Which BOND Fund in Taxable at 22% Tax Rate

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
Rajsx
Posts: 465
Joined: Wed Mar 21, 2007 10:07 pm
Location: Florida

Which BOND Fund in Taxable at 22% Tax Rate

Post by Rajsx » Mon Nov 11, 2019 8:55 pm

In the Taxable Account, I need advice to choose a different Vanguard Bond Fund Admiral to move Funds from Vanguard Intermediate Fund Tax Exempt Admiral (VWITX) which i presently have. The reason being now I am in 22% Tax Bracket.

I am 63 & due for retirement at age 65 , my all Vanguard(Flagship Select) Asset Allocation is 55% Stocks : 45% Fixed Income including Cash in the Bank. I have a total of 6 Vanguard Funds in the Portfolio.

My other Bond Funds namely Vanguard Total Bond Mkt Index Adm (VBTLX) & Vanguard Total International Bond Index VTABX are in the Tax Deferred.

I am looking into VBILX Vanguard Intermediate Term Bond Index Adm (VBLX) vs Vanguard Total Bond Index (VBTLX) for Taxable, although open to other Bond Funds.
I see the average returns of VBILX have been higher in all time periods i.e....from YTD to 10 yr, although I think the diverse mix & greater number of Bonds in the VBTLX make it a safer. I understand the past returns are not reflective of future returns.

Which Bond Fund(s) would you suggest in the Taxable ??

Thanks in advance.
Last edited by Rajsx on Tue Nov 12, 2019 9:30 am, edited 1 time in total.
We do not stop laughing because we grow old, we grow old because we stop laughing !!

lakpr
Posts: 4530
Joined: Fri Mar 18, 2011 9:59 am

Re: Which Tax Fund in Taxable at 22% Tax Rate

Post by lakpr » Mon Nov 11, 2019 9:24 pm

Do you have an old 401k or old 403b or IRA account? I would use those accounts as repository for bonds. Since you are older than 59.5, withdrawal from such accounts is penalty free. As for taxes, the only difference between bonds in taxable vs bonds in tax-deferred is the taxes that were deferred on the contributions in the latter. The tax treatment of growth in either account is (almost) identical.

I would invest taxable account completely in equities, and exchange equal amount of equities to bonds in *old 401k or old 403b or IRA* I mentioned above. Your overall allocation did not change, you still have those same equities and same bonds, but now more efficiently allocated.

Sorry, I know this might not be the answer you are looking for in terms of naming a specific bond fund, but consider investing taxable account completely in equities

Topic Author
Rajsx
Posts: 465
Joined: Wed Mar 21, 2007 10:07 pm
Location: Florida

Re: Which Tax Fund in Taxable at 22% Tax Rate

Post by Rajsx » Mon Nov 11, 2019 9:45 pm

Thanks Lakpr for your input.

All my equities are in Taxable & all Bonds are in Tax Deferred.

The only reason I have VWIUX in taxable is because I did not have any more space in Tax Deferred.
We do not stop laughing because we grow old, we grow old because we stop laughing !!

rkhusky
Posts: 8839
Joined: Thu Aug 18, 2011 8:09 pm

Re: Which Tax Fund in Taxable at 22% Tax Rate

Post by rkhusky » Mon Nov 11, 2019 10:06 pm

What is your state tax rate?

Topic Author
Rajsx
Posts: 465
Joined: Wed Mar 21, 2007 10:07 pm
Location: Florida

Re: Which Tax Fund in Taxable at 22% Tax Rate

Post by Rajsx » Mon Nov 11, 2019 10:40 pm

No State Income Tax.
We do not stop laughing because we grow old, we grow old because we stop laughing !!

rkhusky
Posts: 8839
Joined: Thu Aug 18, 2011 8:09 pm

Re: Which Tax Fund in Taxable at 22% Tax Rate

Post by rkhusky » Mon Nov 11, 2019 11:05 pm

Total Bond has slightly more gov't bonds than Intermediate-Term Bond (63% vs. 54%), so it is slightly safer and should therefore have slightly lower returns. Intermediate-Term Bond has more corporate bonds in the lower credit rating (41% vs 29%), which are riskier and have higher correlation to stocks, and therefore should have higher return to compensate.

