Bond Fund recommendations in taxable account

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softengash
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Bond Fund recommendations in taxable account

Post by softengash »

Hello,

I am new to investing and looking for recommendations for bonds in taxable account.

In my fidelity 401k I have 50% bonds (FXNAX) and 50% stocks (FXAIX,FSMAX). I have same size savings (after emergency fund) which I want to invest in taxable account (I don't qualify for Roth IRA and I want some freedom with money before retirement (Current Age: 37) ).
I will be contributing to it every month and my goal for this account is to be diverse (least risk), tax efficient and have some passive income.

My federal marginal income tax rate is 32% and for California state it is 9.3% .

Vanguard CA state muni (VCADX) sounds preferable because it will save me state tax as well as federal tax but its prospectus says it is not completely tax exempt and some part of it is taxable but it doesn't say how much is that taxable part.

Similar is the case with Vanguard tax exempt Muni Int term - VWITX that some part of it is federal taxable (state fully taxable anyways)  

Then there are other options like iShares National MUNI ETF - MUB, Vanguard Tax-exempt Bond ETF - VTEB, Vanguard High-Yield Tax-Exempt Fund - VWALX

Please advice what bond fund(s) mix should I prefer

Qtn: In terms of selling when in need, what is difference between bond fund and bond fund ETF?
Last edited by softengash on Fri Jan 17, 2020 12:13 am, edited 1 time in total.
Jablean
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Re: Bond Fund recommendations in taxable account

Post by Jablean »

Why do you want bonds in taxable? Have you filled up all your 401k/IRA with bonds yet? Best answers will come if you provide overall portfolio and not just a portion.
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softengash
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Re: Bond Fund recommendations in taxable account

Post by softengash »

Yes, I have fidelity 401 k with 50% bonds (FXNAX) and 50% stocks (FXAIX,FSMAX). I still want bonds in taxable for safety.
BionicBillWalsh
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Re: Bond Fund recommendations in taxable account

Post by BionicBillWalsh »

What about Vanguard's Tax-managed balanced fund (VTMFX)? Its about 50/50 in Stock/Bond ratio. Sounds like that's your preferred asset allocation.
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hudson
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Re: Bond Fund recommendations in taxable account

Post by hudson »

softengash,
I like muni funds with the highest AAA/AA/A holdings and the lowest ERs.
I compare SEC yields and distribution yields. The fund needs to be Vanguard Risk Potential 1 or 2...or the equivalent.
I want intermediate term.
My choices in priority order are VCADX, VWITX, MUB, VTEB...I don't buy high yield stuff...too risky.
I know nothing about the other funds listed.
Last edited by hudson on Fri Jan 17, 2020 5:55 pm, edited 1 time in total.
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retiredjg
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Re: Bond Fund recommendations in taxable account

Post by retiredjg »

Stole this idea from grabiner.

Since you live in CA, put half the bonds (in the taxable account) in the CA long term muni fund and half in a national short term fund. This gives you something like an intermediate term risk and positions more of the income to be free of the high state taxes.
lexor
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Re: Bond Fund recommendations in taxable account

Post by lexor »

softengash wrote: Thu Jan 16, 2020 6:04 pm Hello,

I am new to investing and looking for recommendations for bonds in taxable account.

In my fidelity 401k I have 50% bonds (FXNAX) and 50% stocks (FXAIX,FSMAX). I have same size savings (after emergency fund) which I want to invest in taxable account (I don't qualify for Roth IRA and I want some freedom with money before retirement (Current Age: 37) ).
I will be contributing to it every month and my goal for this account is to be diverse (least risk), tax efficient and have some passive income.

My federal marginal income tax rate is 32% and for California state it is 9.3% .

Vanguard CA state muni (VCADX) sounds preferable because it will save me state tax as well as federal tax but its prospectus says it is not completely tax exempt and some part of it is taxable but it doesn't say how much is that taxable part.

