the entire stock balance every year since I'm not selling every year. Sure, but eventually you will sell it, and unless you sell it at 0%, it's mostly a timing of when you pay the tax. Would you rather pay 0.4% now, or defer and pay 1.5 later?

Plus you are going to pay tax on dividends at about 2%. Yes that is only at 15% tax. Or 0.3. Which is less than 0.4 of bonds in taxable in that example. But at 10% growth your value doubles in 7 years. Then your tax on stocks will be 0.6, vs 4.5 on taxable bonds.

Sure, everybody thinks they will defer selling their taxable funds for decades, and tax harvest away any gains until they get to zero percent tax rates. And I'm sure a few will achieve that. But for most they will decide to sell/turnover the stocks for various different reasons.
After a while, the tax loss harvesting opportunities do start to disappear except if new monies added to taxable. And yes, I have held some of my original taxable holdings over 20 years now. Those will be taxed at 15% versus a higher amount if held in tax deferred. The problem is, I'm not paying the 1.5 vs 0.4 you are alluding to. I'll be paying less in taxes using my methodology. Helps to have a written investment plan, IMHO, and not have this short term trading mentality. Tax rates must be considered.

It comes down to whether or not you want to pay a lower tax on higher expected returns or a higher tax on it. Plus, if heirs get remainder, do you want step up at death or having them have required RMD's (not as big of a problem for younger inheritors with lower initial RMD's).

You are confusing behavioral investment issues with a sound strategy (again, has to be followed through). No different than the fact that most people have difficulties even staying the course when markets go up and down.

Now, if we are talking Roth, then you should stuff your higher expected return less tax efficient vehicles in there. It's a matter of what buckets you are going to utilize, the types of investments one will choose (from a simple three fund to slice and dicing), and some other factors.

If you don't have any investing discipline, well, you are making your life more difficult and will have to save more or take more risk to get to same point.

RM
I figure the odds be fifty-fifty I just might have something to say. FZ

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Re: Debunking Bonds in Taxable

Post by White Coat Investor » Tue Nov 12, 2019 12:06 am

columbia wrote:
Thu Nov 08, 2018 9:33 pm
While interesting, these conversations would be more useful, if they focused on....um....ordinary people, who would never consider munis, because we’re just trying to scrape by.

Maybe there should be a wealthy people only sub-forum?

I kid, but only slightly.
I know where one of those is....

Strangely, it seems higher earners have become a little less welcome here at Bogleheads the last couple of years than I remember a decade ago. It seemed like back then the complaint was that everyone here was super well-to-do--doctors, lawyers, engineers, business owners etc.

At any rate, it's offensive to call someone for whom munis might make sense "not ordinary." Most of us have spent a significant portion of our life in other tax brackets. Although these days, even in the top bracket Prime MMF makes sense over the Municipal MMF. I would assume that's a temporary situation though.

But I think most people who hang out here for very long do much, much better than the average American. It's just hard not to once you develop the super power that is the combination of financial literacy and discipline.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

bck63
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Re: Debunking Bonds in Taxable

Post by bck63 » Tue Nov 12, 2019 7:09 am

I'm in the 22% federal tax bracket, 5.5% state. I hold bonds in my taxable account. I actually use a target date fund. Will likely (maybe, hopefully) pay 0% capital gains when I sell in 10-20 years. I don't mind paying taxes along the way for dividends in my tax bracket. I'm saving about 30% of my gross salary.

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Re: Debunking Bonds in Taxable

Post by aristotelian » Tue Nov 12, 2019 8:58 am

When was bonds in taxable ever bunked?

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Re: Debunking Bonds in Taxable

Post by aristotelian » Tue Nov 12, 2019 9:00 am

bck63 wrote:
Tue Nov 12, 2019 7:09 am
I'm in the 22% federal tax bracket, 5.5% state. I hold bonds in my taxable account. I actually use a target date fund. Will likely (maybe, hopefully) pay 0% capital gains when I sell in 10-20 years. I don't mind paying taxes along the way for dividends in my tax bracket. I'm saving about 30% of my gross salary.
The issue is less about paying taxes on bond dividends in taxable. IMO the bigger problem is paying taxes on stock gains in your 401k, especially since 401k will be taxed as income rather than capital gains.

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Re: Debunking Bonds in Taxable

Post by Random Musings » Tue Nov 12, 2019 10:18 am

grabiner wrote:
Mon Nov 11, 2019 11:35 pm
JBTX wrote:
Mon Nov 11, 2019 11:07 pm
Random Musings wrote:
Mon Nov 11, 2019 10:07 pm
JBTX wrote:
Mon Nov 11, 2019 9:55 pm
If stocks earn 10% a year and taxed at 15% and bonds earn 2% and taxed at 22%, which would you rather have in taxable?

If that seems extreme, then do 8% and 3%, 7% and 3.5%. etc etc.
Stocks, in my case tax efficient index/passive equity funds in taxable. With the higher expected returns, I'll have more money taxed at the lower 15% rate, plus with step up if transferred to heirs. Also, there are better tax loss harvesting opportunities with equities in taxable.

RM
Wouldn't you rather have the much higher rate of return tax free?

15% of 10% return = 1.5 tax

22% of 2.0% is 0.4% tax. Which would you rather pay in tax, 1.5 or 0.4?

But you may argue : I'm not taxed on the entire stock balance every year since I'm not selling every year. Sure, but eventually you will sell it, and unless you sell it at 0%, it's mostly a timing of when you pay the tax. Would you rather pay 0.4% now, or defer and pay 1.5 later?
But the effective cost is much lower, because the tax you have not yet paid is more money you have invested until the tax is eventually paid.

