Bonds in taxable accounts?

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schrute
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Bonds in taxable accounts?

Post by schrute » Sat Nov 30, 2019 2:09 pm

Does it make sense to have treasury or muni bond index funds in taxable account?

State: Calif
Last edited by schrute on Sat Nov 30, 2019 2:39 pm, edited 1 time in total.

mcraepat9
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Re: Bonds in taxable accounts?

Post by mcraepat9 » Sat Nov 30, 2019 2:12 pm

Depends on your fed and state/local income tax rates.
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retiredjg
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Re: Bonds in taxable accounts?

Post by retiredjg » Sat Nov 30, 2019 2:54 pm

Hard to know if you are asking whether to use one vs the other? Or if you are asking if either is OK to use.

In CA, if you hold bonds in taxable, the CA muni is a good choice. Seems like treasuries would be a good choice as well.

UpperNwGuy
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Re: Bonds in taxable accounts?

Post by UpperNwGuy » Sat Nov 30, 2019 3:06 pm

Go with municipal bond funds divided 50/50 between a California fund and a national fund.

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mrspock
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Re: Bonds in taxable accounts?

Post by mrspock » Sat Nov 30, 2019 3:07 pm

UpperNwGuy wrote:
Sat Nov 30, 2019 3:06 pm
Go with municipal bond funds divided 50/50 between a California fund and a national fund.
This, and if a bit more nerdy you can do a mix of long term CA muni and short duration national to make it more tax efficient... can’t recall the ratio.

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Re: Bonds in taxable accounts?

Post by mcraepat9 » Sat Nov 30, 2019 3:08 pm

UpperNwGuy wrote:
Sat Nov 30, 2019 3:06 pm
Go with municipal bond funds divided 50/50 between a California fund and a national fund.
+1

I prefer 50/50 CA long term tax exempt fund and national LIMITED term tax exempt so that >50% of the interest income is fed and CA income tax exempt
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schrute
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Re: Bonds in taxable accounts?

Post by schrute » Sat Nov 30, 2019 4:42 pm

retiredjg wrote:
Sat Nov 30, 2019 2:54 pm
Hard to know if you are asking whether to use one vs the other? Or if you are asking if either is OK to use.

In CA, if you hold bonds in taxable, the CA muni is a good choice. Seems like treasuries would be a good choice as well.
Should edit the question, wondering if it made sense to go with bonds at all.

annu
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Re: Bonds in taxable accounts?

Post by annu » Sun Dec 01, 2019 1:51 am

I invested in vwiux
, since you r in cali, can probably do cali fund instead and have even more saving.

If you have money, that you dont need in next 2to 5 years, makes sense, especially if maxing out 401k, to invest in muni funds

retiredjg
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Re: Bonds in taxable accounts?

Post by retiredjg » Sun Dec 01, 2019 6:41 am

schrute wrote:
Sat Nov 30, 2019 4:42 pm
retiredjg wrote:
Sat Nov 30, 2019 2:54 pm
Hard to know if you are asking whether to use one vs the other? Or if you are asking if either is OK to use.

In CA, if you hold bonds in taxable, the CA muni is a good choice. Seems like treasuries would be a good choice as well.
Should edit the question, wondering if it made sense to go with bonds at all.
Does it make any sense at all? That depends on several things including tax bracket and what other accounts you have available and what bond funds you have available in those accounts.

There are also conflicting opinions on whether to hold bonds in taxable.

My general preference is not to put retirement money into bonds in taxable if all the bonds will all fit in tax-deferred accounts. However, grabiner has made a good argument to use state muni funds in a few states that have high taxes (like CA), especially if there is no low cost bond selection in a work plan.

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Re: Bonds in taxable accounts?

Post by grabiner » Sun Dec 01, 2019 10:08 am

retiredjg wrote:
Sun Dec 01, 2019 6:41 am
My general preference is not to put retirement money into bonds in taxable if all the bonds will all fit in tax-deferred accounts. However, grabiner has made a good argument to use state muni funds in a few states that have high taxes (like CA), especially if there is no low cost bond selection in a work plan.
The reason for this is that the tax cost of a fund varies with your tax rate. If you are in a no-tax state and in a moderate tax bracket, you pay 15% tax on qualified dividends on a taxable stock investment. If you are in CA in a moderate tax bracket, you pay 24.3% tax on qualified dividends but you pay the same tax as anyone else on CA munis. If you are in the top tax bracket, even in a no-tax state, you pay 23.8% tax on qualified dividends, which is an equally good reason to hold munis.

The second point is that if your 401(k) has better bond than stock options, or vice versa, that should determine what you hold in your 401(k). If the only low-cost option in your 401(k) is an S&P 500 index, than you might hold your whole 401(k) in that fund, and hold bonds and international stock in your taxable account. Even if bonds in taxable are slightly less tax-efficient for you, the total cost, including expenses, is lower if you put bonds in your taxable account.
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retiredjg
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Re: Bonds in taxable accounts?