Either would be fine. Intermediate-Term Bond has an SEC yield of 2.12% vs 2.24% for Total Bond. Total Bond is safer and has higher SEC yield, so would seem to be a better choice at this time.

In the 22% tax bracket, the after tax return for Total Bond is 1.75%. The current SEC yield for Int. Tax Exempt (VWIUX) is 1.60%. That is close enough that it is not a slam dunk to switch to Total Bond. The duration of Total Bond is 6.2 yr, while for Int. T.E. it is 4.7 yrs. and the average credit quality for the two is similar (Total Bond has higher AAA but also higher BBB), so Int. T.E. is a bit safer, due to the lower duration.

I might just stick with VWIUX if I had other bonds, such as Total Bond, in my tax-deferred. That provides more diversification. But if you really want to switch from Int. T.E., Total Bond is a good choice (Int. Term Bond isn't bad either). How much in cap gains would you have if you sold VWIUX (for which you would pay 15% in cap gains tax)?

Topic Author
Rajsx
Posts: 465
Joined: Wed Mar 21, 2007 10:07 pm
Location: Florida

Re: Which BOND Fund in Taxable at 22% Tax Rate

Post by Rajsx » Tue Nov 12, 2019 9:39 am

Thanks Husky for your helpful advice,

How much in cap gains ?
VWIUX in my account has $3k & DW has $13k in cap gains.

Bond Funds if in Taxable carry 15% Cap Gains instead of Ordinary Income tax rate in Tax Deferred, right ?

Thanks again
We do not stop laughing because we grow old, we grow old because we stop laughing !!

rkhusky
Posts: 8839
Joined: Thu Aug 18, 2011 8:09 pm

Re: Which BOND Fund in Taxable at 22% Tax Rate

Post by rkhusky » Tue Nov 12, 2019 10:00 am

Rajsx wrote:
Tue Nov 12, 2019 9:39 am
Thanks Husky for your helpful advice,

How much in cap gains ?
VWIUX in my account has $3k & DW has $13k in cap gains.

Bond Funds if in Taxable carry 15% Cap Gains instead of Ordinary Income tax rate in Tax Deferred, right ?

Thanks again
If you sold all your VWIUX in yours and DW's account, that would be an extra $2.4k in taxes. If the yield difference between Total Bond and VWIUX of 0.15% continues to hold, then you would need about $1.6M to break even after 1 year, $400K for break even after 4 years.

In a taxable account, the dividends from a bond fund are taxed at income tax rates, capital gains are taxed at capital gain rates. Both will be taxed at income tax rates when withdrawn from a tax-deferred account. But you have to account for the $2.4K in taxes to switch and you have the yearly tax drag in the taxable account, while with tax-deferred you keep earning dividends/cap gains on what would be paid on yearly taxes.

aristotelian
Posts: 7034
Joined: Wed Jan 11, 2017 8:05 pm

Re: Which BOND Fund in Taxable at 22% Tax Rate

Post by aristotelian » Tue Nov 12, 2019 10:49 am

Will your tax bracket in retirement also be 22%?

Topic Author
Rajsx
Posts: 465
Joined: Wed Mar 21, 2007 10:07 pm
Location: Florida

Re: Which BOND Fund in Taxable at 22% Tax Rate

Post by Rajsx » Tue Nov 12, 2019 8:01 pm

Yes, 22% probably unless more dividends from the Bond Funds push me into 24%.
With RMDS in 7 years from now, there is a chance that could happen, we will see

Thanks Aristotelian for asking.

Husky,
I like the way you calculate the costs & results of the possible moves you make, to the Dollar.
For sure it makes taking decisions lot easier.
To pick your brain & learn from you & others, can I post my present Portfolio for your critique

Thanks Husky
We do not stop laughing because we grow old, we grow old because we stop laughing !!

skeptical
Posts: 145
Joined: Fri Jul 18, 2014 12:24 pm

Re: Which BOND Fund in Taxable at 22% Tax Rate

Post by skeptical » Tue Nov 12, 2019 9:37 pm

aristotelian wrote:
Tue Nov 12, 2019 10:49 am
Will your tax bracket in retirement also be 22%?
Rajsx wrote:
Tue Nov 12, 2019 8:01 pm
Yes, 22% probably unless more dividends from the Bond Funds push me into 24%.
If you are in retirement (no earned income), and your only income is from your portfolio, a 55/45 portfolio can have no fed taxes due, assuming you are married and have not more than $10M in taxable, assuming you are married. ex: VTSAX/VWIUX. If you are not married, the limit to this scenario is less, but still quite a large number.