My estimate from When to prefer low-rate bonds to stocks in taxable is that the tax costs for a long-term taxable stock investment, sold after 30 years, is slightly more than double the dividend tax; I estimated 0.67% on a stock investment. Therefore, you would prefer to hold stocks in taxable in a 22% bracket if bonds yield 3% or less, and in a higher bracket if munis yield 2% or less (estimating the tax cost on munis as 1/3 of the yield, so that munis break even with taxable bonds of comparable risk in a 25% bracket).

But this is based on an assumption that you expect to sell all the stocks; if you leave some to heirs or charity when returns are this high, then stocks in taxable will cost less if returns are high because you don't sell some of them, and cost less if returns are low because the capital gain will be lower. Thus, even at current yields, I recommend stocks in a taxable account except for investors subject to the 3.8% Medicare surtax, or in high-tax states if there is a low-cost muni fund for the state.
Thanks for the info with respect to current situation. Those particular caveats do not affect me. However, saying that, if people are subject to these caveats and already have location of equities in taxable and bonds in tax-deferred, wouldn't they just keep them there to avoid current tax hit? Is it just new monies would be put in using that methodology until the yield situation changes and they are back to putting in new monies the way they originally did?

Regards,

RM
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Re: Debunking Bonds in Taxable

Post by grabiner » Tue Nov 12, 2019 1:59 pm

Random Musings wrote:
Tue Nov 12, 2019 10:18 am
Thanks for the info with respect to current situation. Those particular caveats do not affect me. However, saying that, if people are subject to these caveats and already have location of equities in taxable and bonds in tax-deferred, wouldn't they just keep them there to avoid current tax hit? Is it just new monies would be put in using that methodology until the yield situation changes and they are back to putting in new monies the way they originally did?
This is correct. If you have stocks in your taxable account with a significant capital gain, you probably don't want to sell them even if you would prefer to hold bonds in taxable now. (You can make the switch the other way around. If you start with bonds in taxable, and then rates rise to make taxable stocks more attractive, you can sell your bonds, likely for a capital loss.)

If you have a high-cost tax-inefficient stock fund in your taxable account, then it is probably worth selling even if you do have a taxable capital gain, since the fund will cost more to hold than to sell.
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Re: Debunking Bonds in Taxable

Post by JBTX » Tue Nov 12, 2019 2:33 pm

grabiner wrote:
Mon Nov 11, 2019 11:35 pm
JBTX wrote:
Mon Nov 11, 2019 11:07 pm
Random Musings wrote:
Mon Nov 11, 2019 10:07 pm
JBTX wrote:
Mon Nov 11, 2019 9:55 pm
If stocks earn 10% a year and taxed at 15% and bonds earn 2% and taxed at 22%, which would you rather have in taxable?

If that seems extreme, then do 8% and 3%, 7% and 3.5%. etc etc.
Stocks, in my case tax efficient index/passive equity funds in taxable. With the higher expected returns, I'll have more money taxed at the lower 15% rate, plus with step up if transferred to heirs. Also, there are better tax loss harvesting opportunities with equities in taxable.

RM
Wouldn't you rather have the much higher rate of return tax free?

15% of 10% return = 1.5 tax

22% of 2.0% is 0.4% tax. Which would you rather pay in tax, 1.5 or 0.4?

But you may argue : I'm not taxed on the entire stock balance every year since I'm not selling every year. Sure, but eventually you will sell it, and unless you sell it at 0%, it's mostly a timing of when you pay the tax. Would you rather pay 0.4% now, or defer and pay 1.5 later?
But the effective cost is much lower, because the tax you have not yet paid is more money you have invested until the tax is eventually paid.

My estimate from When to prefer low-rate bonds to stocks in taxable is that the tax costs for a long-term taxable stock investment, sold after 30 years, is slightly more than double the dividend tax; I estimated 0.67% on a stock investment. Therefore, you would prefer to hold stocks in taxable in a 22% bracket if bonds yield 3% or less, and in a higher bracket if munis yield 2% or less (estimating the tax cost on munis as 1/3 of the yield, so that munis break even with taxable bonds of comparable risk in a 25% bracket).

But this is based on an assumption that you expect to sell all the stocks; if you leave some to heirs or charity when returns are this high, then stocks in taxable will cost less if returns are high because you don't sell some of them, and cost less if returns are low because the capital gain will be lower. Thus, even at current yields, I recommend stocks in a taxable account except for investors subject to the 3.8% Medicare surtax, or in high-tax states if there is a low-cost muni fund for the state.
The answer depends on the specifics. You can easily build scenarios that favor either. However, I built a spreadsheet that compares the scenarios, and if you assume 15% cap gains or 22/24% ordinary tax rates, both during and after sale, and something like a 2% dividend rate, typically if the rate of return on stocks is twice as high as bonds, the stocks in taxable wins, by a small amount. Probably most notable is that it just doesn't make that much difference either way, until you start looking at bonds with much higher rates than now.

Of course you can assume that eventually you will sell the stocks at a 0% gain. Even then, the advantage for stocks in taxable is small (because there is still some ongoing dividend realization, and that realization grows in absolute terms as stocks outpace bonds). Also, if one is going to defer cap gains realization to an eventual lower rate, it very well could be that your ordinary income rate is lower too, which would be good for traditional IRAS and perhaps suggest Roth conversions.

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Re: Debunking Bonds in Taxable

Post by international001 » Tue Nov 12, 2019 2:36 pm

stocknoob4111 wrote:
Mon Nov 11, 2019 1:31 pm
One other thing I forgot to add - over the long term, say 10-20 years, your equity position will be growing much faster than your bond position. This means that the income that is generated from that position will also grow much faster and so will the tax liability. Having those equities in your tax deferred may be beneficial in this regard due to the rate of growth.
That's a fake argument
You have to compare with an overall portfolio with the percentage of AA is constant. In other words, if you have equities in your tax deferred, they'll grow faster, but then you have to sell some and buy bonds to rebalance.

