Bond Selection for Taxable College Account

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Topic Author
SimpleStupid
Posts: 35
Joined: Wed May 05, 2021 6:38 am

Bond Selection for Taxable College Account

Post by SimpleStupid »

Hi All. We have 8 years until college, and I'm struggling with the bond portion of our taxable college savings account. Here is an overview of our situation.

Tax Bracket: 32%
State: NY

Current College AA:
US STOCKS 41.95%
INT STOCKS 28.20%
US BONDS 29.85%
Glide path to activate in 1-2 years.

529 Account: 100% VBMPX, Vanguard Total Bond Market Inst

Taxable Account: After maxing the 529 in bonds, we still have a good chunk of the bond portion to invest via taxable. Since we recently transferred our taxable account (in kind) from Betterment to Fidelity, we have a bunch of bond funds that mostly look destined for the scrap heap, but i wanted to get your opinions.

QUESTIONS:
- Should our horizon of 8 years relate in any way to the bond fund’s horizon?
- Do you see anything worth keeping in the list below?
- Assuming we'll need to fully replace or supplement some of the below, what else would you be looking at? I combed some threads and the options currently under consideration are: High-yield savings, VMLTX, A small allocation to NY State Munis.

Thank you in advance!

SS

----------------------------------------------

CURRENT FUNDS FROM BETTERMENT TRANSFER:

MUB iShares National Muni Bond ETF Municipal Bond Muni National Interm
TFI SPDR Nuveen Blmbg Barclays Muni Bd ETF Municipal Bond Muni National Long
GBIL Goldman Sachs Access Treasury 0-1 Yr ETF Taxable Bond UltrashortBond
AGG iShares Core US Aggregate Bond ETF TaxableBond Intermediate CoreBond
LQD iShares iBoxx$ Invmt Grade Corp Bd ETF TaxableBond Corporate Bond
EMB iShares JPMorgan USD EmMkts Bd ETF TaxableBond Emerging Markets Bond
SHV iShares Short Treasury Bond ETF Taxable Bond Ultrashort Bond
JPST JPMorgan Ultra-Short Income ETF Taxable Bond Ultrashort Bond
VWOB Vanguard Emerging Mkts Govt Bd ETF Taxable Bond Emerging Markets Bond
VTIP Vanguard Short-Term Infl-Prot Secs ETF Taxable Bond Inflation-Protected Bond
BNDX Vanguard Total International Bond ETF Taxable Bond World Bond-USD Hedged
exodusNH
Posts: 1360
Joined: Wed Jan 06, 2021 8:21 pm

Re: Bond Selection for Taxable College Account

Post by exodusNH »

SimpleStupid wrote: Wed Nov 24, 2021 9:07 am Hi All. We have 8 years until college, and I'm struggling with the bond portion of our taxable college savings account. Here is an overview of our situation.

Tax Bracket: 32%
State: NY

Current College AA:
US STOCKS 41.95%
INT STOCKS 28.20%
US BONDS 29.85%
Glide path to activate in 1-2 years.

529 Account: 100% VBMPX, Vanguard Total Bond Market Inst

Taxable Account: After maxing the 529 in bonds, we still have a good chunk of the bond portion to invest via taxable. Since we recently transferred our taxable account (in kind) from Betterment to Fidelity, we have a bunch of bond funds that mostly look destined for the scrap heap, but i wanted to get your opinions.

QUESTIONS:
- Should our horizon of 8 years relate in any way to the bond maturity date?
- Do you see anything worth keeping in the list below?
- Assuming we'll need to fully replace or supplement some of the below, what else would you be looking at? I combed some threads and the options currently under consideration are: High-yield savings, VMLTX, A small allocation to NY State Munis.

Thank you in advance!

SS

----------------------------------------------

CURRENT FUNDS FROM BETTERMENT TRANSFER:

