Author Topic: Should I throw some VBTLX in taxable account?  (Read 1086 times)

The 585

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Should I throw some VBTLX in taxable account?
« on: March 19, 2017, 07:58:06 AM »
I'm currently planning on a ~2030 FIRE date. I understand that it is best to have bond allocation in tax advantaged accounts--however, since I will only be 40, I will plan to live off my taxable Vanguard investments for as long as possible before needing to touch the 401k and Roth investments.

My Vanguard taxable account holdings are currently in VTSAX and VTIAX. Should I add some VBTLX in the mix, or would this be unwise? Any better strategy to secure my early retirement investments? Thanks!

Heckler

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Re: Should I throw some VBTLX in taxable account?
« Reply #1 on: March 19, 2017, 08:45:45 AM »
At 26, assess your risk tolerance and realize you have a 50-75 year investing horizon.


If you decide bonds are still in your near future, understand the tax implications.   

Bonds in taxable will cost you income tax on the interest (in Canada tax law at least), at your current tax rate - so, 38% in my case if I didn't invest with taxes in mind. 

So, a bond paying 2% interest will only make me 1.24% each dividend payout.

http://canadiancouchpotato.com/2014/11/19/ask-the-spud-bond-etfs-in-taxable-accounts/

http://canadiancouchpotato.com/2013/03/06/why-gics-beat-bond-etfs-in-taxable-accounts/
« Last Edit: March 19, 2017, 08:53:42 AM by Heckler »

MustacheAndaHalf

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Re: Should I throw some VBTLX in taxable account?
« Reply #2 on: March 20, 2017, 04:01:24 AM »
OP is in Virginia, so I think U.S. tax law will apply.

I'd like to expand OP's question to improve it: if you're going to hold bonds, what should you hold and where should it be located?

Vanguard Tax-Exempt Bond ETF (VTEB) has a 2.19% "SEC" yield (good for comparing funds) that is exempt from Federal income tax.

Vanguard Total Bond Market ETF (BND) has a 2.57% "SEC" yield at ordinary income tax rates.

2.19 / 2.57 = 0.85, meaning anyone above the 15% tax bracket benefits from tax-exempt.  So by way of example....
2.57% x 0.75 (25% tax bracket) = 1.93% yield after taxes,
versus 2.19% tax exempt yield.

Most people would benefit from holding a tax-exempt bond fund in a taxable account.  It makes more room in their retirement accounts, and the after-tax yield is better.  So my answer to the modified question, yes you should hold bonds in taxable - but use a tax-exempt bond fund.

2Birds1Stone

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Re: Should I throw some VBTLX in taxable account?
« Reply #3 on: March 20, 2017, 05:55:46 AM »
No, your overall allocation is what matters. Tax advantaged fund placement is still going to help you maximize returns. You can definitely keep equities in taxable and bonds in Roth/401k/tIRA accounts.
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The 585

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Re: Should I throw some VBTLX in taxable account?
« Reply #4 on: March 20, 2017, 07:07:05 AM »
Thanks guys. Would it be wise to move my $18k Roth IRA from Target Retirement 2050 Fund to VBTLX? The Roth IRA accounts for about 10% of my overall porfolio, which is currently only 3% bonds according to my portfolio analyzer.

This way, it would increase my bond allocation but keep it in a tax-sheltered account which would be accessible in early retirement?

2Birds1Stone

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Re: Should I throw some VBTLX in taxable account?
« Reply #5 on: March 20, 2017, 08:23:05 AM »
I would recommend writing out a Personal Investment Policy Statement, which should outline your desired asset allocation.

Then based on that specific asset allocation I would place funds into the optimal type of account from a tax perspective.

Check out the bogleheads guide here https://www.bogleheads.org/wiki/Tax-efficient_fund_placement

Figuring out an AA that you are comfortable with long term, in goods times and in bad, is VERY important.
"A small house can hold as much happiness as a big one." - Fortune Cookie

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dca

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Re: Should I throw some VBTLX in taxable account?
« Reply #6 on: March 24, 2017, 01:24:20 PM »
I'm a noob & still getting my own financial ducks in order. But what would be wrong with this:

1. Keep VBTLX in your 401k and VTSAX/VTIAX in your taxable account.
2. When you retire, sell the amount of VBTLX  you want to pull each year in your retirement account.
3. Make the inverse trade in taxable: sell equities and buy VBTLX.
4. Rise & repeat each year in retirement.

You'd have to pay capital gains tax on the equities you sell in your taxable account, but depending on your tax bracket during retirement and your needs, that could be 0%.

dca

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Re: Should I throw some VBTLX in taxable account?
« Reply #7 on: March 24, 2017, 01:31:31 PM »
Or, each time you want to pull VBTLX in retirement: exchange VBTLX for equities in 401k, and sell the same amount in equities in taxable.