With this assumptions, bonds in tax deferred are always better. Just because the taxes on the earnings are lower

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Re: Debunking Bonds in Taxable

Post by JBTX » Tue Nov 12, 2019 2:40 pm

Random Musings wrote:
Mon Nov 11, 2019 11:44 pm
JBTX wrote:
Mon Nov 11, 2019 11:07 pm
Random Musings wrote:
Mon Nov 11, 2019 10:07 pm
JBTX wrote:
Mon Nov 11, 2019 9:55 pm
Random Musings wrote:
Mon Nov 11, 2019 9:26 pm
I though that it usually makes sense to have tax efficient equity funds in taxable and bonds in tax deferred. Equities have higher expected returns, so in taxable they will be taxed at lower cap gains rate, especially when drawing off them during retirement (if you need to) before dipping into traditional or rollover IRA's Those you can wait, hopefully until 70 1/2, before paying income taxes on them.

Even in the early 80's, looking back, both longer term bonds and equities had similar returns, but it would have made more sense even then to hold bonds in tax deferred as more income being generated by the high yields.

Of course, personal tax rates must be considered, but in most cases keep tax efficient index/passive funds in taxable if one has taxable accounts.

RM
If stocks earn 10% a year and taxed at 15% and bonds earn 2% and taxed at 22%, which would you rather have in taxable?

If that seems extreme, then do 8% and 3%, 7% and 3.5%. etc etc.
Stocks, in my case tax efficient index/passive equity funds in taxable. With the higher expected returns, I'll have more money taxed at the lower 15% rate, plus with step up if transferred to heirs. Also, there are better tax loss harvesting opportunities with equities in taxable.

RM
Wouldn't you rather have the much higher rate of return tax free?

15% of 10% return = 1.5 tax

22% of 2.0% is 0.4% tax. Which would you rather pay in tax, 1.5 or 0.4?

But you may argue : I'm not taxed on the entire stock balance every year since I'm not selling every year. Sure, but eventually you will sell it, and unless you sell it at 0%, it's mostly a timing of when you pay the tax. Would you rather pay 0.4% now, or defer and pay 1.5 later?

Plus you are going to pay tax on dividends at about 2%. Yes that is only at 15% tax. Or 0.3. Which is less than 0.4 of bonds in taxable in that example. But at 10% growth your value doubles in 7 years. Then your tax on stocks will be 0.6, vs 4.5 on taxable bonds.

Sure, everybody thinks they will defer selling their taxable funds for decades, and tax harvest away any gains until they get to zero percent tax rates. And I'm sure a few will achieve that. But for most they will decide to sell/turnover the stocks for various different reasons.
After a while, the tax loss harvesting opportunities do start to disappear except if new monies added to taxable. And yes, I have held some of my original taxable holdings over 20 years now. Those will be taxed at 15% versus a higher amount if held in tax deferred. The problem is, I'm not paying the 1.5 vs 0.4 you are alluding to. I'll be paying less in taxes using my methodology. Helps to have a written investment plan, IMHO, and not have this short term trading mentality. Tax rates must be considered.

It comes down to whether or not you want to pay a lower tax on higher expected returns or a higher tax on it. Plus, if heirs get remainder, do you want step up at death or having them have required RMD's (not as big of a problem for younger inheritors with lower initial RMD's).

You are confusing behavioral investment issues with a sound strategy (again, has to be followed through). No different than the fact that most people have difficulties even staying the course when markets go up and down.

Now, if we are talking Roth, then you should stuff your higher expected return less tax efficient vehicles in there. It's a matter of what buckets you are going to utilize, the types of investments one will choose (from a simple three fund to slice and dicing), and some other factors.

If you don't have any investing discipline, well, you are making your life more difficult and will have to save more or take more risk to get to same point.

RM
As to your statements about Roth, whether it's traditional or Roth doesn't make any difference unless the tax rates change. But yes less tax efficient high yield high return (like REITS) are indeed better suited for tax advantaged accounts.

It's not just about discipline. It's about flexibility. I have a relative who has had money in funds for 40 years and may eventually pass them on to get step up. I understand that can and does happen.

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Re: Debunking Bonds in Taxable

Post by JBTX » Tue Nov 12, 2019 2:45 pm

international001 wrote:
Tue Nov 12, 2019 2:36 pm
stocknoob4111 wrote:
Mon Nov 11, 2019 1:31 pm
One other thing I forgot to add - over the long term, say 10-20 years, your equity position will be growing much faster than your bond position. This means that the income that is generated from that position will also grow much faster and so will the tax liability. Having those equities in your tax deferred may be beneficial in this regard due to the rate of growth.
That's a fake argument
You have to compare with an overall portfolio with the percentage of AA is constant. In other words, if you have equities in your tax deferred, they'll grow faster, but then you have to sell some and buy bonds to rebalance.

With this assumptions, bonds in tax deferred are always better. Just because the taxes on the earnings are lower
You end up with more and more stocks in taxable and at some point wouldn't you have to sell taxable stocks to rebalance?

I'm not sure why the argument is a "fake argument". Either way you have to rebalance.

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Re: Debunking Bonds in Taxable

Post by international001 » Tue Nov 12, 2019 2:56 pm

White Coat Investor wrote:
Tue Nov 12, 2019 12:06 am

At any rate, it's offensive to call someone for whom munis might make sense "not ordinary." Most of us have spent a significant portion of our life in other tax brackets. Although these days, even in the top bracket Prime MMF makes sense over the Municipal MMF. I would assume that's a temporary situation though.
Anybody making more than $30k is not ordinary in world terms https://www.investopedia.com/articles/p ... -world.asp
You have the choice of being offended or read/ask in BH. Whatever the segment of people who are in BH, I think anybody receives good advice for whatever their situation is. It's unfortunate that there are not more modest income people; they are the ones that could benefit the most. From less than 2 years in BH, I find the judgmental comments are just the anecdote.

