Equities or Bonds in Tax Advantage

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sureshoe
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Equities or Bonds in Tax Advantage

Post by sureshoe » Sun Dec 01, 2019 8:27 pm

I'm sure this has been debated, but having trouble getting a good Google search to find it.

I'm pretty much a buy/hold indexer, and I've generally been heavier on equities, but easing into bonds as I get into my mid-40s. I'll probably go around 70-30 over time.

I have maxed out all my tax advantaged accounts: IRAs, HSAs, 401ks. So the root of the question is would you hold Equities or Bonds in the taxable account? Is there a good model to reference for this?

Thanks, and sorry for my failed Google-Fu.

retired@50
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Re: Equities or Bonds in Tax Advantage

Post by retired@50 » Sun Dec 01, 2019 8:51 pm

Hold equity in a taxable account, assuming you use a tax friendly mutual fund or ETF like VTSAX or VTI, which are Vanguard's total market stock funds.

Hold bonds in your 401k if you have a decent low-expense ratio bond index fund available.

Regards,

bradinsky
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Re: Equities or Bonds in Tax Advantage

Post by bradinsky » Sun Dec 01, 2019 9:24 pm

retired@50 wrote:
Sun Dec 01, 2019 8:51 pm
Hold equity in a taxable account, assuming you use a tax friendly mutual fund or ETF like VTSAX or VTI, which are Vanguard's total market stock funds.

Hold bonds in your 401k if you have a decent low-expense ratio bond index fund available.

Regards,
If all of the tax advantaged space was maxed out, would you not then hold both equities & bonds in taxable, at your chosen AA? Sometimes, we have no other choice.

retired@50
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Re: Equities or Bonds in Tax Advantage

Post by retired@50 » Mon Dec 02, 2019 12:44 am

bradinsky wrote:
Sun Dec 01, 2019 9:24 pm
retired@50 wrote:
Sun Dec 01, 2019 8:51 pm
Hold equity in a taxable account, assuming you use a tax friendly mutual fund or ETF like VTSAX or VTI, which are Vanguard's total market stock funds.

Hold bonds in your 401k if you have a decent low-expense ratio bond index fund available.

Regards,
If all of the tax advantaged space was maxed out, would you not then hold both equities & bonds in taxable, at your chosen AA? Sometimes, we have no other choice.
It depends on how you're using the accounts. You say "tax advantaged space was maxed out" does that mean that the entire 401k is bonds? If not, you can hold more bonds in the 401k, then make up for that discrepancy by holding more equity in taxable.

Regards,

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Stinky
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Re: Equities or Bonds in Tax Advantage

Post by Stinky » Mon Dec 02, 2019 5:57 am

retired@50 wrote:
Sun Dec 01, 2019 8:51 pm
Hold equity in a taxable account, assuming you use a tax friendly mutual fund or ETF like VTSAX or VTI, which are Vanguard's total market stock funds.

Hold bonds in your 401k if you have a decent low-expense ratio bond index fund available.

Regards,
I agree with this.

Put all of your bonds in 401(k) or similar tax-advantaged account, if possible.
It's a GREAT day to be alive - Travis Tritt

Dandy
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Re: Equities or Bonds in Tax Advantage

Post by Dandy » Mon Dec 02, 2019 9:50 am

Equities are usually the choice since fixed income usually pays higher taxable distributions. Equities, early on, provide a means to tax loss harvest. Usually, if you hold them long enough though you will have large cap gains and that might curb your enthusiasm for selling shares. If you are heavy into equities in your taxable account and experience large gains it can make keeping your overall equity exposure more difficult - since sales to rebalance likely mean taxes.

I followed the general guide of having most of my equities in taxable and most of my fixed income in my TIRA. I want a conservative allocation of about 43/57. As I deplete my fixed income heavy TIRA due to RMDs and my taxable equities grow I face a rising equity allocation or taxes to rebalance.

I favor mostly equities in taxable and Roth IRAs and mostly fixed income in tax advantaged TIRA/401k. It makes any rebalancing easier and less likely to cause unnecessary taxes when there is some fixed income assets in all accounts.

bradinsky
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Re: Equities or Bonds in Tax Advantage

Post by bradinsky » Tue Dec 03, 2019 7:06 am

retired@50 wrote:
Mon Dec 02, 2019 12:44 am
bradinsky wrote:
Sun Dec 01, 2019 9:24 pm
retired@50 wrote:
Sun Dec 01, 2019 8:51 pm
Hold equity in a taxable account, assuming you use a tax friendly mutual fund or ETF like VTSAX or VTI, which are Vanguard's total market stock funds.

