Looking for suggestions on bond fund for IRA - Traditional and Roth

[Swamp Chomp]

For a Roth and Traditional IRA, what would suggestions be for a good bond fund to use?  These accounts have 90% VTSAX and looking to have 10% in bonds but not sure what the most widely used Mustachian bond fund is.  Many thanks!

[dandarc]

VBTLX is to bonds as VTSAX is to stocks.

[Swamp Chomp]

Nuf said.  Thank.  I'll check it out.

[Swamp Chomp]

It has a $3K buy in... is there one equal that doesn't have that high a buy in?  I'm just not there yet.

'BND' seems to have the same expense ratio and total fund net assets to VBTLX...?

[EvenSteven]

Yes, BND is the ETF version of VBTLX.

[Swamp Chomp]

Okay.  So BND and VBTLX will behave exactly the same, correct?  Sorry, not exactly sure how the ETF is different from a strict bond fund...

[Swamp Chomp]

And the follow up to that is, how is BND, which is an ETF different from VTBLX, other than with VTBLX you need $3k to buy in?

[EvenSteven]

Bogle heads has a wiki comparing ETFs to mutual funds.

https://www.bogleheads.org/wiki/ETFs_vs_mutual_funds

For me personally, I don't care much either way about any of the differences so I treat them as functionally equivalent.

[Swamp Chomp]

This may be a numb question but if I want to keep a 90%|10% ratio balance, I set that up for each retirement vehicle (IRA, Taxable stock account, etc...), correct?

[seattlecyclone]

This may be a numb question but if I want to keep a 90%|10% ratio balance, I set that up for each retirement vehicle (IRA, Taxable stock account, etc...), correct?

That's one option. Another option is to just make sure 10% of your overall portfolio is in bonds, even if that means you have no bonds in one account and more than 10% in another account.

There's something to be said for putting your investments that you expect to grow the least over time (i.e. your bonds) in the account that will be taxed the most upon withdrawal (i.e. your traditional IRA), while having the account that will be taxed the least (your Roth IRA) heavier in the assets you expect to grow more (i.e. stocks).

[Swamp Chomp]

This may be a numb question but if I want to keep a 90%|10% ratio balance, I set that up for each retirement vehicle (IRA, Taxable stock account, etc...), correct?

That's one option. Another option is to just make sure 10% of your overall portfolio is in bonds, even if that means you have no bonds in one account and more than 10% in another account.

There's something to be said for putting your investments that you expect to grow the least over time (i.e. your bonds) in the account that will be taxed the most upon withdrawal (i.e. your traditional IRA), while having the account that will be taxed the least (your Roth IRA) heavier in the assets you expect to grow more (i.e. stocks).

VERY HELPFUL - Great point!

I might have some correcting to do... I have bonds in my taxable brokerage account and my Roth.  What happens if I move the bonds in the Roth into the Traditional?  Will that just translate into a tax deduction?  But then things will be better situated for the long-term?

[seattlecyclone]

This may be a numb question but if I want to keep a 90%|10% ratio balance, I set that up for each retirement vehicle (IRA, Taxable stock account, etc...), correct?

That's one option. Another option is to just make sure 10% of your overall portfolio is in bonds, even if that means you have no bonds in one account and more than 10% in another account.

There's something to be said for putting your investments that you expect to grow the least over time (i.e. your bonds) in the account that will be taxed the most upon withdrawal (i.e. your traditional IRA), while having the account that will be taxed the least (your Roth IRA) heavier in the assets you expect to grow more (i.e. stocks).

VERY HELPFUL - Great point!

I might have some correcting to do... I have bonds in my taxable brokerage account and my Roth.  What happens if I move the bonds in the Roth into the Traditional?  Will that just translate into a tax deduction?  But then things will be better situated for the long-term?

You generally can't move assets from Roth to traditional. What you can do is trade bonds for stocks in your Roth and do the opposite trade in your traditional. No tax consequences for doing this.

[MustacheAndaHalf]

Mutual funds are taxed differently than bonds.  When a bond generates income, you pay ordinary income tax.  When a stock, mutual fund or ETF generates dividends, those get taxed at a lower "dividend income" tax rate.  For the median taxpayer, it means paying 22% of the bond income but only 15% of the ETF / mutual fund dividends.

Another difference is long-term capital gains.  Most of the benefit from a bond is the income.  For a stock/ETF/mutual fund, it's mostly the growth - the rise in value.  That rise in value is "capital gains", and you pay less tax on that (just like you pay less tax on dividends).