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Re: Debunking Bonds in Taxable

Post by international001 » Tue Nov 12, 2019 3:00 pm

JBTX wrote:
Tue Nov 12, 2019 2:33 pm


The answer depends on the specifics. You can easily build scenarios that favor either. However, I built a spreadsheet that compares the scenarios, and if you assume 15% cap gains or 22/24% ordinary tax rates, both during and after sale, and something like a 2% dividend rate, typically if the rate of return on stocks is twice as high as bonds, the stocks in taxable wins, by a small amount. Probably most notable is that it just doesn't make that much difference either way, until you start looking at bonds with much higher rates than now.

If you consider the percentage of bonds and stocks to be constant, what difference does it make that bonds yield 2% or 4%? If they are in tax-deferred, you will always pay fewer taxes

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Re: Debunking Bonds in Taxable

Post by bck63 » Tue Nov 12, 2019 3:05 pm

international001 wrote:
Tue Nov 12, 2019 2:56 pm
White Coat Investor wrote:
Tue Nov 12, 2019 12:06 am

At any rate, it's offensive to call someone for whom munis might make sense "not ordinary." Most of us have spent a significant portion of our life in other tax brackets. Although these days, even in the top bracket Prime MMF makes sense over the Municipal MMF. I would assume that's a temporary situation though.
Anybody making more than $30k is not ordinary in world terms https://www.investopedia.com/articles/p ... -world.asp
You have the choice of being offended or read/ask in BH. Whatever the segment of people who are in BH, I think anybody receives good advice for whatever their situation is. It's unfortunate that there are not more modest income people; they are the ones that could benefit the most. From less than 2 years in BH, I find the judgmental comments are just the anecdote.
I make a base salary of 77K and you bogleheads have changed my financial life. Thank you.

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Re: Debunking Bonds in Taxable

Post by tesuzuki2002 » Tue Nov 12, 2019 3:06 pm

willthrill81 wrote:
Mon Oct 08, 2018 4:39 pm
Gort wrote:
Mon Oct 08, 2018 4:38 pm
After we come to a consesnus on this topic, perhaps we could discuss the "How much international should I hold?" topic. :oops:
Not that! Anything but that!!! :oops:

:sharebeer

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Re: Debunking Bonds in Taxable

Post by JBTX » Tue Nov 12, 2019 3:19 pm

international001 wrote:
Tue Nov 12, 2019 3:00 pm
JBTX wrote:
Tue Nov 12, 2019 2:33 pm


The answer depends on the specifics. You can easily build scenarios that favor either. However, I built a spreadsheet that compares the scenarios, and if you assume 15% cap gains or 22/24% ordinary tax rates, both during and after sale, and something like a 2% dividend rate, typically if the rate of return on stocks is twice as high as bonds, the stocks in taxable wins, by a small amount. Probably most notable is that it just doesn't make that much difference either way, until you start looking at bonds with much higher rates than now.

If you consider the percentage of bonds and stocks to be constant, what difference does it make that bonds yield 2% or 4%? If they are in tax-deferred, you will always pay fewer taxes
If you are going to assume that you have to sell stocks every year in taxable to rebalance, you aren't going to have much left over to step up. But yes, if that was your only option, I guess so.

An implicit assumption in these comparisons by me and presumably others is you have enough in tax advantaged accounts elsewhere to rebalance, such that you don't have to sell the taxable stocks, or the stocks in question in the tax advantaged account.

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Re: Debunking Bonds in Taxable

Post by White Coat Investor » Tue Nov 12, 2019 3:28 pm

international001 wrote:
Tue Nov 12, 2019 2:56 pm
White Coat Investor wrote:
Tue Nov 12, 2019 12:06 am

At any rate, it's offensive to call someone for whom munis might make sense "not ordinary." Most of us have spent a significant portion of our life in other tax brackets. Although these days, even in the top bracket Prime MMF makes sense over the Municipal MMF. I would assume that's a temporary situation though.
Anybody making more than $30k is not ordinary in world terms https://www.investopedia.com/articles/p ... -world.asp
You have the choice of being offended or read/ask in BH. Whatever the segment of people who are in BH, I think anybody receives good advice for whatever their situation is. It's unfortunate that there are not more modest income people; they are the ones that could benefit the most. From less than 2 years in BH, I find the judgmental comments are just the anecdote.
Yes, there are lots of posters here from Zimbabwe. :) We can't do polls here on Bogleheads anymore, but I can remember from back when we could that the average Bogleheads forum participant was dramatically different in terms of income and net worth from the average American, much less the average human.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

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Re: Debunking Bonds in Taxable

Post by JBTX » Tue Nov 12, 2019 4:33 pm

Kevin in this thread basically comes to a similar conclusion as I have here and articulates it better.


viewtopic.php?f=10&t=95676

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Re: Debunking Bonds in Taxable

Post by SantaClaraSurfer » Tue Nov 12, 2019 6:29 pm

My humble input would be to observe that there are multiple real-world advantages to having your 401(k) reflect your current asset allocation that don't involve maximizing return. My wife and I keep our 401(k)s as two, separate, mini 3-funds portfolios. It's great to have that as a bulwark for our retirements.

There are also real-world advantages to maintaining some bond investments outside of your tax-advantaged space, from the ability to sell off in need, reallocate as appropriate or simply, in the case of I-Bonds, have a very secure long term safety investment that is there even in worst case scenarios.

In my opinion, tax tails should not wag financial security dogs.

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Re: Debunking Bonds in Taxable

Post by billthecat » Wed Nov 13, 2019 12:14 am

My setup is:

Roth IRA/401K, HSA - 100% US stock
Traditional 401K - 100% US bonds
Taxable - blend of US stock, international stock, US bonds, and cash/CDs/MM/I Bonds. My taxable account is nearly 5x my tax advantaged accounts.

In aggregate, it's 58.4% stock (US and international), 41.6% fixed income (bonds and cash). (Not tax-adjusted.)