Hold bonds in your 401k if you have a decent low-expense ratio bond index fund available.

Regards,
If all of the tax advantaged space was maxed out, would you not then hold both equities & bonds in taxable, at your chosen AA? Sometimes, we have no other choice.

It depends on how you're using the accounts. You say "tax advantaged space was maxed out" does that mean that the entire 401k is bonds? If not, you can hold more bonds in the 401k, then make up for that discrepancy by holding more equity in taxable.

Regards,
75% of our portfolio is in taxable & 25% is in tax advantaged. With a AA of 50% equities & 50% fixed income, we really have little choice but to hold bond funds in taxable.

Brad

stan1
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Re: Equities or Bonds in Tax Advantage

Post by stan1 » Tue Dec 03, 2019 7:40 am

bradinsky wrote:
Tue Dec 03, 2019 7:06 am
retired@50 wrote:
Mon Dec 02, 2019 12:44 am
bradinsky wrote:
Sun Dec 01, 2019 9:24 pm
retired@50 wrote:
Sun Dec 01, 2019 8:51 pm
Hold equity in a taxable account, assuming you use a tax friendly mutual fund or ETF like VTSAX or VTI, which are Vanguard's total market stock funds.

Hold bonds in your 401k if you have a decent low-expense ratio bond index fund available.

Regards,
If all of the tax advantaged space was maxed out, would you not then hold both equities & bonds in taxable, at your chosen AA? Sometimes, we have no other choice.

It depends on how you're using the accounts. You say "tax advantaged space was maxed out" does that mean that the entire 401k is bonds? If not, you can hold more bonds in the 401k, then make up for that discrepancy by holding more equity in taxable.

Regards,
75% of our portfolio is in taxable & 25% is in tax advantaged. With a AA of 50% equities & 50% fixed income, we really have little choice but to hold bond funds in taxable.

Brad
You'll need to look at your specifics. What is your marginal tax rate (federal and state)? If you are nearing retirement what marginal tax rate do you expect in retirement? Does your state tax bond income as ordinary income or is there a preferential rate? Are you planning to move to a different state soon? Are you still working and contributing to the retirement accounts or are you retired?

I do agree you'd probably want to hold some bonds in taxable, but above information would let us know whether state specific munis, national munis, treasuries, or total bond market would work best in your situation (likely its a combination of several).

bradinsky
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Re: Equities or Bonds in Tax Advantage

Post by bradinsky » Tue Dec 03, 2019 8:23 am

stan1 wrote:
Tue Dec 03, 2019 7:40 am
bradinsky wrote:
Tue Dec 03, 2019 7:06 am
retired@50 wrote:
Mon Dec 02, 2019 12:44 am
bradinsky wrote:
Sun Dec 01, 2019 9:24 pm
retired@50 wrote:
Sun Dec 01, 2019 8:51 pm
Hold equity in a taxable account, assuming you use a tax friendly mutual fund or ETF like VTSAX or VTI, which are Vanguard's total market stock funds.

Hold bonds in your 401k if you have a decent low-expense ratio bond index fund available.

Regards,
If all of the tax advantaged space was maxed out, would you not then hold both equities & bonds in taxable, at your chosen AA? Sometimes, we have no other choice.
[/quote

It depends on how you're using the accounts. You say "tax advantaged space was maxed out" does that mean that the entire 401k is bonds? If not, you can hold more bonds in the 401k, then make up for that discrepancy by holding more equity in taxable.

Regards,
75% of our portfolio is in taxable & 25% is in tax advantaged. With a AA of 50% equities & 50% fixed income, we really have little choice but to hold bond funds in taxable.

Brad
You'll need to look at your specifics. What is your marginal tax rate (federal and state)? If you are nearing retirement what marginal tax rate do you expect in retirement? Does your state tax bond income as ordinary income or is there a preferential rate? Are you planning to move to a different state soon? Are you still working and contributing to the retirement accounts or are you retired?