MUB iShares National Muni Bond ETF Municipal Bond Muni National Interm
TFI SPDR Nuveen Blmbg Barclays Muni Bd ETF Municipal Bond Muni National Long
GBIL Goldman Sachs Access Treasury 0-1 Yr ETF Taxable Bond UltrashortBond
AGG iShares Core US Aggregate Bond ETF TaxableBond Intermediate CoreBond
LQD iShares iBoxx$ Invmt Grade Corp Bd ETF TaxableBond Corporate Bond
EMB iShares JPMorgan USD EmMkts Bd ETF TaxableBond Emerging Markets Bond
SHV iShares Short Treasury Bond ETF Taxable Bond Ultrashort Bond
JPST JPMorgan Ultra-Short Income ETF Taxable Bond Ultrashort Bo
VWOB Vanguard Emerging Mkts Govt Bd ETF Taxable Bond Emerging Markets Bond
VTIP Vanguard Short-Term Infl-Prot Secs ETF Taxable Bond Inflation-Protected Bond
BNDX Vanguard Total International Bond ETF Taxable Bond World Bond-USD Hedged
In general, the duration of the bond fund should be roughly matched to your use timeline. The average of your need is 10 years. Vanguard's BND or AGG are fine for that.

Whether to use munis or not depends on your tax bracket and state taxes. A NY muni fund would be exempt from both state and federal taxes. The yields mostly take this into account. You need to run the numbers using muni, state muni, and regular bonds to see if the tax savings make sense. The general rule is 24%+ favors munis, 22% needs the math, < 22% favors regular.

You could simplify the above to AGG or a state-specific muni and VTIP or another short-term bond fund to get your duration matched. MUB is fine but if you have a state-specific fund and you'd benefit from the tax savings, you might as well save on the state as well.

It would help to know what percent of the above each of those funds represents.
dbr
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Joined: Sun Mar 04, 2007 9:50 am

Re: Bond Selection for Taxable College Account

Post by dbr »

SimpleStupid wrote: Wed Nov 24, 2021 9:07 am
- Should our horizon of 8 years relate in any way to the bond fund’s horizon?
Yes, but note your horizon shortens over time and a bond fund maintains a constant duration. You could buy individual bonds that mature when needed, but to have no default risk those would be Treasuries probably.
Topic Author
SimpleStupid
Posts: 35
Joined: Wed May 05, 2021 6:38 am

Re: Bond Selection for Taxable College Account

Post by SimpleStupid »

exodusNH wrote: Wed Nov 24, 2021 9:40 am
You could simplify the above to AGG or a state-specific muni and VTIP or another short-term bond fund to get your duration matched. MUB is fine but if you have a state-specific fund and you'd benefit from the tax savings, you might as well save on the state as well.

It would help to know what percent of the above each of those funds represents.
Thank you for your response.

As far as percentages go, I would have to look. But none of them have enough right now to satisfy the entire allocation. Plus, based on the direction I'm leaning, I'm not sure any but MUB are worth keeping anyway. I'm leaning more toward:

33% Federal Intermediate Munis (Existing MUB + VWITX)
33% NY State Intermediate, possibly MANKX
33% VTIP

Then I'll just scrap the rest that are currently in the account.
Topic Author
SimpleStupid
Posts: 35
Joined: Wed May 05, 2021 6:38 am

Re: Bond Selection for Taxable College Account

Post by SimpleStupid »

dbr wrote: Wed Nov 24, 2021 9:59 am Yes, but note your horizon shortens over time and a bond fund maintains a constant duration. You could buy individual bonds that mature when needed, but to have no default risk those would be Treasuries probably.
Thank you. I'm thinking to buy Intermediate muni funds (both federal and ny state) for now, and then switch to short-term when I hit 2-4 years prior.

But now I'm looking at the 529, and questioning the plan to invest in VBMPX there. It would be a good 2/3 of the bond allocation, and has a good amount of 15-30 year bonds. Another option offered in the 529 is the Vanguard Income Portfolio, which is a mix of four funds, which still includes 34.5% Total Bond Fund. Would these Total Bond Funds be too aggressive for a 10 year horizon you think?
exodusNH
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Joined: Wed Jan 06, 2021 8:21 pm

Re: Bond Selection for Taxable College Account

Post by exodusNH »

SimpleStupid wrote: Wed Nov 24, 2021 3:16 pm
exodusNH wrote: Wed Nov 24, 2021 9:40 am
You could simplify the above to AGG or a state-specific muni and VTIP or another short-term bond fund to get your duration matched. MUB is fine but if you have a state-specific fund and you'd benefit from the tax savings, you might as well save on the state as well.

It would help to know what percent of the above each of those funds represents.
Thank you for your response.

As far as percentages go, I would have to look. But none of them have enough right now to satisfy the entire allocation. Plus, based on the direction I'm leaning, I'm not sure any but MUB are worth keeping anyway. I'm leaning more toward:

33% Federal Intermediate Munis (Existing MUB + VWITX)
33% NY State Intermediate, possibly MANKX
33% VTIP

Then I'll just scrap the rest that are currently in the account.
Vanguard's NY muni might be a better option, if you have it: VNYTX. From reading here, Vanguard's muni funds are very good and has a lower expense ratio.

