Author Topic: Bonds in Taxable Account  (Read 592 times)

nihilism122

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Bonds in Taxable Account
« on: November 12, 2018, 12:50:43 PM »
Does anybody do this and do you recommend it?  I have very few bonds in the portfolio, but over the next few years I will need to increase my bond allocation.  The only realistic way I can do that is by either:  1)  selling stock in my tax sheltered accounts and replacing it with bonds;  or 2)  putting a large portion of my bond allocation in a taxable account.  I do not have nearly enough room in my tax sheltered accounts to simply add bonds with new money, which is why I am in this situation.  Any ideas?

terran

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Re: Bonds in Taxable Account
« Reply #1 on: November 12, 2018, 01:35:32 PM »
You might find this helpful: https://www.bogleheads.org/wiki/Tax-efficient_fund_placement

In short: the reason people usually put bonds in tax advantaged and stocks in taxable is that bond interest is taxed at ordinary income tax rates while long term capital gains and qualified dividends are taxed at long term capital gains rates which are lower and at least for capital gains can be deferred (unlike interest or dividends) as long as you don't realize the gain.

There's no tax hit for selling stocks and buying bonds in tax advantaged, so I don't think exchanging funds should be a barrier to doing what is otherwise most tax efficient.

Exflyboy

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Re: Bonds in Taxable Account
« Reply #2 on: November 12, 2018, 02:19:49 PM »
Yes I got tripped by this.. Then it was pointed out to me that in order to sell bonds in retirement (prior to 59.5) one simply sells stocks (say VTSAX) in the taxable account, then immediately rebalance your 401k such that you transfer the same amount that you sold in your taxable account from stocks into bonds.

Net effect is you sold some bonds in your retirement account but kept the tax advantage of having all bonds in retirement accounts.

Radagast

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Re: Bonds in Taxable Account
« Reply #3 on: November 12, 2018, 09:56:09 PM »
You can also allocate 40% Series I Saving Bonds (perhaps the safest financial instruments in existence, yielding 2.83% right now), 40% Vanguard High Yield Tax Exempt (a good proxy for Vanguard's corporate bond index, except issued by municipalities), 20% long term treasury bond fund (VGLT/TLT/VLGSX). This will give you about the same yield, duration, and credit risk as a total bond index fund, with some extra possible diversification benefits. Importantly, it will also put 80% of your bonds in taxable accounts with low/no/delayed taxes, leaving the 20% which is most useful for rebalancing in tax advantaged space (assuming you have an option where you can fit 20% in). A useful way to both save and eat your cake.

But then, putting it all in total bond funds in tax shelters is about the same as above but simpler.

Edit: got wrong long term treasury fund tickers.
« Last Edit: November 12, 2018, 10:11:49 PM by Radagast »

MustacheAndaHalf

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Re: Bonds in Taxable Account
« Reply #4 on: November 13, 2018, 07:50:09 AM »
Yes, but tax-exempt bonds.

Comparing two funds with similar duration:
BND, Vanguard Total Market Bond ETF, duration 6.2 years, +3.43% SEC yield
VTEB, Vanguard Tax-Exempt Bond ETF, duration 5.8 years, +2.95% SEC yield

So when 3.43% drops 14%, it becomes 2.95%.  That means anyone in a 12% bracket makes more money off BND.  But anyone above a 14% tax bracket makes more from VTEB.  Hope that helps you get an idea of how to calculate the tradeoff between tax-exempt and taxable bonds.

Those living in a state with high taxes (CA, NY) may also want to look at Vanguard tax-exempt funds specific to those states.

Aggie1999

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Re: Bonds in Taxable Account
« Reply #5 on: November 13, 2018, 08:24:15 AM »
Yes I got tripped by this.. Then it was pointed out to me that in order to sell bonds in retirement (prior to 59.5) one simply sells stocks (say VTSAX) in the taxable account, then immediately rebalance your 401k such that you transfer the same amount that you sold in your taxable account from stocks into bonds.

Net effect is you sold some bonds in your retirement account but kept the tax advantage of having all bonds in retirement accounts.

I think your wording is a bit off. Seems like what you are saying in the first paragraph is to rebalance from stocks into bonds in the tax advantaged, equal to what you sold stock wise in the taxable. I think what you mean is you want to rebalance in the tax advantaged in such a way that you convert the bonds into stocks at whatever amount keeps your overall portfolio of bonds to stocks ratio the same (say 30/70). Am I reading something wrong?

HeadedWest2029

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Re: Bonds in Taxable Account
« Reply #6 on: November 13, 2018, 01:18:27 PM »
Yeah, I think that's what he meant too Aggie.  And hot damn, why didn't I think of that before? SMH
One drawback to that strategy would be if your taxable accounts get cut in half by a bear market and you don't have enough to last until the ROTH IRA conversion ladder kicks in to save the day.  So I can still see logic in keeping some bonds in the taxable accounts during the ER, pre 59.5 y/o withdrawal period, but during accumulation this makes darn good sense
« Last Edit: November 13, 2018, 01:40:09 PM by HeadedWest2029 »

COEE

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Re: Bonds in Taxable Account
« Reply #7 on: November 14, 2018, 08:42:52 PM »
There's also an argument to be made that if you primarily use a Roth and a taxable account then it's better to hold bonds in taxable so that your stock can grow in roth and be withdrawn 100% tax-free.

https://www.whitecoatinvestor.com/asset-location-bonds-go-in-taxable/

Personally, I also like I-bonds.  I LOVE that they are anywhere between a short-term (1 year) and long-term (30 year) bond.  They are also held in a tax deferred account.
« Last Edit: November 14, 2018, 08:46:43 PM by COEE »