For numbers less than $10M, there is a balance of VWIUX vs VBTLX (total bond) that will keep fed taxes near zero, but with VBTLX income there will probably be some taxes.

You should also consider that the lower your taxable income, the more you can do conversions and rebalancing with little to no taxes.

In other words, VWIUX (or other muni funds such as VWLUX, VMLUX) is a great way to eliminate fed taxes and also give you room for conversions, sales, and rebalancing.

User avatar
grabiner
Advisory Board
Posts: 26206
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Which BOND Fund in Taxable at 22% Tax Rate

Post by grabiner » Tue Nov 12, 2019 10:12 pm

skeptical wrote:
Tue Nov 12, 2019 9:37 pm
aristotelian wrote:
Tue Nov 12, 2019 10:49 am
Will your tax bracket in retirement also be 22%?
Rajsx wrote:
Tue Nov 12, 2019 8:01 pm
Yes, 22% probably unless more dividends from the Bond Funds push me into 24%.
If you are in retirement (no earned income), and your only income is from your portfolio, a 55/45 portfolio can have no fed taxes due, assuming you are married and have not more than $10M in taxable, assuming you are married. ex: VTSAX/VWIUX. If you are not married, the limit to this scenario is less, but still quite a large number.
For this to work, you need almost all of your income to be from qualified dividends, and you need to have your total taxable income in the 12% tax bracket. You can also gain the same benefit with nonzero tax; again, your goal is to have your total taxable income at the top of the 12% tax bracket (actually at the threshold for 15% tax on qualified dividends, which is very close).

If you work this out perfectly, it might actually be the right strategy. The reason is that your marginal tax rate is actually 27%, not 22%; if you switch from munis to taxable bonds and earn an extra $1000 in taxable bond interest, you pay $120 tax on the bond interest and push $1000 of qualified dividends above the 0% limit for another $150 in tax. At a 27% marginal tax rate, munis may be attractive.

But I still wouldn't recommend this because of the need for precision. If your taxable income is too low, you waste space in the 12% tax bracket which could be filled with taxable bonds.. If it is too high (and SS and RMDs from your IRA may force you up), taxable bonds would be taxed at only a 22% rate. In either situation, taxable bonds would probably be better; my rule of thumb is that the after-tax returns from taxable and muni bonds of comparable risk is equal at a 25% tax rate.
Wiki David Grabiner

rkhusky
Posts: 8839
Joined: Thu Aug 18, 2011 8:09 pm

Re: Which BOND Fund in Taxable at 22% Tax Rate

Post by rkhusky » Tue Nov 12, 2019 10:44 pm

Rajsx wrote:
Tue Nov 12, 2019 8:01 pm
Yes, 22% probably unless more dividends from the Bond Funds push me into 24%.
With RMDS in 7 years from now, there is a chance that could happen, we will see

Thanks Aristotelian for asking.

Husky,
I like the way you calculate the costs & results of the possible moves you make, to the Dollar.
For sure it makes taking decisions lot easier.
To pick your brain & learn from you & others, can I post my present Portfolio for your critique

Thanks Husky
Getting opinions on your portfolio asset allocation is a common service provided by many on Bogleheads.

See these pages: viewtopic.php?t=6212 and https://www.bogleheads.org/wiki/Asking_ ... _questions

skeptical
Posts: 145
Joined: Fri Jul 18, 2014 12:24 pm

Re: Which BOND Fund in Taxable at 22% Tax Rate

Post by skeptical » Wed Nov 13, 2019 8:03 am

grabiner wrote:
Tue Nov 12, 2019 10:12 pm

For this to work, you need almost all of your income to be from qualified dividends, and you need to have your total taxable income in the 12% tax bracket. You can also gain the same benefit with nonzero tax; again, your goal is to have your total taxable income at the top of the 12% tax bracket (actually at the threshold for 15% tax on qualified dividends, which is very close).