Similar is the case with Vanguard tax exempt Muni Int term - VWITX that some part of it is federal taxable (state fully taxable anyways)  

Then there are other options like iShares National MUNI ETF - MUB, Vanguard Tax-exempt Bond ETF - VTEB, Vanguard High-Yield Tax-Exempt Fund - VWALX

Please advice what bond fund(s) mix should I prefer

Qtn: In terms of selling when in need, what is difference between bond fund and bond fund ETF?
Probably the California fund or Fidelity Municipal Bond Index Fund or a split between them to diversify. At your tax bracket Fidelity Municipal Bond Index Fund should beat your current bond fund albeit only slightly.

I don't agree with using short term bonds personally due to such low returns.
“The miracle of compounding returns is overwhelmed by the tyranny of compounding costs.” -Mr. John C. Bogle
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Re: Bond Fund recommendations in taxable account

Post by Cyclesafe »

At your tax brackets you are easily better off with some combination of muni's. I've never had VCADX or VWIUX throw any non-federal tax exempt interest. The usual heuristic is to have no more than 50% of your total fixed in muni's and no more than 50% of your muni's from one state. I don't know what the rationale for this is, however.
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softengash
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Re: Bond Fund recommendations in taxable account

Post by softengash »

Thank you everyone for the valuable input. Appreciate it!
joeschmo
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Re: Bond Fund recommendations in taxable account

Post by joeschmo »

Cyclesafe wrote: Sat Jan 18, 2020 7:01 am At your tax brackets you are easily better off with some combination of muni's. I've never had VCADX or VWIUX throw any non-federal tax exempt interest. The usual heuristic is to have no more than 50% of your total fixed in muni's and no more than 50% of your muni's from one state. I don't know what the rationale for this is, however.
I've heard this kind of thing too. How then do high-tax-bracket investors fill the remaining 50% of the bond allocation?

Also if a California resident owns California bonds but through something like VTEB or VWIUX, are they subject to CA tax?
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Cyclesafe
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Re: Bond Fund recommendations in taxable account

Post by Cyclesafe »

joeschmo wrote: Sat Jan 18, 2020 5:12 pm
Cyclesafe wrote: Sat Jan 18, 2020 7:01 am At your tax brackets you are easily better off with some combination of muni's. I've never had VCADX or VWIUX throw any non-federal tax exempt interest. The usual heuristic is to have no more than 50% of your total fixed in muni's and no more than 50% of your muni's from one state. I don't know what the rationale for this is, however.
I've heard this kind of thing too. How then do high-tax-bracket investors fill the remaining 50% of the bond allocation? In tax deferred or, if no room in taxable (perhaps US obligations that are exempt from state tax.)

Also if a California resident owns California bonds but through something like VTEB or VWIUX, are they subject to CA tax? Yes. Cali taxes funds that contain less than 50% federal obligations or less than 50% Cali obligations. At the present time, Vanguard CA municipal bond funds make sense versus their corresponding national municipal bond funds only at the 10.3 and above tax brackets.
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Re: Bond Fund recommendations in taxable account

Post by ofckrupke »

joeschmo wrote: Sat Jan 18, 2020 5:12 pm Also if a California resident owns California bonds but through something like VTEB or VWIUX, are they subject to CA tax?
Yes, unless at least half of the fund's interest-bearing assets are individually CA-exempt (CA munis or US Govt obligations, chiefly).
[This test needs to be passed four times annually for the associated dividend income to be exempt for that year.]
As a practical matter this means no CA exemption whatever for almost any muni fund that doesn't bill itself as a CA muni fund.
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Re: Bond Fund recommendations in taxable account

Post by joeschmo »