I do agree you'd probably want to hold some bonds in taxable, but above information would let us know whether state specific munis, national munis, treasuries, or total bond market would work best in your situation (likely its a combination of several).
DW & I are both 67, retired & live in Ohio. We like it here, our children are here & we have no plans to relocate. For 2019, we are in the 22% Federal & 7% state tax brackets. For 2020, we will be @ 12% & 5%.

stan1
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Re: Equities or Bonds in Tax Advantage

Post by stan1 » Tue Dec 03, 2019 8:39 am

bradinsky wrote:
Tue Dec 03, 2019 8:23 am

DW & I are both 67, retired & live in Ohio. We like it here, our children are here & we have no plans to relocate. For 2019, we are in the 22% Federal & 7% state tax brackets. For 2020, we will be @ 12% & 5%.
At 67 the question would be what you expect your tax rate to be when you start taking RMDs at 70.5 and after.

At 12% + 5% Total Bond Market and Treasury bills are probably reasonable. Difference between taxable bonds and muni bonds is likely to be small and taxable bonds are more diversified.

At 22% + 5% I'd go with a national muni bond fund and treasury bills.

Personally I would not put 25% of my assets into muni bonds. Personally I would not use Ohio specific muni bonds at your tax rate (too concentrated).

bradinsky
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Re: Equities or Bonds in Tax Advantage

Post by bradinsky » Tue Dec 03, 2019 9:02 am

stan1 wrote:
Tue Dec 03, 2019 8:39 am
bradinsky wrote:
Tue Dec 03, 2019 8:23 am

DW & I are both 67, retired & live in Ohio. We like it here, our children are here & we have no plans to relocate. For 2019, we are in the 22% Federal & 7% state tax brackets. For 2020, we will be @ 12% & 5%.
At 67 the question would be what you expect your tax rate to be when you start taking RMDs at 70.5 and after.

At 12% + 5% Total Bond Market and Treasury bills are probably reasonable. Difference between taxable bonds and muni bonds is likely to be small and taxable bonds are more diversified.

At 22% + 5% I'd go with a national muni bond fund and treasury bills.

Personally I would not put 25% of my assets into muni bonds. Personally I would not use Ohio specific muni bonds at your tax rate (too concentrated).
Thanks for the input Stan! Regarding RMD’s, with only 25% of the portfolio in tax advantaged, we should still be in the 12% + 5% brackets. Our combined SS is $36K, so hopefully that gives us room to stay in those brackets for a few years.

Brad

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Hector
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Re: Equities or Bonds in Tax Advantage

Post by Hector » Tue Dec 03, 2019 11:58 am

I prefer
  • Equities in non retirement accounts because its tax efficient. Tax from long term capital gain and dividend is lesser than interest from bonds. TLH is another benefit.
  • Equities in Roth because I think stock would do better than bonds over few decades and I might not pay tax on Roth.
  • Bonds in regular IRA and 401(k) as I think bonds will appreciate less than equities over few decades and distribution from these accounts would be regular income.

Topic Author
sureshoe
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Re: Equities or Bonds in Tax Advantage

Post by sureshoe » Wed Dec 11, 2019 10:01 am

retired@50 wrote:
Sun Dec 01, 2019 8:51 pm
Hold equity in a taxable account, assuming you use a tax friendly mutual fund or ETF like VTSAX or VTI, which are Vanguard's total market stock funds.

Hold bonds in your 401k if you have a decent low-expense ratio bond index fund available.

Regards,
Yeah, throwing the bulk of it in VTI. The problem I'm running into for the 401ks is the bond funds really aren't fantastic, so it's taking a bit of juggling to get the mix I want. I'd like to just toss it in BND, but not an option there - trying to move it around to the Roths.

retired@50
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Re: Equities or Bonds in Tax Advantage

Post by retired@50 » Wed Dec 11, 2019 10:04 am

sureshoe wrote:
Wed Dec 11, 2019 10:01 am
retired@50 wrote:
Sun Dec 01, 2019 8:51 pm
Hold equity in a taxable account, assuming you use a tax friendly mutual fund or ETF like VTSAX or VTI, which are Vanguard's total market stock funds.

Hold bonds in your 401k if you have a decent low-expense ratio bond index fund available.

Regards,
Yeah, throwing the bulk of it in VTI. The problem I'm running into for the 401ks is the bond funds really aren't fantastic, so it's taking a bit of juggling to get the mix I want. I'd like to just toss it in BND, but not an option there - trying to move it around to the Roths.
If you want to list the bond choices that are available to you, the forum, and I, would be happy to help.