If you work this out perfectly, it might actually be the right strategy. The reason is that your marginal tax rate is actually 27%, not 22%; if you switch from munis to taxable bonds and earn an extra $1000 in taxable bond interest, you pay $120 tax on the bond interest and push $1000 of qualified dividends above the 0% limit for another $150 in tax. At a 27% marginal tax rate, munis may be attractive.

But I still wouldn't recommend this because of the need for precision. If your taxable income is too low, you waste space in the 12% tax bracket which could be filled with taxable bonds.. If it is too high (and SS and RMDs from your IRA may force you up), taxable bonds would be taxed at only a 22% rate. In either situation, taxable bonds would probably be better; my rule of thumb is that the after-tax returns from taxable and muni bonds of comparable risk is equal at a 25% tax rate.
Valid points about the precision, though I have found that in practice, it has worked very well for my situation, though this may change in the future.

I have all my stock in Total Stock Market, so all (almost) dividends are qualified. I use my extra 12% space for the occasional selling of stock for either tax free income or to rebalance for free. Whatever is left over I use for Roth conversions at 12%. I am trying to get rid of non-Roth as much as I can before 70.

And, most interesting, for over five years the interest from VWIUX has been more than VBTLX even *before* taxes, and much greater after tax, even though the SEC yield has been larger for VBTLX.

The total return has been the same for both (as it has been for 10-15 years), so I slowly build up long term cap losses, but still come out ahead in absolute (total return) terms by at about .6% per year, not even counting the savings from the cap losses, the Roth conversions, or the selling equity as needed. I have not done a precise calculation, but I probably save close to 1% a year, maybe more.

The tables are starting to turn, as the actual yield for both funds is now about the same. Right now, this still makes VWIUX better, but if this trend continues (and it is a slow moving trend), I can easily switch back to VBLTX and realize long term losses while still coming out ahead in absolute terms.

There is the issue of risk, and VBTLX is in some respects less risky than VWIUX (2008 is an example), but there are also risks in VBTLX due to corporate holdings. High quality muni's on the whole are pretty safe, I hope.

rkhusky
Posts: 8839
Joined: Thu Aug 18, 2011 8:09 pm

Re: Which BOND Fund in Taxable at 22% Tax Rate

Post by rkhusky » Wed Nov 13, 2019 8:25 am

skeptical wrote:
Wed Nov 13, 2019 8:03 am
High quality muni's on the whole are pretty safe, I hope.
A past study showed that AAA and AA muni's had virtually no defaults. And for the few defaults, investors eventually got most of their money back.

For a detailed look at muni default, see: https://www.researchpool.com/download/? ... _data=true
The number of defaults is so low that the report actually discusses each of the long term defaults in Appendix A, with a summary table in Exhibit 28.
Exhibit 23 compares default rates (1970-2016) between muni's and corporates for different ratings.
Exhibit 24 shows default rates (1970-2016) for different categories and ratings.

skeptical
Posts: 145
Joined: Fri Jul 18, 2014 12:24 pm

Re: Which BOND Fund in Taxable at 22% Tax Rate

Post by skeptical » Wed Nov 13, 2019 9:49 am

rkhusky wrote:
Wed Nov 13, 2019 8:25 am
skeptical wrote:
Wed Nov 13, 2019 8:03 am
High quality muni's on the whole are pretty safe, I hope.
A past study showed that AAA and AA muni's had virtually no defaults. And for the few defaults, investors eventually got most of their money back.

For a detailed look at muni default, see: https://www.researchpool.com/download/? ... _data=true
The number of defaults is so low that the report actually discusses each of the long term defaults in Appendix A, with a summary table in Exhibit 28.
Exhibit 23 compares default rates (1970-2016) between muni's and corporates for different ratings.
Exhibit 24 shows default rates (1970-2016) for different categories and ratings.
Yes, default risk has been so low I do not lose sleep over it. They did fine during the depression, from what I understand. However, they do not do as well as treasuries during other really bad times (2008), but they seem to bounce back quickly. I think it is a psychological impact, which also happens when the inevitable article comes out about cities having revenue, pension and other problems.

Biggest risk to me is a change in taxation status, but even then, I would think it would only apply to new issues, creating a bump in valuation for existing holders, either individually bonds or in a fund.

In the meantime, I have been enjoying a steady stream of nearly 3% tax free dividends for years.