I've heard this kind of thing too. How then do high-tax-bracket investors fill the remaining 50% of the bond allocation? In tax deferred or, if no room in taxable (perhaps US obligations that are exempt from state tax.)
Yeah, unfortunately tax deferred is already full. I have been searching the web to no avail; what are specific examples of US obligations that are exempt from state tax?
Also if a California resident owns California bonds but through something like VTEB or VWIUX, are they subject to CA tax? Yes. Cali taxes funds that contain less than 50% federal obligations or less than 50% Cali obligations. At the present time, Vanguard CA municipal bond funds make sense versus their corresponding national municipal bond funds only at the 10.3 and above tax brackets.
Sigh...sounds like I'll be perhaps 75% VTEB or 30/40/30 short/interm/long and 25% California...and then adjust that to fit in some US obligations exempt from state tax...and then feel worried that there is not much diversification and want to throw in some corporates but for the taxation issue...the bond dilemmas continue and simplicity seems far away!
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Re: Bond Fund recommendations in taxable account

Post by grabiner »

Jablean wrote: Thu Jan 16, 2020 9:07 pm Why do you want bonds in taxable? Have you filled up all your 401k/IRA with bonds yet? Best answers will come if you provide overall portfolio and not just a portion.
In the 32% federal and 9.3% CA tax bracket, I would prefer at least CA munis in taxable rather than bonds in a 401(k). The reason is that the tax rate on qualified dividends is 28.1%, rather than the 15% usually used for comparison, while the tax rate on CA munis is the same rate that everyone else pays. (If you pay state tax but can't use an in-state fund, the comparison is still based on 15%. For example, I pay 8.2% MD tax, so my tax rate on qualified dividends is 23.2%, but my tax rate on munis is 8.2% because there is no low-cost MD muni fund. Therefore, I prefer bonds in my employer plan, but that would change if Vanguard opened a MD muni fund.)
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Re: Bond Fund recommendations in taxable account

Post by grabiner »

joeschmo wrote: Sat Jan 18, 2020 5:12 pm
Cyclesafe wrote: Sat Jan 18, 2020 7:01 am At your tax brackets you are easily better off with some combination of muni's. I've never had VCADX or VWIUX throw any non-federal tax exempt interest. The usual heuristic is to have no more than 50% of your total fixed in muni's and no more than 50% of your muni's from one state. I don't know what the rationale for this is, however.
I've heard this kind of thing too. How then do high-tax-bracket investors fill the remaining 50% of the bond allocation?
My usual recommendation is 50% Vanguard Limited-Term Tax-Exempt, and 50% Vanguard CA Long-Term Tax-Exempt. This gives you an intermediate-term overall duration, with half your bonds in CA, but more than half your bond interest exempt from CA tax.
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Re: Bond Fund recommendations in taxable account

Post by joeschmo »

Thanks @grabiner! How does this change for someone who is young and in California for a year or two but doesn't know beyond then? I'm assuming the CA concentration would be a regret if I moved states?
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Re: Bond Fund recommendations in taxable account

Post by retiredjg »

joeschmo wrote: Sat Jan 18, 2020 11:29 pm Thanks @grabiner! How does this change for someone who is young and in California for a year or two but doesn't know beyond then? I'm assuming the CA concentration would be a regret if I moved states?
In you move from CA, you can sell the bonds. Since bonds generally have small capital gains or even capital losses, this should not present much of a problem.
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Re: Bond Fund recommendations in taxable account

Post by aristotelian »

joeschmo wrote: Sat Jan 18, 2020 6:16 pm Yeah, unfortunately tax deferred is already full. I have been searching the web to no avail; what are specific examples of US obligations that are exempt from state tax?
I am confused. The original post says the 401k has 50% stocks. Easiest solution would be to sell stocks in the 401k and buy stocks in taxable. At the end of the day you will have smaller 401k taxed as income and bigger taxable account taxed as LTCG.
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Re: Bond Fund recommendations in taxable account

Post by Nowizard »

It appears these suggestions are taking into account the California location which makes sense. How would they differ if in a similar situation but not living in California, or would they even change?

Tim
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Re: Bond Fund recommendations in taxable account

Post by lexor »

Nowizard wrote: Sun Jan 19, 2020 9:47 am It appears these suggestions are taking into account the California location which makes sense. How would they differ if in a similar situation but not living in California, or would they even change?