When I retire early, I will have excess bonds, as a "bond tent." Then, for the first few years after early retirement (per I-Orp), I'll convert the traditional portion of my 401K (which is bonds) to Roth (which is stock), reducing the tent. By having bonds in the traditional portion of my 401K, it should (in theory) grow more slowly than stock so it should (in theory) result in less taxable income at the time of conversion to Roth. Anyway, that's my plan - I'm open to feedback.
We cannot direct the winds but we can adjust our sails.

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Re: Debunking Bonds in Taxable

Post by international001 » Wed Nov 13, 2019 4:01 pm

JBTX wrote:
Tue Nov 12, 2019 2:45 pm
international001 wrote:
Tue Nov 12, 2019 2:36 pm
stocknoob4111 wrote:
Mon Nov 11, 2019 1:31 pm
One other thing I forgot to add - over the long term, say 10-20 years, your equity position will be growing much faster than your bond position. This means that the income that is generated from that position will also grow much faster and so will the tax liability. Having those equities in your tax deferred may be beneficial in this regard due to the rate of growth.
That's a fake argument
You have to compare with an overall portfolio with the percentage of AA is constant. In other words, if you have equities in your tax deferred, they'll grow faster, but then you have to sell some and buy bonds to rebalance.

With this assumptions, bonds in tax deferred are always better. Just because the taxes on the earnings are lower
You end up with more and more stocks in taxable and at some point wouldn't you have to sell taxable stocks to rebalance?

I'm not sure why the argument is a "fake argument". Either way you have to rebalance.
Selling stocks in taxable it's of course an added complication. But I'm not considering because it's more difficult to measure
Consider that you just rebalance with new money (typical accumulation phase)

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Re: Debunking Bonds in Taxable

Post by international001 » Wed Nov 13, 2019 4:03 pm

White Coat Investor wrote:
Tue Nov 12, 2019 3:28 pm
international001 wrote:
Tue Nov 12, 2019 2:56 pm
White Coat Investor wrote:
Tue Nov 12, 2019 12:06 am

At any rate, it's offensive to call someone for whom munis might make sense "not ordinary." Most of us have spent a significant portion of our life in other tax brackets. Although these days, even in the top bracket Prime MMF makes sense over the Municipal MMF. I would assume that's a temporary situation though.
Anybody making more than $30k is not ordinary in world terms https://www.investopedia.com/articles/p ... -world.asp
You have the choice of being offended or read/ask in BH. Whatever the segment of people who are in BH, I think anybody receives good advice for whatever their situation is. It's unfortunate that there are not more modest income people; they are the ones that could benefit the most. From less than 2 years in BH, I find the judgmental comments are just the anecdote.
Yes, there are lots of posters here from Zimbabwe. :) We can't do polls here on Bogleheads anymore, but I can remember from back when we could that the average Bogleheads forum participant was dramatically different in terms of income and net worth from the average American, much less the average human.
If BH culture leaked down to more modest income, it's a badge of honor for BH
Didn't know polls were not allowed anymore. Legal issues?

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Re: Debunking Bonds in Taxable

Post by international001 » Wed Nov 13, 2019 4:09 pm

billthecat wrote:
Wed Nov 13, 2019 12:14 am
My setup is:

Roth IRA/401K, HSA - 100% US stock
Traditional 401K - 100% US bonds
Taxable - blend of US stock, international stock, US bonds, and cash/CDs/MM/I Bonds. My taxable account is nearly 5x my tax advantaged accounts.

In aggregate, it's 58.4% stock (US and international), 41.6% fixed income (bonds and cash). (Not tax-adjusted.)

When I retire early, I will have excess bonds, as a "bond tent." Then, for the first few years after early retirement (per I-Orp), I'll convert the traditional portion of my 401K (which is bonds) to Roth (which is stock), reducing the tent. By having bonds in the traditional portion of my 401K, it should (in theory) grow more slowly than stock so it should (in theory) result in less taxable income at the time of conversion to Roth. Anyway, that's my plan - I'm open to feedback.
I guess you want to withdraw first from taxable to make better use of tax-deferred growth
But why not having your bond tent in 401k/ROth? Even if you have taxable stocks that you sell to withdraw money. You can always buy more stocks in 401k/Roth to rebalance

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Re: Debunking Bonds in Taxable

Post by international001 » Wed Nov 13, 2019 4:14 pm

JBTX wrote:
Tue Nov 12, 2019 3:19 pm
international001 wrote:
Tue Nov 12, 2019 3:00 pm
JBTX wrote:
Tue Nov 12, 2019 2:33 pm


The answer depends on the specifics. You can easily build scenarios that favor either. However, I built a spreadsheet that compares the scenarios, and if you assume 15% cap gains or 22/24% ordinary tax rates, both during and after sale, and something like a 2% dividend rate, typically if the rate of return on stocks is twice as high as bonds, the stocks in taxable wins, by a small amount. Probably most notable is that it just doesn't make that much difference either way, until you start looking at bonds with much higher rates than now.

If you consider the percentage of bonds and stocks to be constant, what difference does it make that bonds yield 2% or 4%? If they are in tax-deferred, you will always pay fewer taxes
If you are going to assume that you have to sell stocks every year in taxable to rebalance, you aren't going to have much left over to step up. But yes, if that was your only option, I guess so.

An implicit assumption in these comparisons by me and presumably others is you have enough in tax advantaged accounts elsewhere to rebalance, such that you don't have to sell the taxable stocks, or the stocks in question in the tax advantaged account.
For sure, there are added complications. I'm just looking at it from the baseline scenario, and where you save most in taxes.
I myself hold lots of bonds in taxable because I may need the money before retirement. If I knew it was only for retirement, I would not.