Topic Author
Rajsx
Posts: 465
Joined: Wed Mar 21, 2007 10:07 pm
Location: Florida

Re: Which BOND Fund in Taxable at 22% Tax Rate

Post by Rajsx » Wed Nov 13, 2019 11:02 pm

This is my all Vanguard Portfolio of $6.24 Mil, with a Asset Allocation of Stocks 56% & Bonds 44% .
Please critique & what would you do different & why -

IRA - 29% Tax Deferred
VTABX - 6%
VBTLX - 16%
VBTLX - 7% ( DW)

Roth - 4% Tax Free
VTSAX -2%
VTSAX -2% (DW)

Taxable - 68 %
VTSAX - 23%
VTIAX - 7%
VWIUX - 2%
VTSAX - 14%(DW)
VWIUX -14%(DW)
VTIAX - 6%(DW)
VTMGX - 2%(DW)
Total- 101% (Rounding off numbers)

Including the $380k for 3 yrs of living expenses in Bank CDs & Online Banks, the over all Asset Allocation is around Stocks 52% & Bonds 48%

VTMG has significant Cap Gains *
VWIUX -in taxable as we did not have space in Tax Deferred & we needed more Bonds to maintain AA,*

Presently looking into moving funds from VWIUX into taxable bond fund being now in 22% Tax Bracket we may come ahead after paying taxes, & keeping MAGI under $170k to prevent a Medicare Supplemental Premium Surcharge.

This year I converted $60k into Roth IRA & plan to continue converting keeping taxable income upto $168K (married filing jointly,) till age 70 to keep RMDs manageable & for kids to benefit from the step up basis of stocks & higher appreciation compared to Bonds in Tax deferred.

I will start withdrawing around $125k -$150k/year for living expenses at retirement in 2 years

Thanking you in advance
We do not stop laughing because we grow old, we grow old because we stop laughing !!

Topic Author
Rajsx
Posts: 465
Joined: Wed Mar 21, 2007 10:07 pm
Location: Florida

Re: Which BOND Fund in Taxable at 22% Tax Rate

Post by Rajsx » Sat Nov 16, 2019 1:38 am

Bump Bump
We do not stop laughing because we grow old, we grow old because we stop laughing !!

rkhusky
Posts: 8839
Joined: Thu Aug 18, 2011 8:09 pm

Re: Which BOND Fund in Taxable at 22% Tax Rate

Post by rkhusky » Sat Nov 16, 2019 8:21 am

Most of your tickers are well known, but just in case:
VTABX - International Bond
VBTLX - Total Bond
VTSAX - Total Stock
VTIAX - Total International
VWIUX - Intermediate Tax Exempt
VTMGX - Developed Market

557880yvi
Posts: 101
Joined: Wed Mar 06, 2019 3:11 pm

Re: Which BOND Fund in Taxable at 22% Tax Rate

Post by 557880yvi » Sat Nov 16, 2019 8:29 am

following

rkhusky
Posts: 8839
Joined: Thu Aug 18, 2011 8:09 pm

Re: Which BOND Fund in Taxable at 22% Tax Rate

Post by rkhusky » Sat Nov 16, 2019 8:31 am

Given that you have 29% in other bonds (23% tax adjusted in the 22% bracket), having 16% in tax exempt would not bother me. And due to the slight difference in after-tax yield, I would likely not switch to Total Bond in taxable and incur the cap gains that that would incur. Plus you can do more Roth conversions without the taxable dividends that Total Bond would throw off each year (how much that is worth, I do not know). When you start pulling from taxable for living expenses, you could always start with the tax exempt bonds (and stocks to maintain your asset allocation).

Topic Author
Rajsx
Posts: 465
Joined: Wed Mar 21, 2007 10:07 pm
Location: Florida

Re: Which BOND Fund in Taxable at 22% Tax Rate

Post by Rajsx » Sat Nov 16, 2019 9:06 am

Thank Husky,

I appreciate your participation in the thread & I benefited from your valuable feedback.
We do not stop laughing because we grow old, we grow old because we stop laughing !!

User avatar
dratkinson
Posts: 4857
Joined: Thu Jul 26, 2007 6:23 pm
Location: Centennial CO

Re: Which BOND Fund in Taxable at 22% Tax Rate

Post by dratkinson » Sat Nov 16, 2019 4:36 pm

My solution. Started on this road while in 15% fed tax bracket, and trying to stay in 15%. Works for me. Not recommended by forum. Acknowledge you don't have a state income tax.