Tim
Generally compare FMBIX yield multiplied by 1+your federal tax rate and compare to FXNAX yield. Also look if your state has a state tax exempt fund and if it does compare that to FMBIX and FXNAX including state tax savings this time.
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Re: Bond Fund recommendations in taxable account

Post by retiredjg »

Nowizard wrote: Sun Jan 19, 2020 9:47 am It appears these suggestions are taking into account the California location which makes sense. How would they differ if in a similar situation but not living in California, or would they even change?

Tim
For me, it would change. I have a preference for bonds in the tax-deferred accounts so I would suggest aristotelian's approach of simply selling stocks in the 401k and buying bonds there in order to reach target. This would push stocks into taxable.

Of, if there is a preference to hold bonds in taxable, as with this poster, I'd suggest using an intermediate term national tax-exempt fund if a state fund is not available.

But I see grabiner's point that people in higher brackets can pay pretty high taxes on qualified dividends from stocks held in a taxable account.

First is the 15% LTCG tax + 9.3% state tax + 3.8% NITT (because of the high income)...that adds to 28.1% tax on qualified dividends. That may be higher than some people might want to pay if they could, instead, hold a tax-exempt bond for their state in taxable.

I still prefer the older Bogleheads suggestion of mostly stocks in taxable and most or all of your bonds in tax-deferral for several reasons (tax loss harvesting, not growing the 401k too large, etc.). But I see the logic of putting bonds in taxable in a high tax state that has a muni bond fund.
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Re: Bond Fund recommendations in taxable account

Post by lexor »

retiredjg wrote: Sun Jan 19, 2020 10:07 am
Nowizard wrote: Sun Jan 19, 2020 9:47 am It appears these suggestions are taking into account the California location which makes sense. How would they differ if in a similar situation but not living in California, or would they even change?

Tim
For me, it would change. I have a preference for bonds in the tax-deferred accounts so I would suggest aristotelian's approach of simply selling stocks in the 401k and buying bonds there in order to reach target. This would push stocks into taxable.

Of, if there is a preference to hold bonds in taxable, as with this poster, I'd suggest using an intermediate term national tax-exempt fund if a state fund is not available.

But I see grabiner's point that people in higher brackets can pay pretty high taxes on qualified dividends from stocks held in a taxable account.

First is the 15% LTCG tax + 9.3% state tax + 3.8% NITT (because of the high income)...that adds to 28.1% tax on qualified dividends. That may be higher than some people might want to pay if they could, instead, hold a tax-exempt bond for their state in taxable.

I still prefer the older Bogleheads suggestion of mostly stocks in taxable and most or all of your bonds in tax-deferral for several reasons (tax loss harvesting, not growing the 401k too large, etc.). But I see the logic of putting bonds in taxable in a high tax state that has a muni bond fund.
I generally agree with this. I was answering specifically if you wanted to hold bonds in taxable for some reason.
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Re: Bond Fund recommendations in taxable account

Post by softengash »

Thanks for the insights. Much appreciated!!
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Re: Bond Fund recommendations in taxable account

Post by adzio »

Total newbie here, and eager to learn. I’m also looking for a Bond Fund recommendation for CA in a taxable account.

To reiterate the recommendation above: 50% Vanguard Limited-Term Tax-Exempt (VMULX 0.09% ER Admiral or VMLTX 0.17% ER Investor) and 50% Vanguard CA Long-Term Tax-Exempt (VCLAX 0.09% ER Admiral or VCITX 0.17% ER Investor) for a total of 100% bond allocation in a diversified portfolio.

Unfortunately for me, VMLUX and VCLAX are “Institutional Customers Only” (= options for 401(k)/IRA) and thus unavailable in my taxable (Schwab). The Investor class funds, albeit available, have almost double the expense ratio.

