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bond class selection for taxable account

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  • Avatar dsog 
    Participant
    Status: Physician
    Posts: 14
    Joined: 12/28/2017

    I’m in the process of starting a Vanguard taxable account and I’m trying to determine the optimal bond class to include in my portfolio. I’m debating between the tax exempt municipal bond index fund VTEAX (PROS: no federal taxes, CONS: slightly lower possible returns, higher ER, small purchase fee) vs the total bond index fund VBTLX (PROS and CONS inverse of the other fund). I’m not making a huge initial total portfolio investment (probably ~$20K) but plan on continuing to contribute on a monthly basis to grow the portfolio over time.

    Any tips or insights or aspects I have not considered about this decision?

    #206293 Reply
    Avatar ZZZ 
    Participant
    Status: Spouse
    Posts: 420
    Joined: 06/18/2018

    ” I’m trying to determine the optimal bond class to include in my portfolio.”

    None.

    #206295 Reply
    Avatar Peds 
    Participant
    Status: Physician
    Posts: 3594
    Joined: 01/08/2016
    Any tips or insights or aspects I have not considered about this decision?

    Click to expand…

    yes. first what is your AA?

    second, why cant all the FI portion fit inside your 401/403 etc?

    third, therefore, you dont need any bonds in taxable right now.

    fourth for the future, what is your marginal bracket? that is what decides if you choose munis vs taxable bonds.

     

    #206298 Reply
    Avatar Peds 
    Participant
    Status: Physician
    Posts: 3594
    Joined: 01/08/2016
    Splash Refinancing Bonus

    None.

    Click to expand…

    shhh.

    #206299 Reply
    Liked by Lordosis, Tim
    Avatar Atlas Axis 
    Participant
    Status: Physician
    Posts: 17
    Joined: 02/16/2016

    Per the WCI’s recommendation, I save 20% of my gross income for retirement.

    I max out my 401k, 457b, and made personal and spousal backdoor Roth contributions.  I still need to save more than those accounts to achieve 20% for retirement so I invest in a taxable account. I chose to put some bonds in taxable according to my investor policy statement asset allocation.

    I did VWITX (0.17), which requires a $3,000 minimum investment.

    I will change this to VWIUX (ER 0.09) when I have more bonds in taxable ($50,000 minimum investment).

     

    As an aside, I also make contributions to my kids 529’s, but I consider this giving/spending, not wealth building. Any my current plan for extra money used for wealth/net worth building (pay off debt vs invest) will go to extra mortgage payments. Extra mortgage payments may not be mathematically correct, but it is a luxury I choose to afford.

    #206300 Reply
    Lordosis Lordosis 
    Participant
    Status: Physician
    Posts: 779
    Joined: 02/11/2019

    Yeah we need more information. Like what bond choices you have in your 401/403/457. Marginal rate. AA.
    Answer these questions and you will get more useful responses.

    “Never let your sense of morals prevent you from doing what is right.”

    #206303 Reply
    Avatar dsog 
    Participant
    Status: Physician
    Posts: 14
    Joined: 12/28/2017
    Disability Insurance

    AA?

    #206306 Reply
    Avatar Peds 
    Participant
    Status: Physician
    Posts: 3594
    Joined: 01/08/2016
    #206308 Reply
    Avatar dsog 
    Participant
    Status: Physician
    Posts: 14
    Joined: 12/28/2017

    AA is 75% stocks/25% bonds.

    My initial thought was to maintain that AA ratio across all different accounts individually (i.e. taxable, 403b, IRA, etc), but perhaps that is not the most tax efficient approach?

    #206309 Reply
    Avatar MaxPower 
    Participant
    Status: Physician
    Posts: 275
    Joined: 02/22/2016

    No, that is not the most efficient way to manage your asset allocation. Consider them all one big portfolio and then make your selections based on what funds are best to hold in Roth, tax deferred, or taxable, as well as lowest ER (expense ratio) funds to match your desired asset allocation. Do a search on the Boglehead wiki for tax efficient placement of funds to give you a baseline understanding. Posting your options of funds here would give people better info to give you appropriate recommendations.

    #206311 Reply
    Avatar Peds 
    Participant
    Status: Physician
    Posts: 3594
    Joined: 01/08/2016
    but perhaps that is not the most tax efficient approach?

    Click to expand…

    not the best nor tax efficient approach.

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

    #206313 Reply
    Avatar bonebrokemefix 
    Participant
    Status: Physician
    Posts: 48
    Joined: 04/10/2017

    I thought I was in the same boat, needing to even out my AA with bonds this year in a new taxable acct, until Peds pointed out recently that I’m probably looking at things incorrectly. I have room to make future contributions into tax-deferred, but this year I have to rebalance enough that the employee 401K chunk won’t cover the “bond deficit”. There is a profit-sharing employer chunk coming that I could use though. I also need to shift my international stock bucket into taxable, so that would free up some 401k space.

    I think my challenge is that I don’t know if the bond options I have in my employer plan are any good. I have a soloK that I could use, but I basically have no 1099 income so would be out of balance in short order.

    I’m hovering around 38% marginal rate, and likely to increase. No state income tax. Current AA is 99:1, desired is more like 90:10. Figure I’ve got ~15 yrs of putting up with medicine left in me.

     

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    #206368 Reply
    Avatar Peds 
    Participant
    Status: Physician
    Posts: 3594
    Joined: 01/08/2016

    99:1 seems inconsequential. Just own being 100% or at least hit 5%.

    #206386 Reply
    Avatar bonebrokemefix 
    Participant
    Status: Physician
    Posts: 48
    Joined: 04/10/2017

    Not intentional necessarily, just a collection of relics in a lifecycle fund from fellowship 403b. And probably truly inconsequential, since I rounded up. But, that’s why I’m looking to trickle in some bonds as well.

    #206477 Reply

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