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Re: Debunking Bonds in Taxable

Post by international001 » Wed Nov 13, 2019 4:37 pm

JBTX wrote:
Tue Nov 12, 2019 4:33 pm
Kevin in this thread basically comes to a similar conclusion as I have here and articulates it better.


viewtopic.php?f=10&t=95676
The analysis is flaw. You have to keep rebalancing between tax-advantage and taxable to keep a constant AA.
Furhtermore, you also need to compute for the tax of the distributions . For ROth, multiply by 1. For 401k, multiply by 0.75 (if you assume your tax rate at retirement will be 25%), for taxable it's more complicated, but you can multiply by 0.85% (if you assume small cost basis and tax on capital of 15%)

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Re: Debunking Bonds in Taxable

Post by billthecat » Wed Nov 13, 2019 11:37 pm

international001 wrote:
Wed Nov 13, 2019 4:09 pm
billthecat wrote:
Wed Nov 13, 2019 12:14 am
My setup is:

Roth IRA/401K, HSA - 100% US stock
Traditional 401K - 100% US bonds
Taxable - blend of US stock, international stock, US bonds, and cash/CDs/MM/I Bonds. My taxable account is nearly 5x my tax advantaged accounts.

In aggregate, it's 58.4% stock (US and international), 41.6% fixed income (bonds and cash). (Not tax-adjusted.)

When I retire early, I will have excess bonds, as a "bond tent." Then, for the first few years after early retirement (per I-Orp), I'll convert the traditional portion of my 401K (which is bonds) to Roth (which is stock), reducing the tent. By having bonds in the traditional portion of my 401K, it should (in theory) grow more slowly than stock so it should (in theory) result in less taxable income at the time of conversion to Roth. Anyway, that's my plan - I'm open to feedback.
I guess you want to withdraw first from taxable to make better use of tax-deferred growth
But why not having your bond tent in 401k/ROth? Even if you have taxable stocks that you sell to withdraw money. You can always buy more stocks in 401k/Roth to rebalance
Correct, according to I-Orp I should first deplete my taxable funds (and convert my traditional tax-deferred to Roth during the first 4-5 years or so), and then deplete the Roth.

So, the tent is partially in my tax-advantaged accounts - it's 100% of my tax-deferred. My tax-deferred space is not big enough to hold my entire bond allocation. So then why not put bonds in Roth? Because the long term expected return of stocks is much larger. Of course, though, as I spend down the taxable account, at some point I will have to start converting stock to bonds within the Roth space to prevent the bonds from getting too low, but that's a very long ways off.

So I went back to I-Orp and set both tax-deferred and Roth to bonds, and adjusted my taxable to more or less come out with the same total allocation, and it reduced my projected annual disposable income.
Last edited by billthecat on Thu Nov 14, 2019 12:40 am, edited 1 time in total.
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Re: Debunking Bonds in Taxable

Post by l1am » Thu Nov 14, 2019 12:27 am

Can we finally stop the mantra on here that bonds belong in tax advantaged first? And maybe update the wiki too to not be so biased.

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Re: Debunking Bonds in Taxable

Post by White Coat Investor » Thu Nov 14, 2019 12:37 am

l1am wrote:
Thu Nov 14, 2019 12:27 am
Can we finally stop the mantra on here that bonds belong in tax advantaged first? And maybe update the wiki too to not be so biased.
I think the rule of thumb is still bonds in tax advantaged most of the time. It's just important to realize there are exceptions to it, particularly at low interest rates.
Last edited by White Coat Investor on Thu Nov 14, 2019 12:45 am, edited 1 time in total.
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Re: Debunking Bonds in Taxable

Post by l1am » Thu Nov 14, 2019 12:43 am

White Coat Investor wrote:
Thu Nov 14, 2019 12:37 am
I think the rule of thumb is still in bonds in tax advantaged most of the time. It's just important to realize there are exceptions to it, particularly at low interest rates.
It depends how broad the exceptions are. I'm going to do some math in a spreadsheet in a few days.

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Re: Debunking Bonds in Taxable

Post by longinvest » Thu Nov 14, 2019 8:03 am

l1am wrote:
Thu Nov 14, 2019 12:27 am
Can we finally stop [saying] that bonds belong in tax advantaged first? And maybe update the wiki [to] not be so biased[?]
I agree with the suggestion to modify the wiki.

I think that the default suggestion, if one is made, should be to mirror the asset allocation in all accounts, which represents a moderate and good enough suggestion. I think that forum member Stlutz said it best in an earlier post:
stlutz wrote:
Wed Oct 10, 2018 8:40 pm
The other problem is that tax laws change. It hasn't always been the case that long-term capital gains and dividends got favorable treatment. It's very possible that the same could happen in the future. The problem with optimizing is that you're optimizing for right now, which might be different from what is optimal in the future.
[...]
Because I can't predict future interest rates or tax policy I hold the same stock/bond mix in all of my accounts. I'll never have the "best" arrangement but I won't have the worst either when things change in an unexpected way.
(I added the emphasis.)

A mirrored allocation has many advantages. It enables the use of a low-cost automatically-rebalanced Bogleheads One-Fund Portfolio across all accounts including taxable ones, it's resilient to unanticipated asset returns and tax law changes, it's inherently tax-adjusted, and it can also help with behavioral risks. Here's what Rick Ferri wrote about it:

viewtopic.php?p=1426569#p1426569
Rick Ferri wrote:
Wed Jun 27, 2012 3:31 pm
Tax location is tricky for everyone and is even harder for someone who is transitioning into retiring or retired.

First, we can't know what a client's tax rate will be when they need money or if tax rates will be different in the future as they are now, and when that change will occur. A taxable account may be in a high tax bracket this year and low one next year if a client retires or something else occurs. So, my default suggestion is to have the same allocation across all portfolio. If a client has a good grasp of exactly what their needs will be in the future, then we can have a conversation about increasing equity in the taxable account and increasing bonds in the tax-sheltered account.