Short of being forced to create an account at Vanguard specifically for this purpose and directing some of the money there to hold the bond allocation, I’d like to know:

1. Are VMLUX and VCLAX “Institutional Customers Only” at Vanguard as well? I’m assuming no.

2. Would 50% VTEAX (0.09% ER Admiral) and 50% VCITX 0.17% ER Investor) be an ok substitute for the time being with the same goal of minimizing taxes, at least until I have an opportunity to move some of the money to tax-advantaged? How much more fed/state tax inefficient would this be compared to 50% VMULX + 50% VCLAX? How much more fed/state tax inefficient is 100% VTEAX?

I'm consistently in the 20+% tax brackets, maybe except for tax year 2021.
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Re: Bond Fund recommendations in taxable account

Post by hudson »

adzio wrote: Fri Sep 24, 2021 3:51 am Total newbie here, and eager to learn. I’m also looking for a Bond Fund recommendation for CA in a taxable account.

To reiterate the recommendation above: 50% Vanguard Limited-Term Tax-Exempt (VMULX 0.09% ER Admiral or VMLTX 0.17% ER Investor) and 50% Vanguard CA Long-Term Tax-Exempt (VCLAX 0.09% ER Admiral or VCITX 0.17% ER Investor) for a total of 100% bond allocation in a diversified portfolio.

Unfortunately for me, VMLUX and VCLAX are “Institutional Customers Only” (= options for 401(k)/IRA) and thus unavailable in my taxable (Schwab). The Investor class funds, albeit available, have almost double the expense ratio.

Short of being forced to create an account at Vanguard specifically for this purpose and directing some of the money there to hold the bond allocation, I’d like to know:

1. Are VMLUX and VCLAX “Institutional Customers Only” at Vanguard as well? I’m assuming no.

2. Would 50% VTEAX (0.09% ER Admiral) and 50% VCITX 0.17% ER Investor) be an ok substitute for the time being with the same goal of minimizing taxes, at least until I have an opportunity to move some of the money to tax-advantaged? How much more fed/state tax inefficient would this be compared to 50% VMULX + 50% VCLAX? How much more fed/state tax inefficient is 100% VTEAX?

I'm consistently in the 20+% tax brackets, maybe except for tax year 2021.
VCLAX and VMULX are not restricted at Vanguard....both are great funds.
VTEAX and it's twin VTEB are great funds. You'll pay state taxes on both. VCITX is a great choice.
I like VWIUX but I'm not in California; if so I would jump all over the CA long muni. (Vanguard lists the average duration of the fund as 5.3 years; can that be correct; the average stated maturity is 17.4 years.)
22% tax brackets...might work; consider doing the math
24% tax bracket...probably would work...also do the math
As you know, it's not a big deal to create an account at Vanguard. I don't hesitate to open an account at a new place to get a good deal.
Grabiner posted above; I'd strongly consider his recommendations.
W. Bernstein on munis: viewtopic.php?p=5160087#p5160087
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Re: Bond Fund recommendations in taxable account

Post by adzio »

Thanks hudson for the reply.

Just to clarify for my own understanding, will I get a comparable tax advantage with 50% VTEAX and 50% VCITX to what was suggested earlier? Or it's apples and oranges.

I did see VWIUX earlier, unfortunately again for me it's also “Institutional Customers Only” at Schwab. I have a separate Fidelity account, I'll check and see if those bond funds are available for purchase there.

Just some background on the brokerage choice here. My former tech employer had my 401(k) with Vanguard that was moved out about 5 years ago to another administrator. When I wanted to create brand new accounts (IRA/brokerage) with Vanguard a few weeks back, I was told I needed to go the paperwork-in-mail route for both because of a glitch at Vanguard that wouldn't let me open an account online as the old account info "was in the way". That arcane issue plus some of the recent reviews made me think and steer towards Schwab instead. Got a good deal with them too, they matched a competitor's bonus offer. However I agree with you, if I can't get the tax benefits elsewhere the pain of setting up the account by mail may be a good trade off.
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Re: Bond Fund recommendations in taxable account

Post by retiredjg »

adzio, in general, Vanguard mutual funds should be bought at Vanguard where there are no transaction costs. Vanguard ETFs (if one exists for the funds you are interested in) are widely available without transaction costs. I don't know if those funds have ETFs or not.