Post by retiredjg » Sun Dec 01, 2019 10:29 am

Readers should keep in mind that many people should not even be using a taxable account at all (for retirement money).

In almost all cases, it is best to fill up a work plan(s) and an IRA(s) (often Roth IRA) before putting any retirement money into a taxable account.

In other words, since most people in this country never even reach this threshold, only a small percentage of workers should be using a taxable at all (except for emergency fund and things like a house downpayment).

prioritarian
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Re: Bonds in taxable accounts?

Post by prioritarian » Sun Dec 01, 2019 3:01 pm

retiredjg wrote:
Sun Dec 01, 2019 10:29 am
Readers should keep in mind that many people should not even be using a taxable account at all (for retirement money).

In almost all cases, it is best to fill up a work plan(s) and an IRA(s) (often Roth IRA) before putting any retirement money into a taxable account.

In other words, since most people in this country never even reach this threshold, only a small percentage of workers should be using a taxable at all (except for emergency fund and things like a house downpayment).
If you max out your tax deferred options then a taxable account is a good option (fairly common here, I think). For people who have high fee annuities and no employer matching (e.g. many educator 403bs) a taxable account is sometimes preferable.
Last edited by prioritarian on Sun Dec 01, 2019 3:07 pm, edited 1 time in total.

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Re: Bonds in taxable accounts?

Post by prioritarian » Sun Dec 01, 2019 3:06 pm

schrute wrote:
Sat Nov 30, 2019 2:09 pm
Does it make sense to have treasury or muni bond index funds in taxable account?

If someone is retiring early (or intends to use the taxable for a major purchase) having bonds in taxable can make a lot of sense.

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schrute
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Re: Bonds in taxable accounts?

Post by schrute » Mon Dec 02, 2019 8:49 pm

prioritarian wrote:
Sun Dec 01, 2019 3:01 pm
retiredjg wrote:
Sun Dec 01, 2019 10:29 am
Readers should keep in mind that many people should not even be using a taxable account at all (for retirement money).

In almost all cases, it is best to fill up a work plan(s) and an IRA(s) (often Roth IRA) before putting any retirement money into a taxable account.

In other words, since most people in this country never even reach this threshold, only a small percentage of workers should be using a taxable at all (except for emergency fund and things like a house downpayment).
If you max out your tax deferred options then a taxable account is a good option (fairly common here, I think). For people who have high fee annuities and no employer matching (e.g. many educator 403bs) a taxable account is sometimes preferable.
But does it make sense to start putting bonds in my taxable? Or wait until getting closer to retirement.

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schrute
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Re: Bonds in taxable accounts?

Post by schrute » Mon Dec 02, 2019 8:50 pm

prioritarian wrote:
Sun Dec 01, 2019 3:06 pm
schrute wrote:
Sat Nov 30, 2019 2:09 pm
Does it make sense to have treasury or muni bond index funds in taxable account?

If someone is retiring early (or intends to use the taxable for a major purchase) having bonds in taxable can make a lot of sense.
I'm not close to early retirement. Maybe 10 years away to contemplate early retirement? Does it make sense to start putting bonds in now or allocate for them closer to "retiring"?

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Re: Bonds in taxable accounts?

Post by livesoft » Mon Dec 02, 2019 8:54 pm

schrute wrote:
Mon Dec 02, 2019 8:50 pm
I'm not close to early retirement. Maybe 10 years away to contemplate early retirement? Does it make sense to start putting bonds in now or allocate for them closer to "retiring"?
I don't have any bonds nor cash in my taxable account and I am retired. I have 100% equities in my taxable account. I have bonds in my tax-deferred accounts, so why would I want them in my taxable account? Why would I want to pay more income taxes?
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schrute
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Re: Bonds in taxable accounts?

Post by schrute » Mon Dec 02, 2019 8:58 pm

livesoft wrote:
Mon Dec 02, 2019 8:54 pm
schrute wrote:
Mon Dec 02, 2019 8:50 pm
I'm not close to early retirement. Maybe 10 years away to contemplate early retirement? Does it make sense to start putting bonds in now or allocate for them closer to "retiring"?
I don't have any bonds nor cash in my taxable account and I am retired. I have 100% equities in my taxable account. I have bonds in my tax-deferred accounts, so why would I want them in my taxable account? Why would I want to pay more income taxes?
Aren't bonds more reliable from an income standpoint? I don't think they're tax efficient at all, except maybe Munis. Or T-bills (at the state-level). I just don't see the point in getting them in a taxable given they have a low return (except recently).

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Re: Bonds in taxable accounts?

Post by livesoft » Mon Dec 02, 2019 9:01 pm

I invest for total return, so when I need money to spend, I simply sell some shares from the investments in my taxable account. If my asset allocation says I need more shares of equities, then I simply rebalance by exchanging from bond fund shares to equity fund shares both of which are found in my tax-deferred account.
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Re: Bonds in taxable accounts?

