Should I add vbtlx and vtiax to my taxable brokerage?

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Topic Author
Lilybluerose
Posts: 23
Joined: Tue Sep 21, 2021 1:30 pm

Should I add vbtlx and vtiax to my taxable brokerage?

Post by Lilybluerose »

Emergency funds: Three to six months of expenses (I have $20k in an emergency fund in my online savings account)

Debt: Around $113k left on my mortgage. 4.2% interest

Tax Filing Status: (Married filing jointly with 2 child dependents) Husband is unemployed

Tax Rate: xx% Federal, xx% State- I am not sure. I used a calculator online and it says- 22%

State of Residence: PA

Age:34

Desired Asset allocation: xx% stocks / xx% bonds
Desired International allocation: xx% of stocks I am sorry, but I am not sure. I am pretty new to this.

Please provide an approximate size of your total portfolio - I started very late and am trying really hard to catch up.

Show us your current portfolio including all investment and retirement accounts I use vanguard. I am self employed.
Taxable Brokerage= $15k
Roth IRA= 40k
solo 401k= 45.5k

Taxable
VTSAX Expense ratio= 0.04%

Roth IRA= VFIFX Vanguard target retirement 2050 Expense ratio= 0.15%

Solo 401k= VFIFX Vanguard target retirement 2050 Expense ratio= 0.15%



Contributions- I maxed out the roth and 401k, and now have money that I would like to invest, outside of my emergency fund, and around 130k I am leaving in a savings account to save up to buy a new house.


Questions:

My allocation for everything on my vanguard is

Stocks 91.4% - domestic 66 percent international 33%

Bonds 8.6%

I chose vtsax for my brokerage after reading the simple path to wealth. I'm reading more on the Bogle site about the 3 fund with vtsax /vbtlx/vtiax.

I was wondering if it's a bad idea to add the vbtlx and vtiax to a taxable brokerage account?

Should I add these to my 401k and Ira next year instead?

Thanks for reading. This stuff can go over my head pretty easily. I need simple, which is why I chose target dates for my 401 and Ira.

I'll have about 50k to put into this brokerage but I'm not sure which funds to put it into. Ty so much for any advice.
Last edited by Lilybluerose on Wed Sep 22, 2021 12:07 pm, edited 4 times in total.
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dratkinson
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Location: Centennial CO

Re: Should I add vbtlx and vtiax to my taxable brokerage?

Post by dratkinson »

First-tier emergency funds.

You want to keep 3-6mos of living expense in checking, savings, CDs as your 1st-tier EFs, as a buffer between financial emergencies and your formal retirement accounts. Don't want to be stealing eggs from the golden goose sitting on your TA (tax-advantaged) retirement accounts (IRA, 401k,...). Plus, uncle sugar may impose an early withdrawal penalty (before age 59.5, "double plus ungood").

But having 6-12mos in 1st-tier EFs would be much better.

Think about using your $50K now, and more later to:
--Pay off high-interest consumer debt (exception for tax-deductible home mortgage interest).
--Max TA contributions.
--Build 1st-tier EF containing 6mos of living expenses---small buffer before tax-reporting consequences of tapping extended-tier EF.
--Build extended-tier EF containing 1-5yrs---earns more than 1st-tier EFs, larger buffer before tax consequences of tapping TA.



Bonds.

It's a good idea to have some bonds in taxable. Why? They can serve multiple duties: earn more than your 1st-tier EFs, as an extended-tier of your 1st-tier EFs to handle larger emergencies, home projects, new car, dry powder, retirement bonds if not used otherwise.

After you have 6mos of living expenses in your 1st-tier EFs, then can think about adding bonds as an extended-tier EF. Right now, your extended-tier EF is VTSAX... and it's been great recently. But it's more volatile than bonds, so not good as an extended-tier EF.

During a crash:
--Stocks can lose 50-90%. (Lost 40% in 2008-2009. Not good if you lose a job and need the money.)
--Bonds can lose 5-15%. (Relatively easy to overfill to ~120% (=1/(1-.15)) of anticipated need, to ensure need is met during bond crash.)
--Stock/bond crashes are not typically coincidental.


IF! you're in the 12% fed tax bracket, can withstand more risk, and want to add bonds to taxable, then I'd use a LT (long-term) national muni fund (VWLTX). Be aware it comes with more reward/risk. The "more reward" is necessary to match TBM's (total bond market index fund) higher yield in a low tax bracket. But the "more risk" (NAV volatility) may worry some. (Me? I overfill my bonds and TLH (tax-loss harvest) the extra risk.)

IF! you're in the 25%+ fed tax bracket, and want to add bonds to taxable, then most recommend an IT (intermediate-term) national muni fund (VWITX) or ETF (MUB). It's safer and should match/exceed TBM's after-tax income in a higher tax bracket. (Me? I'd still prefer the LT national muni, for the extra dividends. But I do have 3yrs of living expenses in safer VWITX/VWIUX as an extended-tier EF.)