I'm in 22% fed tax bracket, 5% state tax bracket. My Roth IRA is 100% equities to "shoot for the moon". So all my bonds are in taxable with a 3-fund portfolio. I don't foresee the need to sell bonds so don't worry about NAV fluctuations, except to TLH, and did last Dec.

VWLUX (LT national muni) + single-state muni. Why? Both produce better after-tax income than TBM. Single-state muni produces slightly better after-tax income than VWLUX. And doing my due diligence to reseach/find it let me scratch the itch to be "doing something" to reach for more yield.

VWIUX. It doesn't perform better than TBM, but it does produce slightly better after-tax income than my local CU's CDs. So use it as a CD substitute with no early withdrawal penalty. Keep 3yrs of living expenses in it as the last tier of my formal EFs, home projects, new car, dry powder fund. No longer chasing (CD) rates helps to keep my life simple.


Muni dividends don't add to AGI. So kept me in 15% tax bracket longer so benefited longer from 0% tax on QDI/LTCG. TEY calculation misses this benefit, need to produce sample tax return to see it. But increasing TSM/TISM dividends pushed me in 25%/22% bracket. Firmly so after taking SS.

The Vanguard funds are "daily-accrual" funds so both are exempt from the IRS >6mos holding period requirement to protect TE dividends---easy to sell most recent shares to minimize CGs. If needed, they would help me weather any "Sequence of Return" risk in retirement.

My target is a forum-recommended 50/50 allocation to national/single-state munis to reduce single-state default risk.


I came to my decisions after using Excel1040.com to create multiple sample tax returns: ST/IT/LT, treasury/muni/corp, before/after SS. And compared all to TBM. Selected the best solutions. (My use of VWIUX as a CD proxy is a rationalization to convince myself that I don't need to sell and recognize CGs. :))

Simplifying assumption. For each bond fun candidate, wag total annual dividends = total bond fund principal X bond fund SEC yield. While results may not exactly match the real world, their ranks should hold.



Your choice.
d.r.a., not dr.a. | I'm a novice investor, you are forewarned.

Topic Author
Rajsx
Posts: 465
Joined: Wed Mar 21, 2007 10:07 pm
Location: Florida

Re: Which BOND Fund in Taxable at 22% Tax Rate

Post by Rajsx » Sun Nov 17, 2019 8:47 am

Thanks Doc, you make some interesting & valid points.

I will wait till next year to decide about moving funds from VWIUX to VBTLX as I my income this year is already just below the 22% Tax for mfj.
I learnt a lot from the different takes of members about VWIUX.

I am hoping the Tax free dividends from VXIUX do not push the MAGI higher than $170k to make me pay the Medicare Premium Surcharge.
We do not stop laughing because we grow old, we grow old because we stop laughing !!

Dottie57
Posts: 8243
Joined: Thu May 19, 2016 5:43 pm
Location: Earth Northern Hemisphere

Re: Which BOND Fund in Taxable at 22% Tax Rate

Post by Dottie57 » Sun Nov 17, 2019 9:08 am

Question about Muni bonds. If buying them individually and not in a fund, don’t you need to know the source for of money for payback? General obligation bonds are better than. Bond for a special project which is expected to make enough money to pay off the bonds.

User avatar
dratkinson
Posts: 4857
Joined: Thu Jul 26, 2007 6:23 pm
Location: Centennial CO

Re: Which BOND Fund in Taxable at 22% Tax Rate

Post by dratkinson » Sun Nov 17, 2019 6:57 pm

BH Which BOND fund in Taxable at 22% Tax Rate


Rajsx wrote:
Sun Nov 17, 2019 8:47 am

I am hoping the Tax free dividends from VXIUX do not push the MAGI higher than $170k to make me pay the Medicare Premium Surcharge.
The short answer.

VBTLX is a better choice than VWIUX if your goal is after-tax income. But it's not your best choice if your goal is to minimize MAGI; VWIUX is a better choice.

So you need to decide upon your true goal. Is it: (1) minimizing Medicare MAGI, or (2) maximizing after-tax income with which to pay a Medicare surcharge.



The long answer.