Second, there is a hidden risk with having different allocations in taxable versus non-taxable, and we saw this risk turn into reality during 2008 and early 2009. A few clients terminated their higher risk taxable portfolio because that specific portfolio was losing more money than the more conservative non-taxable portfolio. In other words, they separated their portfolios in their mind and compared returns rather than looking at the big picture.

The most important aspect of a total portfolio approach is the overall asset allocation between all accounts. How that is divided among accounts is much less important. If a client wants to make asset location important, then we can have a conversation about it.

Rick Ferri
Bogleheads investment philosophy | One-ETF global balanced index portfolio | VPW

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Re: Debunking Bonds in Taxable

Post by Rick Ferri » Sat Nov 16, 2019 1:01 pm

I cannot say how I will advise someone on this matter until I review their goals, investment strategy, tax situation, and needs. There are times I recommend putting bonds mainly in tax-deferred accounts (asset allocation and asset location), and there are times I recommend the same allocation in all account types (asset allocation only).

No one size fits all.

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The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.

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Re: Debunking Bonds in Taxable

Post by 1210sda » Sat Nov 16, 2019 1:27 pm

longinvest wrote:
Thu Nov 14, 2019 8:03 am
A mirrored allocation has many advantages. It enables the use of a low-cost automatically-rebalanced Bogleheads One-Fund Portfolio across all accounts including taxable ones, it's resilient to unanticipated asset returns and tax law changes, it's inherently tax-adjusted, and it can also help with behavioral risks.
Everyone's situation is individual and personal. For me, the reduction of behavioral risk is a big deal!!

1210

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Re: Debunking Bonds in Taxable

Post by bck63 » Sat Nov 16, 2019 9:03 pm

I keep an approximately equal allocation of stocks/bonds in each account type: tax-free, tax-deferred, and taxable. It seems to keep me on track better.

I remember reading Rick Ferri recommending this.

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Re: Debunking Bonds in Taxable

Post by international001 » Sat Nov 16, 2019 9:48 pm

billthecat wrote:
Wed Nov 13, 2019 11:37 pm
So then why not put bonds in Roth? Because the long term expected return of stocks is much larger.
Again.. this is a fake argument if you rebalance so your overall portfolio (Roth, 401k, taxable) keeps a constant AA

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Re: Debunking Bonds in Taxable

Post by JBTX » Sat Nov 16, 2019 9:49 pm

White Coat Investor wrote:
Thu Nov 14, 2019 12:37 am
l1am wrote:
Thu Nov 14, 2019 12:27 am
Can we finally stop the mantra on here that bonds belong in tax advantaged first? And maybe update the wiki too to not be so biased.
I think the rule of thumb is still bonds in tax advantaged most of the time. It's just important to realize there are exceptions to it, particularly at low interest rates.
At the interest rates over the last 10+ years I don't think the math supports the rule of thumb. Sure, there are individual reasons, some of them not quantitative to do one or the other. The quantitative results for most isn't different enough to override those qualitative preferences for those who have them.
Last edited by JBTX on Sat Nov 16, 2019 9:51 pm, edited 1 time in total.

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Re: Debunking Bonds in Taxable

Post by JBTX » Sat Nov 16, 2019 9:51 pm

international001 wrote:
Sat Nov 16, 2019 9:48 pm
billthecat wrote:
Wed Nov 13, 2019 11:37 pm
So then why not put bonds in Roth? Because the long term expected return of stocks is much larger.
Again.. this is a fake argument if you rebalance so your overall portfolio (Roth, 401k, taxable) keeps a constant AA
If fake=correct I agree. Your use of fake as a descriptor is needlessly condescending. Please find a better choice of words.

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Re: Debunking Bonds in Taxable

Post by international001 » Tue Nov 19, 2019 10:57 am

JBTX wrote:
Sat Nov 16, 2019 9:51 pm
international001 wrote:
Sat Nov 16, 2019 9:48 pm
billthecat wrote:
Wed Nov 13, 2019 11:37 pm
So then why not put bonds in Roth? Because the long term expected return of stocks is much larger.
Again.. this is a fake argument if you rebalance so your overall portfolio (Roth, 401k, taxable) keeps a constant AA
If fake=correct I agree. Your use of fake as a descriptor is needlessly condescending. Please find a better choice of words.
condescending != imprecise
fake != correct
fake ~ mental trick because we are not measuring apples to apples

If you put all your stocks in Roth, your Roth will grow more than your taxable. But if your objective is to have a 50/50 allocation, you may end up having to sell some stocks in your Roth and buy some bonds there

If you put all your stocks in taxable, your taxable will grow more than your Roth. So you'll have to sell some stocks in your taxable and buy some bonds there

You want the IRS to take a lower chunk, on year 1, year 2, etc.. it will be the option where most bonds are in Roth.

But I could think that even with this rebalancing, over enough years, you want the Roth to become larger, so the chunk the IRS ends up taking (let's say at year 20) is smaller. Is that the argument?

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Re: Debunking Bonds in Taxable

Post by JBTX » Wed Nov 20, 2019 9:45 am

international001 wrote:
Tue Nov 19, 2019 10:57 am
JBTX wrote:
Sat Nov 16, 2019 9:51 pm
international001 wrote:
Sat Nov 16, 2019 9:48 pm
billthecat wrote:
Wed Nov 13, 2019 11:37 pm
So then why not put bonds in Roth? Because the long term expected return of stocks is much larger.
Again.. this is a fake argument if you rebalance so your overall portfolio (Roth, 401k, taxable) keeps a constant AA
If fake=correct I agree. Your use of fake as a descriptor is needlessly condescending. Please find a better choice of words.
condescending != imprecise
fake != correct
fake ~ mental trick because we are not measuring apples to apples

If you put all your stocks in Roth, your Roth will grow more than your taxable. But if your objective is to have a 50/50 allocation, you may end up having to sell some stocks in your Roth and buy some bonds there

If you put all your stocks in taxable, your taxable will grow more than your Roth. So you'll have to sell some stocks in your taxable and buy some bonds there

You want the IRS to take a lower chunk, on year 1, year 2, etc.. it will be the option where most bonds are in Roth.

