Author Topic: Need more bonds, which vehicle to choose  (Read 3727 times)

FrugalZony

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Need more bonds, which vehicle to choose
« on: August 21, 2013, 12:12:51 PM »
So I have done a cleanup of my investments over the last few weeks and now that the dust settles, I realise I may need to up the percentage of bonds

I have three accounts
IRA at TD Ameritrade fully funded for this year, 0% bonds
401 K with fidelity through employer 30% bonds (held in VBTIX and VIPIX, some in an interest income fund)
Private Investment account at TD Ameritrade currently 19% bonds (mostly in BND)

I have read that it is better to keep bonds in taxable accounts and stocks in tax deferred acounts if you have a choice, if you believe you will be using your taxable accounts for ER
and if you believe you will be in a lower tax bracket once you start dipping into tax deferred acounts.

So in view of that I am wondering what makes most sense for me, I have 10 Years left to FIRE, if we manage to keep on track.

Options:
- Up my percentage of bond in the private account by using all/most future contributions for bonds (right now my monthly contributions there go into VTI) and keep rebalancing from there once a certain overall percentage has been achieved
- Change my 401 allocations to rebalance over time
- Dedicate next contribution (2014) in ROTH IRA fully to bonds

From what I understand, using my regular TD account makes most sense, but I might toally be missing a point, so I would appreciate any recommendations.

Also, about 80% of my money right now is in the 401k, so I would have to pretty much divert every contribution to the regular account over the next few months into Bonds to rebalance, which means I would be loosing out on cost averging VTI.

Any pointers for further reading, insight or suggestions are highly welcome!!
Thank you!!


beltim

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Re: Need more bonds, which vehicle to choose
« Reply #1 on: August 21, 2013, 01:44:20 PM »
I think you missed the easiest option, which is selling some stocks and buying some bonds.  This is the normal way to rebalance, and is probably the best assuming you don't do it too often.  And this can be done in any account, though it would be tax-deferred in the IRA and 401(k).
« Last Edit: August 21, 2013, 01:50:22 PM by beltim »

dragoncar

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Re: Need more bonds, which vehicle to choose
« Reply #2 on: August 21, 2013, 01:48:07 PM »
I think you've got it backwards-- bonds in tax deferred and stocks in taxable.  Interest is taxed as income but qualified dividends are at a lower rate.  Analysis depends on current and future tax brackets of course.

bUU

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Re: Need more bonds, which vehicle to choose
« Reply #3 on: August 21, 2013, 02:10:12 PM »
I agree with dragoncar: Everything I've seen says, at the most basic simplistic level, bonds in tax-deferred. Generally, stocks that pay great dividends should probably go in tax-deferred as well, with other stocks and all international equities in taxable.

dragoncar

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Re: Need more bonds, which vehicle to choose
« Reply #4 on: August 21, 2013, 02:14:22 PM »
I agree with dragoncar: Everything I've seen says, at the most basic simplistic level, bonds in tax-deferred. Generally, stocks that pay great dividends should probably go in tax-deferred as well, with other stocks and all international equities in taxable.

Right, sorry I meant its a preference for tax-deferred in this order:

Bonds, dividend paying stocks, non-dividend stocks/commodities

Cash is traditionally also in tax deferred, but its paying so little no I'm not sure it matters

livetogive

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Re: Need more bonds, which vehicle to choose
« Reply #5 on: August 21, 2013, 05:59:24 PM »
I think you've got it backwards-- bonds in tax deferred and stocks in taxable.  Interest is taxed as income but qualified dividends are at a lower rate.  Analysis depends on current and future tax brackets of course.

Yes.  Also do most of your buying/selling in the tax deffered accounts if possible as stated above.

FrugalZony

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Re: Need more bonds, which vehicle to choose
« Reply #6 on: August 22, 2013, 06:31:15 PM »
Thank you all for taking the time to respond!!!

*sigh* I am truly a hopeless case. I cannot believe that after all the reading I have done, I am still getting it backwards.
I am glad I posted this before plunking in more money into BND in the TD account. I was getting ready to do just that and
figured I'd rather ask the specialists ;) Glad I did!!

Now, should I get rid of the BND in the TD account altogether? I have not held it for a long time, so it may not be a lot of gain and might get more complicated
if I do it later?

If I'll do the Bond investing in the 401 K then, this will be a great option.
I have a few funds I stopped paying into now that I have cleaned up the allocations,but have to wait a little longer to trade for something else to avoid penalties (I already traded everything that was older than 90 days, now I can move the rest soon)
so these will be exchanged for Bonds and I'll change my allocation too, so I can catch up a bit. Then I review at the end of the year.
Achieving a higher percentage is much easier in my 401 K anyways, as that's where 80% of my savings are.

Thanks again! Very much appreciated!

dragoncar

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Re: Need more bonds, which vehicle to choose
« Reply #7 on: August 22, 2013, 07:09:01 PM »
Thank you all for taking the time to respond!!!

*sigh* I am truly a hopeless case. I cannot believe that after all the reading I have done, I am still getting it backwards.
I am glad I posted this before plunking in more money into BND in the TD account. I was getting ready to do just that and
figured I'd rather ask the specialists ;) Glad I did!!

Now, should I get rid of the BND in the TD account altogether? I have not held it for a long time, so it may not be a lot of gain and might get more complicated
if I do it later?

If I'll do the Bond investing in the 401 K then, this will be a great option.
I have a few funds I stopped paying into now that I have cleaned up the allocations,but have to wait a little longer to trade for something else to avoid penalties (I already traded everything that was older than 90 days, now I can move the rest soon)
so these will be exchanged for Bonds and I'll change my allocation too, so I can catch up a bit. Then I review at the end of the year.
Achieving a higher percentage is much easier in my 401 K anyways, as that's where 80% of my savings are.

Thanks again! Very much appreciated!

It might even be a loss, in which case you can "harvest" the loss if you are purchasing a non substantially similar bond fund in non taxable or waiting a month.  Might not be worth the hassle -- google wash sale rule.

FrugalZony

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Re: Need more bonds, which vehicle to choose
« Reply #8 on: August 22, 2013, 11:29:10 PM »
Thank you very much, I just looked up wash sale.
Truthfully the difference is so small, it won't have a big impact, but it's probably better to clean it up now.
Thank you!!