When you have stocks in taxable, you'll pay a lower rate on the dividends, and a lower rate for selling that growth.  While you also pay a lower rate when you sell a bond fund, that's usually far less than the bond income.  So actually stocks tend to be better in taxable.

Because bonds throw off more income, and it's taxed at a higher rate, putting bonds in a Traditional IRA makes more sense from a tax perspective.

[Swamp Chomp]

Mutual funds are taxed differently than bonds.  When a bond generates income, you pay ordinary income tax.  When a stock, mutual fund or ETF generates dividends, those get taxed at a lower "dividend income" tax rate.  For the median taxpayer, it means paying 22% of the bond income but only 15% of the ETF / mutual fund dividends.

Another difference is long-term capital gains.  Most of the benefit from a bond is the income.  For a stock/ETF/mutual fund, it's mostly the growth - the rise in value.  That rise in value is "capital gains", and you pay less tax on that (just like you pay less tax on dividends).

When you have stocks in taxable, you'll pay a lower rate on the dividends, and a lower rate for selling that growth.  While you also pay a lower rate when you sell a bond fund, that's usually far less than the bond income.  So actually stocks tend to be better in taxable.

Because bonds throw off more income, and it's taxed at a higher rate, putting bonds in a Traditional IRA makes more sense from a tax perspective.

Thanks a bunch.  I better understand why you guys were saying to put bonds in the tIRA.  I'll adjust things in 2020 using the method @ seattlecyclone suggested.

Thank you.

[Swamp Chomp]

This may be a numb question but if I want to keep a 90%|10% ratio balance, I set that up for each retirement vehicle (IRA, Taxable stock account, etc...), correct?

That's one option. Another option is to just make sure 10% of your overall portfolio is in bonds, even if that means you have no bonds in one account and more than 10% in another account.

There's something to be said for putting your investments that you expect to grow the least over time (i.e. your bonds) in the account that will be taxed the most upon withdrawal (i.e. your traditional IRA), while having the account that will be taxed the least (your Roth IRA) heavier in the assets you expect to grow more (i.e. stocks).

@seattlecyclone - I've been using VTBLX for bonds thus far.  I had planned to follow your advise, putting bonds in tIRA, but when i do that, my Vanguard tIRA doesn't have VTBLX as an option... so I'm not sure what one to use...  What other low-cost bond index funds do people recommend?

[seattlecyclone]

This may be a numb question but if I want to keep a 90%|10% ratio balance, I set that up for each retirement vehicle (IRA, Taxable stock account, etc...), correct?

That's one option. Another option is to just make sure 10% of your overall portfolio is in bonds, even if that means you have no bonds in one account and more than 10% in another account.

There's something to be said for putting your investments that you expect to grow the least over time (i.e. your bonds) in the account that will be taxed the most upon withdrawal (i.e. your traditional IRA), while having the account that will be taxed the least (your Roth IRA) heavier in the assets you expect to grow more (i.e. stocks).

@seattlecyclone - I've been using VTBLX for bonds thus far.  I had planned to follow your advise, putting bonds in tIRA, but when i do that, my Vanguard tIRA doesn't have VTBLX as an option... so I'm not sure what one to use...  What other low-cost bond index funds do people recommend?

You transposed two letters. Vanguard's total bond fund is VBTLX, not VTBLX. Try the correct spelling, and if that doesn't work there's always BND, the ETF version of the same fund.

[Swamp Chomp]

Spelling... extra important with stock tickers... Thanks that was the issue :)

Hit one more hurdle - I've contributed 4K of the 6K limit to my IRA already for 2020 and to get VBTLX there is a 3K minimum... what would you recommend?

[terran]

Spelling... extra important with stock tickers... Thanks that was the issue :)

Hit one more hurdle - I've contributed 4K of the 6K limit to my IRA already for 2020 and to get VBTLX there is a 3K minimum... what would you recommend?

When you can't hit the minimums in a Vanguard fund the ETF version of the fund is a good option as that has a minimum equal to the price of one share of the ETF. As @seattlecyclone said in the post about yours, BND is the ETF equivalent of VBTLX.

Especially in a tax advantaged account where buying/selling won't have a tax implication I would just suggest using a target date fund until you have enough money to create your desired asset allocation. The Vanguard TDFs have a $1000 minimum, the whole fund takes care of your asset allocation so you don't need to hit multiple minimums and the higher expense ratio just won't make that big a difference at a low balance.

[Swamp Chomp]

Much appreciated to all who have helped!