Are you in a high enough tax bracket to justify holding only munis?
Topic Author
SimpleStupid
Posts: 35
Joined: Wed May 05, 2021 6:38 am

Re: Bond Selection for Taxable College Account

Post by SimpleStupid »

exodusNH wrote: Wed Nov 24, 2021 4:47 pm
Vanguard's NY muni might be a better option, if you have it: VNYTX. From reading here, Vanguard's muni funds are very good and has a lower expense ratio.

Are you in a high enough tax bracket to justify holding only munis?
Hey. We're in the 32% bracket, so yes. But I don't think it'd be prudent to hold all the bond allocation in NY Munis. I also thought that the Long-term horizon of VNYTX was too long for my 8 year horizon, this the thought to use the BlackRock Intermediate fund.

Does that make sense?
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grabiner
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Re: Bond Selection for Taxable College Account

Post by grabiner »

SimpleStupid wrote: Wed Nov 24, 2021 6:50 pm
exodusNH wrote: Wed Nov 24, 2021 4:47 pm
Vanguard's NY muni might be a better option, if you have it: VNYTX. From reading here, Vanguard's muni funds are very good and has a lower expense ratio.

Are you in a high enough tax bracket to justify holding only munis?
Hey. We're in the 32% bracket, so yes. But I don't think it'd be prudent to hold all the bond allocation in NY Munis. I also thought that the Long-term horizon of VNYTX was too long for my 8 year horizon, this the thought to use the BlackRock Intermediate fund.
My normal recommendation for this situation is a 50/50 split between Vanguard Limited-Term Tax-Exempt and NY Long-Term Tax-Exempt. Thus only half your munis are in NY, and you have an overall intermediate-term duration, but more than half your muni interest is exempt from NY state tax.
Wiki David Grabiner
Topic Author
SimpleStupid
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Re: Bond Selection for Taxable College Account

Post by SimpleStupid »

grabiner wrote: Wed Nov 24, 2021 9:03 pm My normal recommendation for this situation is a 50/50 split between Vanguard Limited-Term Tax-Exempt and NY Long-Term Tax-Exempt. Thus only half your munis are in NY, and you have an overall intermediate-term duration, but more than half your muni interest is exempt from NY state tax.
Hi David. Thank you. What is the advantage to this recommended approach, versus using Intermediate for both Fed and State, still split 50/50 (see my current plan below)? I have a feeling it relates to the part where you say "but more than half your muni interest is exempt from NY state tax" but not sure how?

Current Plan For Bond Only Portion Is:
65% Vanguard Total Bond Market II VTBNX (100% of 529 Balance)
17% BNY Mellon New York Tax Exempt Bond DRNYX (50% of Taxable)
17% Vanguard Interm-Term Tx-Ex Inv VWITX (50% of Taxable)

Duration is 6.4.
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grabiner
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Re: Bond Selection for Taxable College Account

Post by grabiner »

SimpleStupid wrote: Sat Nov 27, 2021 6:38 am
grabiner wrote: Wed Nov 24, 2021 9:03 pm My normal recommendation for this situation is a 50/50 split between Vanguard Limited-Term Tax-Exempt and NY Long-Term Tax-Exempt. Thus only half your munis are in NY, and you have an overall intermediate-term duration, but more than half your muni interest is exempt from NY state tax.
Hi David. Thank you. What is the advantage to this recommended approach, versus using Intermediate for both Fed and State, still split 50/50 (see my current plan below)? I have a feeling it relates to the part where you say "but more than half your muni interest is exempt from NY state tax" but not sure how?
Long-term bonds have higher yields than short-term bonds. Thus, if you have equal dollar amounts in long-term and short-term bond funds, more than half the interest is on the long-term bond fund.
Wiki David Grabiner
Topic Author
SimpleStupid
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Re: Bond Selection for Taxable College Account

Post by SimpleStupid »

grabiner wrote: Sat Nov 27, 2021 9:37 am Long-term bonds have higher yields than short-term bonds. Thus, if you have equal dollar amounts in long-term and short-term bond funds, more than half the interest is on the long-term bond fund.
Ah, I see. Thank you again David. I'll try that route then.
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