I had a coworker who complained that their house was almost paid off, mortgage interest deduction was dropping, and wished it were higher. I suggested they could refinance at a higher rate to increase their mortgage interest deduction. :annoyed You just can't please some people.

If MAGI is your biggest worry, then "Danger, Will Robinson!"

N.B. MAGI is based on actual dollars. Actual dollars come from actual yield, not TEY (taxable-equivalent yield).

Meaning.
--The VBTLX higher SEC yield (expected actual yield going forward) will push your MAGI higher.
--The VWIUX (less) and VWLUX (more) lower SEC yields will NOT push your MAGI as high.


Sample tax returns. This is where doing sample tax returns come in handy---they capture the dual effects of MAGI (AMT, SS taxation,...) + income taxation.

You will be doing yourself a huge favor if you produce sample tax returns for your situation. Otherwise I foresee the possibility that you may pay CGs to sell VWIUX, then pay a Medicare surcharge because VBTLX will increase your MAGI. This would probably annoy you.

This is what I believe you will discover from your sample tax returns---lowest to highest.
--Medicare MAGI: VWIUX -- VWLUX -- VBTLX (because of VBTLX's higher SEC yield).
--After-tax income: VWIUX -- VBTLX -- VWLUX (because of VWLUX's higher TEY).

But you must do the work and prove above for yourself. Why? As Abraham Lincoln said, “You can’t believe everything you read on the internet.”


N.B. If minimizing your MAGI is your primary concern, then VWIUX is your answer. You are where you want to be, no change required. ...But VMSXX (muni mmkt fund) would lower your MAGI even more. :annoyed You just can't please some people. :)

“Plan for the worst, hope for the best.” Don’t recall the Medicare surcharge being that bad.

When I checked, if I had to pay a Medicare surcharge, I’d have the money to do so. So I vote, “Shoot for after-tax income, and be happy I have the money to pay a Medicare surcharge.” You are allowed a veto vote.

Simplifying assumption: I try to ignore boundary layer issues. What one year/tax code giveth, the next taketh away. Don’t want to be paying CGs tax to whipsaw my investments to minimize changing boundary layer issues.


Required student exercises.
--Learn what actual Medicare surcharge you will pay.
--Produce sample tax returns for VWIUX, VWLUX, VBTLX, before/after SS for each---6 tax returns. (Should be able to do all 6 in an evening with Excel1040, after you create your baseline tax return.)
--For each sample tax return, compute: After-tax income = 1040 total income + muni income (not included in 1040 total income) – 1040 fed tax – Medicare surcharge.

If lucky, you will find one solution that works well before/after SS. One-and-done is the most tax efficient solution.

Why? You’re going to do the tax returns, eventually, anyway, so might as well do them in advance and pick the outcome you prefer. That way, when the real world happens, you will know you are doing the best you can, so “No worries, mate.”
Last edited by dratkinson on Sun Nov 17, 2019 8:42 pm, edited 1 time in total.
d.r.a., not dr.a. | I'm a novice investor, you are forewarned.

Topic Author
Rajsx
Posts: 465
Joined: Wed Mar 21, 2007 10:07 pm
Location: Florida

Re: Which BOND Fund in Taxable at 22% Tax Rate

Post by Rajsx » Sun Nov 17, 2019 7:55 pm

Thanks Doc for your suggestion, points well taken.

Although it will take some time to digest your suggestion fully & do the sample Taxes, it will give me the answers I am looking for.

Thanks
We do not stop laughing because we grow old, we grow old because we stop laughing !!

User avatar
dratkinson
Posts: 4857
Joined: Thu Jul 26, 2007 6:23 pm
Location: Centennial CO

Re: Which BOND Fund in Taxable at 22% Tax Rate

Post by dratkinson » Sun Nov 17, 2019 9:42 pm

BH Which BOND fund in Taxable at 22% Tax Rate


Dottie57 wrote:
Sun Nov 17, 2019 9:08 am
Question about Muni bonds. If buying them individually and not in a fund, don’t you need to know the source for of money for payback? General obligation bonds are better than. Bond for a special project which is expected to make enough money to pay off the bonds.
Yes. And special project bonds may be subject to the AMT, which is another exposure our sample tax return can reveal.

I used 2018 Excel1040 to check my AMT exposure under the new tax code---it was less. So I can venture into HY munis?

