Bonds Question

[Ape86]

Hi, I have a bonds question. Here are the details:

Currently own $100k of SWAGX (Schwab US Aggregate Bond Index). The other portion of my portfolio (75%) is in SWPPX.
It's all in a non-retirement Schwab brokerage account.
My marginal Tax Bracket: 24%
I live in CA.

Now learning that SWAGX is not the most tax-efficient bond I could hold in that account. I'm obviously new at bonds.

GPT did some math based on this info and recommended I consider SWCAX instead (CA Tax-Free Bond), to avoid ALL federal and state taxes on it. One argument was that the higher potential yields from SWAGX are eaten away by federal and state taxes, so that SWCAX is probably a better net result.

However, the net amount of tax on SWAGX (according to GPT) aren't massive. Around $1400 per year, which is worth avoiding -- but not the end of the world for me.

Does anyone have an argument for keeping SWAGX? Or anything else I'm overlooking? Before I re-allocate the $100k to SWCAX I'd love any words of advice.

Thank you!

Ape86

[Radagast]

There are four tax treatments to consider.
Corporate: fully taxed at all levels
Federal: federal but no state taxes:
Municipal: state but no federal taxes
CA municipal: no taxes at all

You should multiply the yield of each by 1 minus your tax rate and compare against credit rating and duration to get the correct answer. I recall that municipal bonds are usually priced for tax parity at the very highest income bracket or the one below it, so it may make sense to stick with federal bonds only if that is what you find. I don’t think I’d want the corporate portion of SWAGX in a taxable account. Federal at minimum and perhaps municipal if that’s what you find is most efficient.

Also why even keep bonds in taxable? Best to avoid that without good reason.

[Ape86]

Thanks for the input! I do have a Roth 401K as well, which I max out -- but for the next few years it's being managed by an advisor. Until I change that situation (avoiding the hassle for now, will most likely take control of it when I FIRE), I'm still doing a lot more with my brokerage account. And I'm trying to generally do the Bogel bonds / stock split in it for some alleged stability. Still heavily favoring stocks (75%).

It sounds like your advice lined up with the GPT answer, too.