International.

Tax-advantaged accounts (IRA, 401k,...). Your TDR (target-date retirement) funds already contain US/international, stocks/bonds. So no need to add anything to your TA accounts.

Taxable account. The US is reported to be ~50% of the world market. The S&P500 (~80% of TSM) is reported to earn ~40% of its annual income from international sales. So TSM (VTSAX) already contains a ~30% (=~80%x~40%) exposure to international. So...
--Some say we need 0% additional exposure to international. (TSM is more tax-efficient than TISM: better for our tax return.)
--Others say a 50% additional exposure to international is okay.
--Believe Vanguard uses a ~30% additional exposure to international in its TDR funds.

Bottom line: your choice.

It's simpler to just own TSM/bonds in taxable. For now. You can decide upon TISM, later. (Me? I own some TISM in taxable. Why? Not because I know which will do better going forward, but because I wanted to buy something cheaper, when I needed to buy stocks and TSM was high.)


N.B. You should set all of the funds in your taxable account to use the "specific share identification" method for cost basis. Why? It'll let you chose which share lots to sell. Why? So you have more control over the CGs (capital gains) reported on any sale. You must make this election before you sell any shares... or the brokerage will choose something else (less beneficial) for you.



Forum review.

But to better answer your questions, we need more information from you.
--Download this sticky to your PC: viewtopic.php?f=1&t=6212
--Overwrite it with your information. (ALL of your information: omitted information = omitted ideas.)
--When done editing, paste it into bottom of your OP (original post, original poster) by clicking the edit icon (pencil) in your OP.
--And we'll resume from there.



Welcome.
d.r.a., not dr.a. | I'm a novice investor; you are forewarned.
Topic Author
Lilybluerose
Posts: 23
Joined: Tue Sep 21, 2021 1:30 pm

Re: Should I add vbtlx and vtiax to my taxable brokerage?

Post by Lilybluerose »

Ty so much! I'll look that over and add all info needed
tashnewbie
Posts: 4230
Joined: Thu Apr 23, 2020 12:44 pm

Re: Should I add vbtlx and vtiax to my taxable brokerage?

Post by tashnewbie »

As user above said, it would be helpful if you provided more information per the suggested portfolio review format (link provided above).

In general, it's probably preferable to hold fixed income/bonds (VBTLX, for example) in tax-deferred accounts like traditional 401k/IRA.

Users will be able to provide more focused advice after you update your original post with more information.
Topic Author
Lilybluerose
Posts: 23
Joined: Tue Sep 21, 2021 1:30 pm

Re: Should I add vbtlx and vtiax to my taxable brokerage?

Post by Lilybluerose »

Thank you! I have updated, and hope it is done correctly. If not, any guidance is appreciated. I am trying to learn as much as I can.
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climber2020
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Re: Should I add vbtlx and vtiax to my taxable brokerage?

Post by climber2020 »

Consider keeping it simple and putting all your bonds in your 401k.

When it comes time to rebalance (either stocks to bonds or bonds to stocks), moving money around in a 401k has no tax consequences. In a taxable account, you may incur capital gains when you sell shares.

There's also no need to wait until next year; you can convert stocks to bonds within your 401k right now if you wish to get your target allocation.
cabfranc
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Joined: Tue Jun 25, 2019 12:46 pm

Re: Should I add vbtlx and vtiax to my taxable brokerage?

Post by cabfranc »

I see no reason to put bonds in your taxable given the size of your portfolio. Just keep the 15k in TSM.
tashnewbie
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Joined: Thu Apr 23, 2020 12:44 pm

Re: Should I add vbtlx and vtiax to my taxable brokerage?

Post by tashnewbie »

Your mortgage rate is very high compared to 15-year and 30-year rates that are available now. You didn't mention how long you plan to stay in the current house, but if you can get a no-cost refinance, it would be worth refinancing (even a low-cost refi might be worth it, depending on how long you plan to stay). You may not be able to get the best refi rates because your mortgage balance is relatively low, but I think it would be worth looking into a refi.

Check out the Mega Refinance Thread in the other forum for recent rates people have gotten.

I would use just VTSAX (or something like VFIAX) in the Roth IRA. A lot of people say it's better to keep the highest expected return asset (stocks) in a Roth IRA because qualified withdrawals are penalty- and tax-free. Having a Target Date Fund (TDF) isn't wrong in the Roth IRA, and the 2050 TDF probably only has about 10% bonds right now, but it will become increasingly conservative over time.

I wouldn't add another fund to the taxable brokerage account right now.

You could keep using a TDF in the solo 401k (might need to change the date, depending on your desired bond allocation), or you could split the asset classes into something like VTSAX, VTIAX, and VBTLX.