Decision. No, what I'm doing is good enough.
--Current tax code has 10yrs sunset and I was exposed to AMT under old tax code.
--HY muni benefit is negated by 22%/25% CG tax going/coming, and 28% AMT if I forget to return.
--HY muni increases my after-tax income <1% over my single-state muni---too little reward, too much risk.



Muni bond basics. I read Swedroe's book, "The Only Guide to a Winning Bond Strategy You'll Ever Need", in which he describes all of the things we must consider to buy individual muni bonds.

Decided I didn't want the work/expense required to purchase individual munis, to rebalance with monthly small money.

Decided it would be much easier to buy an acceptable* Vanguard muni fund, let the managers do the work, and I simply rebalance into it. (Decided this route would also be easier for my heirs.)

* The difficulty is in deciding what is an “acceptable” risk for each of us. The forum’s wise advice is to choose bonds for safety and take our risk on the equity side. I tried that for a while but it didn’t fit me.
--After learning that dividends are the major component of bond fund total return (= CGs + dividends), I now skew toward dividends, and tax benefits, for more risk/reward.
--My decision was reinforced after learning that inflation is (one of) the biggest risk(s) faced by retirees.



Individual muni bonds. I did research Swedroe’s posts on the forum and internet in which he describes how his firm chooses individual bonds for clients. And used that information to do my due diligence to find an acceptable single-state muni fund---looking for more risk/reward---dividends + tax benefits. Took ~4mos. Once was enough for me.

Now I just rebalance into the fund. And carefully read its new prospectus looking for red flags indicating it has changed direction. So far, so good.



* My "acceptable risk” bond decisions.
--VFITX (IT treasury), VIPSX (IPS) in my rIRA. NOT acceptable, low-yield/growth bored me to tears.
--Savings bonds. NOT acceptable, fed-taxable low yield, low state tax benefit, contribution limits.
--VWIUX. Acceptable as CD proxy, until I get the next chance to TLH and sell---in no great rush.
--VWLUX. Acceptable, because more after-tax income than TBM.
--Single-state muni fund. Acceptable, because a little more after-tax income than VWLUX, and it lets me scratch the itch to believe I’m “doing something”.
--HY muni fund. NOT acceptable, because too little extra reward, too much extra risk.

After my forum review, I tried the wise way of using safe bonds in my rIRA. But after ~5yrs couldn’t stand wasting the tax-free space on safe low-yield low-growth bonds. So changed to 100% equities to “shoot for the moon” and moved my bonds to taxable. I consider this time to be my due diligence in learning my true risk tolerance.

I bought savings bonds to extend tax-deferred bonds into taxable. Eventually realized they were not for me: fed-taxable low yield, low state tax benefit, contribution limits, needless complication for my heirs and me in my old age. (Preferred muni funds for: tax-free higher yield, fed+state higher tax benefits, unlimited contributions, and simplicity of management.)

I recall buying VWITX at a time when it produced approximately the same TEY for me as TBM, but would lower my AGI, and was a forum favorite (for folks in higher tax brackets---not my case). It's TEY has dropped since then. My current decision to consider it to be a CD proxy is a rationalization to convince myself that I don’t need to rush out, sell it, and owe CGs tax. Better to wait and pair selling with a TLH opportunity.

After finding Excel1040, I bought the other bond funds after running them through it and comparing their after-tax income to TBM, and to each other.

My current decisions are "good enough" so I have not revisited them.
--Any wholesale change to something else could produce only a small benefit, and would be negated by the CGs tax required to make the change.
--Any incremental change to something else would be another fund to manage and could produce only negligible benefits for a long time. (The forum recommends now investing in anything that is <5% of our total investments, as its return is too small to either much help/hurt our total return---so not worth the effort to own.)



Bottom line. It takes a while to learn our true risk tolerance and adapt our investments to match our "...need, willingness, and ability to take risk." We may need to try a few different investments over several years to find our best match.

I recall the advice that we should "...take neither too little, nor too much risk." Above is how I tried, learned, and made my choices. In my case, VFITX+VIPSX+savings bonds are too little risk. And a HY muni fund is too much risk.

Your choice.



Edit. Completeness.
d.r.a., not dr.a. | I'm a novice investor, you are forewarned.

Post Reply