But I could think that even with this rebalancing, over enough years, you want the Roth to become larger, so the chunk the IRS ends up taking (let's say at year 20) is smaller. Is that the argument?
If you rebalance every year, the stocks gain more than interest earned and capital gains taxes exceeds interest revenue taxes.

If you rebalance less than a year it is worse because now both are taxed and regular rates.

ElJefeDelQueso
Posts: 12
Joined: Wed Mar 06, 2019 5:54 pm

Re: Debunking Bonds in Taxable

Post by ElJefeDelQueso » Wed Nov 20, 2019 5:11 pm

Munis in taxable slightly better for my situation, and even if slightly worse the benefit of simplified/lower Fed taxes would be worth it to me. Part of tiered E fund and overall fixed income allocation. Some taxable bonds in tax adv but mostly equities. Everybody has a different situation.

international001
Posts: 1163
Joined: Thu Feb 15, 2018 7:31 pm

Re: Debunking Bonds in Taxable

Post by international001 » Thu Nov 21, 2019 11:01 am

JBTX wrote:
Wed Nov 20, 2019 9:45 am
international001 wrote:
Tue Nov 19, 2019 10:57 am
JBTX wrote:
Sat Nov 16, 2019 9:51 pm
international001 wrote:
Sat Nov 16, 2019 9:48 pm
billthecat wrote:
Wed Nov 13, 2019 11:37 pm
So then why not put bonds in Roth? Because the long term expected return of stocks is much larger.
Again.. this is a fake argument if you rebalance so your overall portfolio (Roth, 401k, taxable) keeps a constant AA
If fake=correct I agree. Your use of fake as a descriptor is needlessly condescending. Please find a better choice of words.
condescending != imprecise
fake != correct
fake ~ mental trick because we are not measuring apples to apples

If you put all your stocks in Roth, your Roth will grow more than your taxable. But if your objective is to have a 50/50 allocation, you may end up having to sell some stocks in your Roth and buy some bonds there

If you put all your stocks in taxable, your taxable will grow more than your Roth. So you'll have to sell some stocks in your taxable and buy some bonds there

You want the IRS to take a lower chunk, on year 1, year 2, etc.. it will be the option where most bonds are in Roth.

But I could think that even with this rebalancing, over enough years, you want the Roth to become larger, so the chunk the IRS ends up taking (let's say at year 20) is smaller. Is that the argument?
If you rebalance every year, the stocks gain more than interest earned and capital gains taxes exceeds interest revenue taxes.

If you rebalance less than a year it is worse because now both are taxed and regular rates.
So let's assume that you don't have to rebalance because you have new money to add where needed
Is it still advantageous to have bonds in taxable?

JBTX
Posts: 5544
Joined: Wed Jul 26, 2017 12:46 pm

Re: Debunking Bonds in Taxable

Post by JBTX » Thu Nov 21, 2019 11:10 pm

international001 wrote:
Thu Nov 21, 2019 11:01 am
JBTX wrote:
Wed Nov 20, 2019 9:45 am
international001 wrote:
Tue Nov 19, 2019 10:57 am
JBTX wrote:
Sat Nov 16, 2019 9:51 pm
international001 wrote:
Sat Nov 16, 2019 9:48 pm


Again.. this is a fake argument if you rebalance so your overall portfolio (Roth, 401k, taxable) keeps a constant AA
If fake=correct I agree. Your use of fake as a descriptor is needlessly condescending. Please find a better choice of words.
condescending != imprecise
fake != correct
fake ~ mental trick because we are not measuring apples to apples

If you put all your stocks in Roth, your Roth will grow more than your taxable. But if your objective is to have a 50/50 allocation, you may end up having to sell some stocks in your Roth and buy some bonds there

If you put all your stocks in taxable, your taxable will grow more than your Roth. So you'll have to sell some stocks in your taxable and buy some bonds there

You want the IRS to take a lower chunk, on year 1, year 2, etc.. it will be the option where most bonds are in Roth.

But I could think that even with this rebalancing, over enough years, you want the Roth to become larger, so the chunk the IRS ends up taking (let's say at year 20) is smaller. Is that the argument?
If you rebalance every year, the stocks gain more than interest earned and capital gains taxes exceeds interest revenue taxes.

If you rebalance less than a year it is worse because now both are taxed and regular rates.
So let's assume that you don't have to rebalance because you have new money to add where needed.
Is it still advantageous to have bonds in taxable?
It depends on the respective tax rates, but if:

1. Interest rates remain comparatively low (less than 4%)
2 tax rates stay about what they are now
3 your capital gains rates stay at 15% or higher (assume you don't have opportunity to recognize gains at 0% rate)
4 assume there aren't large tax loss harvesting opportunities

Then yes, in many cases bonds in taxable will give you a slightly superior result.

The recent tax bill narrowed the gap between income tax rates and capital gains rates, which reduced the benefits of having stocks in taxable.

international001
Posts: 1163
Joined: Thu Feb 15, 2018 7:31 pm

Re: Debunking Bonds in Taxable

Post by international001 » Fri Nov 22, 2019 10:23 am

Sorry.. I think I was replying thinking of no rebalancing (with new money). There was another discussion that was not comparing apples to apples and not considering a constant AA

If you keep a constant AA, it may still beneficial to have stocks on tax-sheltered. After many years, it will grow more than the bonds in taxable. So you'll end up with a bigger relative tax-sheltered account, what will be beneficial. It's just not a benefit that will show in a few years.

Also for consideration, imagine your bonds are treasuries, that do not pay state taxes. Let's say you are in california in a 24% bracket, income state tax is 9%. Then, suddenly it's a tie the amount of tax you pay on QDIV and bond income

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