Post by aristotelian » Mon Dec 02, 2019 9:24 pm

livesoft wrote:
Mon Dec 02, 2019 8:54 pm
schrute wrote:
Mon Dec 02, 2019 8:50 pm
I'm not close to early retirement. Maybe 10 years away to contemplate early retirement? Does it make sense to start putting bonds in now or allocate for them closer to "retiring"?
I don't have any bonds nor cash in my taxable account and I am retired. I have 100% equities in my taxable account. I have bonds in my tax-deferred accounts, so why would I want them in my taxable account? Why would I want to pay more income taxes?
Arguably, muni bonds solve the tax problem. At least that is what most investors think. I am also close to 100% stocks in taxable but the reason is to minimize gains in 401k and maximize gains in taxable and Roth. Muni bonds eliminate tax drag, but that is offset by lower yield, the net effect is to increase tax on 401k.

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Re: Bonds in taxable accounts?

Post by eye.surgeon » Mon Dec 02, 2019 9:56 pm

retiredjg wrote:
Sun Dec 01, 2019 10:29 am
Readers should keep in mind that many people should not even be using a taxable account at all (for retirement money).

In almost all cases, it is best to fill up a work plan(s) and an IRA(s) (often Roth IRA) before putting any retirement money into a taxable account.

In other words, since most people in this country never even reach this threshold, only a small percentage of workers should be using a taxable at all (except for emergency fund and things like a house downpayment).
Very true for the general public but for forum members I suspect the majority have a taxable account because their savings exceed available tax deferred retirement savings space.
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Re: Bonds in taxable accounts?

Post by grabiner » Mon Dec 02, 2019 10:29 pm

schrute wrote:
Mon Dec 02, 2019 8:58 pm
livesoft wrote:
Mon Dec 02, 2019 8:54 pm
I don't have any bonds nor cash in my taxable account and I am retired. I have 100% equities in my taxable account. I have bonds in my tax-deferred accounts, so why would I want them in my taxable account? Why would I want to pay more income taxes?
Aren't bonds more reliable from an income standpoint? I don't think they're tax efficient at all, except maybe Munis. Or T-bills (at the state-level). I just don't see the point in getting them in a taxable given they have a low return (except recently).
The low current return is the reason that you might hold them in a taxable account. The total return of all your accounts is what determines how much money you will have to spend in retirement. Once you have decided how much to hold in bonds, you have to work out the relative tax costs, and also the advantages of the bond versus stock choices in your employer plan to decide where to hold your bonds.

My own taxable account is all stock, but that is based on my tax situation. I live in Maryland, which has a high state tax, but no low-cost muni fund. Therefore, I don't have a special tax advantage for holding munis; I would pay 8.2% tax on munis in a taxable account, and 23.2% on qualified stock dividends. (In contrast, a CA resident in the 9.3% state tax bracket would pay zero tax on CA munis in Vanguard's fund, but 24.3% tax on qualified dividends, making CA munis more attractive.)
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Re: Bonds in taxable accounts?

Post by retiredjg » Tue Dec 03, 2019 7:48 am

schrute wrote:
Mon Dec 02, 2019 8:49 pm
But does it make sense to start putting bonds in my taxable? Or wait until getting closer to retirement.
There is not enough information about your particular situation to even guess.

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Re: Bonds in taxable accounts?

Post by prioritarian » Tue Dec 03, 2019 6:38 pm

schrute wrote:
Sat Nov 30, 2019 2:09 pm
Does it make sense to have treasury or muni bond index funds in taxable account?

Probably depends on their risk tolerance. I have munis in mine but am thinking about moving into treasuries now that my early retirement is getting nearer.

PS: I live in a high tax state so treasuries defer some of my taxes (Oregon).

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Re: Bonds in taxable accounts?

Post by prioritarian » Tue Dec 03, 2019 6:59 pm

livesoft wrote:
Mon Dec 02, 2019 9:01 pm
I invest for total return, so when I need money to spend, I simply sell some shares from the investments in my taxable account.
In early retirement there is risk that market conditions might cause a retiree to pay the IRS penalty on tax deferred accounts. Bonds would lower this risk. (SEPPs are also not a risk-free option because they are inflexible.)

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Re: Bonds in taxable accounts?

Post by colodane » Wed Dec 04, 2019 6:07 pm

It depends on where you are in life and on your preferred asset allocation.

All things being equal, a tax-deferred account is ideal for bond funds. But as you get on in years, two things happen. You want a larger percentage in bonds. After many years of RMDs, your tax-deferred account starts to shrink while your taxable account gets larger. In my particular case, my taxable account is twice as large as my IRA account and I want 75% of my assets in bonds and money markets. So, obviously, the "all bonds in tax-deferred account" approach isn't going to work.

I try to compensate by using primarily muni bonds in my taxable account.

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Re: Bonds in taxable accounts?

Post by abuss368 » Wed Dec 04, 2019 8:41 pm

Tax exempt bond in a taxable account is ideal based on your tax structure. Vanguard Intermediate Term Tax Exempt is an excellent choice. You may pay tax not he state end.

Treasuries are exempt for state purposes and taxable for federal purposes.
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