There is a custodian - I think it may be Schwab - that will let you specify a certain fund family that you can buy at Schwab without transaction costs. You should look into this.

I do not know about California tax-exempt bonds in other fund families, but people seem to like VTEB as a national tax-exempt bond ETF.

Schwab is reported to have very good customer service. Call them and tell them what you want and let them advise you (but maybe ask here before buying...)
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Re: Bond Fund recommendations in taxable account

Post by adzio »

Thank you retiredjg. Yes, based on the great info on this forum (and in the Schwab FAQ viewtopic.php?f=10&t=355173&p=6222778#p6222778) I had requested a Vanguard class fee waiver from Schwab and received it. Yeah! So I'm good in terms of transaction fees on the Schwab side. Now it's a matter of finding an equivalent of VMLUX & VCLAX that I can use. Fidelity just confirmed that they do not offer those (not surprisingly).

If 50% VTEAX and 50% VCITX works ok for CA tax purposes then I could go ahead and purchase those, otherwise I could go the paper-in-mail sign-up route with Vanguard.
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Re: Bond Fund recommendations in taxable account

Post by patrick »

US savings bonds avoid state tax, defer federal tax, and have higher yields than marketable bonds.
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Re: Bond Fund recommendations in taxable account

Post by adzio »

Thanks to all who have contributed tips and suggestions here.

I filled out a paper application form for a new account and mailed it to Vanguard today. During a call with a Vanguard representative I learned that they continue to have a technical issue with their site related to electronic signatures which affects all of the new account creations. I hope the continued glitches are not signs of future issues.

After successfully buying VTSAX at Schwab yesterday I now need to wait to get unblocked so that I can buy the bonds portion of my AA. Until then I'm pretty much riding with no handlebars. :D With the aggressively allocated target-date funds in my tax-deferred I currently have about 3% bond exposure overall. Will reverse an EFT to Fidelity and pump the money into VMLUX & VCLAX Admiral shares when the Vanguard account is set up and funded. Because of the higher initial investment for both I anticipate ending up with AA around 69:31 across all taxable accounts and will continue to pump money into the stocks portion as they become available.

Honestly this "financial yoga" has been largely fun so far. It never occurred to me before to hold stocks under one administrator and bonds under another but if that's what it takes to minimize taxes then so be it. However, I'm not brave enough to mess with my tax-deferred accounts just yet.

Keeping my fingers crossed that there are no glitches and I'm not making some rookie mistake along the way.

I appreciate all of the help so far!
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Re: Bond Fund recommendations in taxable account

Post by hudson »

adzio wrote: Fri Sep 24, 2021 11:38 am Thanks hudson for the reply.

Just to clarify for my own understanding, will I get a comparable tax advantage with 50% VTEAX and 50% VCITX to what was suggested earlier? Or it's apples and oranges.

I did see VWIUX earlier, unfortunately again for me it's also “Institutional Customers Only” at Schwab. I have a separate Fidelity account, I'll check and see if those bond funds are available for purchase there.

Just some background on the brokerage choice here. My former tech employer had my 401(k) with Vanguard that was moved out about 5 years ago to another administrator. When I wanted to create brand new accounts (IRA/brokerage) with Vanguard a few weeks back, I was told I needed to go the paperwork-in-mail route for both because of a glitch at Vanguard that wouldn't let me open an account online as the old account info "was in the way". That arcane issue plus some of the recent reviews made me think and steer towards Schwab instead. Got a good deal with them too, they matched a competitor's bonus offer. However I agree with you, if I can't get the tax benefits elsewhere the pain of setting up the account by mail may be a good trade off.
VTEAX and VCITX are both quality muni funds. I hold VWIUX, a Vanguard intermediate muni. I'm not from California so I don't really understand the tax consequences. If there was a VCITX like fund for my state, I would own it. I've owned VTEAX's twin VTEB in the past; it's a great fund. VWIUX works better for tax loss harvesting because it does "daily accrual." I don't know that "daily accrual" is that big of a deal.
Have you read grabiner's solution for CA muni holders? (Edit: I see that he has posted several times above.)
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Re: Bond Fund recommendations in taxable account