I would keep all desired bonds in the solo 401k for now.

Your total portfolio, excluding the $130k you're saving for a new house, is about $100k right now. If you want 20% bond allocation (this would be an appropriate amount for many people your age, but you have to determine what your personal risk tolerance is and what you want your asset allocation to be), then that means you want $20k in bonds.

In the solo 401k, you could put $20k in VBTLX, and then you could put the remaining $25.5k in VTIAX and VTSAX. You'll need to figure out how much international stock exposure you want, if any. The TDF's stock allocation is 40% international. There's no consensus among forum members about whether and how much international stock to hold. Recommendations range from 0% to 50% (the latter is approximate market weight). I've settled on 20% which seems like a nice goldilocks position.
Topic Author
Lilybluerose
Posts: 23
Joined: Tue Sep 21, 2021 1:30 pm

Re: Should I add vbtlx and vtiax to my taxable brokerage?

Post by Lilybluerose »

tashnewbie wrote: Wed Sep 22, 2021 1:25 pm Your mortgage rate is very high compared to 15-year and 30-year rates that are available now. You didn't mention how long you plan to stay in the current house, but if you can get a no-cost refinance, it would be worth refinancing (even a low-cost refi might be worth it, depending on how long you plan to stay). You may not be able to get the best refi rates because your mortgage balance is relatively low, but I think it would be worth looking into a refi.

Check out the Mega Refinance Thread in the other forum for recent rates people have gotten.

I would use just VTSAX (or something like VFIAX) in the Roth IRA. A lot of people say it's better to keep the highest expected return asset (stocks) in a Roth IRA because qualified withdrawals are penalty- and tax-free. Having a Target Date Fund (TDF) isn't wrong in the Roth IRA, and the 2050 TDF probably only has about 10% bonds right now, but it will become increasingly conservative over time.

I wouldn't add another fund to the taxable brokerage account right now.

You could keep using a TDF in the solo 401k (might need to change the date, depending on your desired bond allocation), or you could split the asset classes into something like VTSAX, VTIAX, and VBTLX.

I would keep all desired bonds in the solo 401k for now.

Your total portfolio, excluding the $130k you're saving for a new house, is about $100k right now. If you want 20% bond allocation (this would be an appropriate amount for many people your age, but you have to determine what your personal risk tolerance is and what you want your asset allocation to be), then that means you want $20k in bonds.

In the solo 401k, you could put $20k in VBTLX, and then you could put the remaining $25.5k in VTIAX and VTSAX. You'll need to figure out how much international stock exposure you want, if any. The TDF's stock allocation is 40% international. There's no consensus among forum members about whether and how much international stock to hold. Recommendations range from 0% to 50% (the latter is approximate market weight). I've settled on 20% which seems like a nice goldilocks position.
Thank you! So if I wanted to change my ira to vtsax instead of target date, I could do that easily without penalty right?

So you are suggesting roth=vtsax, 401k=target date or the three split ( Ill probably keep it tdf) as well as some of it in bonds if I wanted, and then for the brokerage leave it vtsax yes? and then I could possibly add more international if I want to down the line?
Topic Author
Lilybluerose
Posts: 23
Joined: Tue Sep 21, 2021 1:30 pm

Re: Should I add vbtlx and vtiax to my taxable brokerage?

Post by Lilybluerose »

climber2020 wrote: Wed Sep 22, 2021 12:18 pm Consider keeping it simple and putting all your bonds in your 401k.

When it comes time to rebalance (either stocks to bonds or bonds to stocks), moving money around in a 401k has no tax consequences. In a taxable account, you may incur capital gains when you sell shares.

There's also no need to wait until next year; you can convert stocks to bonds within your 401k right now if you wish to get your target allocation.
Thank you that is great information that I did not know
tashnewbie
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Joined: Thu Apr 23, 2020 12:44 pm

Re: Should I add vbtlx and vtiax to my taxable brokerage?

Post by tashnewbie »

Lilybluerose wrote: Wed Sep 22, 2021 1:50 pm Thank you! So if I wanted to change my ira to vtsax instead of target date, I could do that easily without penalty right?

So you are suggesting roth=vtsax, 401k=target date or the three split ( Ill probably keep it tdf) as well as some of it in bonds if I wanted, and then for the brokerage leave it vtsax yes? and then I could possibly add more international if I want to down the line?
No tax consequences to buy/sell in the 401k and Roth IRAs.

I would keep the taxable account as is (so VTSAX).

Roth IRA can stay VTSAX.