Regards,

KlangFool
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Re: Equities or Bonds in Tax Advantage

Post by KlangFool » Wed Dec 11, 2019 10:14 am

Folks,

There are multiple types of tax-advantaged accounts:

A) HSA -> Tax-free going in and tax-free going out -> The best.

B) Trad. 401K, 403B, 457 -> Tax-deferred. No tax going in. Pay tax going out of the account.

C) Roth IRA, Roth 401K and s on -> After-tax contribution into the account. No tax on contribution and earning on the way out.

So, the answer changes greatly depending on which type of tax-advantaged account that we are discussing.

OP should start with this Wiki.

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

KlangFool

aristotelian
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Re: Equities or Bonds in Tax Advantage

Post by aristotelian » Wed Dec 11, 2019 10:15 am

Tax advantaged is not all the same. Roth uses already taxed funds to grow tax free. Traditional uses pretax funds to be taxed in retirement. Since Traditional will be taxed in the future, my preference is to try to concentrate gains in Roth, which argues for stocks in Roth and bonds (up to my target allocation) in Traditional. Since capital gains are taxed less than income, I also overweight stocks in taxable but there are competing schools of thought on that.

B_F_Skinner_Box
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Re: Equities or Bonds in Tax Advantage

Post by B_F_Skinner_Box » Wed Dec 11, 2019 10:17 am

So far I've read exclusively advice to put bonds in tax-advantaged accounts. I'll give the counter argument.

Logic says to, of course, put bonds in tax-advantaged accounts, since they throw off more taxable events (virtually all of its growth), and equity index funds are much friendlier in terms of how often they create taxable events.

However.

https://www.whitecoatinvestor.com/asset ... n-taxable/

After I read this ^ fascinating article, you can make an argument to put bonds in your taxable account - based on the assumption that you expect a lower rate of return from bonds. They give concrete examples showing that holding bonds in taxable and equities in tax-advantaged, is actually BETTER for you, all things considered, and will generate less taxes, than the more traditional method.

Here's the logic (stealing from the mentioned site)
Roth IRA
$100K Bonds grows at 2.69% for 30 years to $221,740 =FV(2.69%,30,,-100000,1)=221,740

Taxable
$100K Stocks grows at 8% -(15% * the 1.86% yield) = 7.72% to $930,873 over 30 years. =FV(7.72%,30,,-100000,1)

You don’t pay capital gains on the original $100K, nor on the $183,177 in dividends received. So capital gains taxes on the $647,696 in gains are $97,154, leaving you with $930,873-$97,154 = $833,718.

Total = $1,055,459

Now, put the stocks in the Roth, and you’ll get this.

Roth IRA
$100K Stocks grows at 8% for 30 years to $1,006,266

Taxable
$100K Municipal Bonds grows at 2.16% for 30 years to $189,857

Total = $1,196,123

You get $140,664 or 13% MORE by putting the stocks into the Roth.
The example assumes a 33% marginal tax rate and the 15% long-term capital gains rate

Or in other words, if you expect bonds to return a small fraction of equities, you should be putting equities into the tax-advantaged accounts, since its growth is expected to be greater... even though it's more efficiently taxed, there is considerably MORE of it to be taxed, so it will result in a higher overall tax burden.

A little counter-intuitive, but worth a thought.

At least, it should give you something to think about, and you can feel less bad about having some bonds in your taxable accounts.

- B F Skinner Box

Topic Author
sureshoe
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Re: Equities or Bonds in Tax Advantage

Post by sureshoe » Wed Dec 11, 2019 10:43 am

And some more color on this since people asked about specific tax situation. I'm very deep in the 35% tax bracket and Ohio. I'm mid-40s and don't expect to take any money out of Roths or 401ks for at least 15-25 years.

Based on the above, it's confirming my thoughts - which is figure out how to get money into bond funds in the Roths/401ks and get a mix into VTI/others in my taxable accounts.

From an AA point-of-view, I have plenty of room to put 25-30% in bonds in tax advantaged.

retired@50
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Re: Equities or Bonds in Tax Advantage

Post by retired@50 » Wed Dec 11, 2019 10:44 am

BF Skinner raises a good point.

Regards,

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