Post by adzio »

grabiner wrote: Sat Jan 18, 2020 11:09 pm
joeschmo wrote: Sat Jan 18, 2020 5:12 pm
Cyclesafe wrote: Sat Jan 18, 2020 7:01 am At your tax brackets you are easily better off with some combination of muni's. I've never had VCADX or VWIUX throw any non-federal tax exempt interest. The usual heuristic is to have no more than 50% of your total fixed in muni's and no more than 50% of your muni's from one state. I don't know what the rationale for this is, however.
I've heard this kind of thing too. How then do high-tax-bracket investors fill the remaining 50% of the bond allocation?
My usual recommendation is 50% Vanguard Limited-Term Tax-Exempt, and 50% Vanguard CA Long-Term Tax-Exempt. This gives you an intermediate-term overall duration, with half your bonds in CA, but more than half your bond interest exempt from CA tax.
Thank you grabiner for the recommendation. I have the Vanguard taxable account opened and ready.

Would 50% Vanguard Limited-Term Tax-Exempt + 50% Vanguard CA Long-Term Tax-Exempt apply to pretty much all of the tax brackets 20% and above? I saw a variation on this in viewtopic.php?f=1&t=358891&p=6245454#p6245454 for 22% and 24%. I'm wondering if it would be beneficial to capture your recommendations for CA using a list of tax brackets and their corresponding bond fund recommendations?

Also, for the folks who have "mini retirements" or "unpaid sabbaticals" between employment years and their tax brackets fluctuate from year to year, do you anticipate any additional considerations or mitigation strategies needed to minimize tax with this blend configuration?

I appreciate all of the advice here!
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Re: Bond Fund recommendations in taxable account

Post by grabiner »

adzio wrote: Thu Sep 30, 2021 4:08 am
grabiner wrote: Sat Jan 18, 2020 11:09 pm My usual recommendation is 50% Vanguard Limited-Term Tax-Exempt, and 50% Vanguard CA Long-Term Tax-Exempt. This gives you an intermediate-term overall duration, with half your bonds in CA, but more than half your bond interest exempt from CA tax.
Thank you grabiner for the recommendation. I have the Vanguard taxable account opened and ready.

Would 50% Vanguard Limited-Term Tax-Exempt + 50% Vanguard CA Long-Term Tax-Exempt apply to pretty much all of the tax brackets 20% and above? I saw a variation on this in viewtopic.php?f=1&t=358891&p=6245454#p6245454 for 22% and 24%. I'm wondering if it would be beneficial to capture your recommendations for CA using a list of tax brackets and their corresponding bond fund recommendations?
In a 22% federal bracket, or a 24% bracket if you are not subject to the Net Investment Income Tax, I would prefer taxable bonds over national munis, and thus I wouldn't recommend Limited-Term Tax-Exempt. In a high-tax state like CA, you might use Treasury bonds for the non-CA half, as they are exempt from state tax as well. (With I-Bonds currently yielding more than TIPS, it's worth maxing out I-Bonds before buying any retail Treasury bonds.)
Also, for the folks who have "mini retirements" or "unpaid sabbaticals" between employment years and their tax brackets fluctuate from year to year, do you anticipate any additional considerations or mitigation strategies needed to minimize tax with this blend configuration?
You can switch between taxable and muni bonds from year to year with little tax cost. I probably wouldn't bother switching in a 24% bracket, or a 22% bracket for just one year.
Wiki David Grabiner
adzio
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Joined: Fri Aug 20, 2021 1:28 am

Re: Bond Fund recommendations in taxable account

Post by adzio »

Thanks!
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