401k: I'd either use a TDF with a date that allowed me to be close to my desired bond allocation or I'd use a 3-fund portfolio of VTSAX, VTIAX, and VBTLX. I presume you selected a 2050 TDF because that's the year around which you'll be 65, which is generally thought to be standard retirement age. You don't have to select a 2050 TDF though. You could select a 2040 one or any other year, if that year's percentage of bonds will allow you to hold the percentage of bonds across your entire portfolio (401k, Roth IRA, and taxable) that you want.
Topic Author
Lilybluerose
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Joined: Tue Sep 21, 2021 1:30 pm

Re: Should I add vbtlx and vtiax to my taxable brokerage?

Post by Lilybluerose »

tashnewbie wrote: Wed Sep 22, 2021 2:02 pm
Lilybluerose wrote: Wed Sep 22, 2021 1:50 pm Thank you! So if I wanted to change my ira to vtsax instead of target date, I could do that easily without penalty right?

So you are suggesting roth=vtsax, 401k=target date or the three split ( Ill probably keep it tdf) as well as some of it in bonds if I wanted, and then for the brokerage leave it vtsax yes? and then I could possibly add more international if I want to down the line?
No tax consequences to buy/sell in the 401k and Roth IRAs.

I would keep the taxable account as is (so VTSAX).

Roth IRA can stay VTSAX.

401k: I'd either use a TDF with a date that allowed me to be close to my desired bond allocation or I'd use a 3-fund portfolio of VTSAX, VTIAX, and VBTLX. I presume you selected a 2050 TDF because that's the year around which you'll be 65, which is generally thought to be standard retirement age. You don't have to select a 2050 TDF though. You could select a 2040 one or any other year, if that year's percentage of bonds will allow you to hold the percentage of bonds across your entire portfolio (401k, Roth IRA, and taxable) that you want.
If I wsnt to change from TDF to vtsax in my roth ira do I do it as exchange VS sell?
tashnewbie
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Re: Should I add vbtlx and vtiax to my taxable brokerage?

Post by tashnewbie »

Lilybluerose wrote: Wed Sep 22, 2021 3:18 pm If I wsnt to change from TDF to vtsax in my roth ira do I do it as exchange VS sell?
It doesn't matter. They're functionally the same thing, to my knowledge. I don't know that I've ever done an exchange order. For an exchange, I assume you would identify the fund being sold (TDF) and the one being purchased (VTSAX). If you do a sell order for the TDF, you'd also have to enter a separate buy order for VTSAX (I think you could do both orders on the same day, one immediately after the other).
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dratkinson
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Re: Should I add vbtlx and vtiax to my taxable brokerage?

Post by dratkinson »

The SWAN test.

You will be provided with many investing options. All are valid and used by different ones among us. Some are safer (to match our personality), some are more risky (to match our personality). But the only correct options for you are the ones that best fit your personality---your true risk tolerance. Which options are those? The ones that let you pass the Sleep-Well-At-Night test.

Will you immediately know which options match your personality? You may, or may not.

Disclosure. Me? I'd lost lots of money investing before finding the BHs. So when they advised that I should take less risk (age 60) and use safe bonds, I did. It took me ~5yr to learn that too-safe bonds (treasuries) bored me to tears. So, after lots of reading, thinking, and testing after-tax income scenarios by produced sample tax returns, I switched to bonds that provide more reward/risk. I'm happier now and do pass the SWAN test.

Bottom line. You must decide which options are appropriate for you. Since it may take some time for you to understand which are best for you, it's okay to start safe/simple, and work your way into options that are more reward/risk/complex.



Account types.

Definition. Tax-advantaged accounts = tax-deferred accounts (traditional: IRA, 401k, solo 401k,...) + tax-free accounts (Roth: IRA, 401k,...)


Characteristics.

--Tax-deferred accounts. Contributions may be tax deductible. Growth is tax-deferred. Withdrawals taxed as ordinary income---lose tax benefits for QDI# (qualified dividend income), LTCG (long-term capital gains), FTC# (foreign tax credit). RMDs apply.

--Taxable accounts. Contributions are not tax deductible. Dividends/withdrawals receive tax benefits for QDI*/LTCG/FTC/TE/TLH. No RMDs. (* QDI: Income previously taxed at corporate level, and taxed same as LTCG at individual level. FTC: foreign tax credit. TE: tax-exempt dividends. TLH: tax-loss harvest.#)

--Tax-free accounts. Contributions are not tax deductible. Growth/withdrawals are tax-free---QDI/LTCG benefits are improved. Lose benefit for FTC. No RMDs. Tax-free withdrawal of principal (not dividends/growth) is allowed from Roth IRA, so can use it as another EF tier (if needed).


Hierarchy of goodness. The above understandings result in this hierarchy of goodness among the account types.

(less good) tax-deferred accounts -- taxable accounts -- tax-free accounts (more good)


Suggestions. Which results in these suggestions as to how we may optimally place our investments.

--Tax-deferred accounts. Since withdrawals are taxed as ordinary income and RMDs apply, it is suggested we skew these accounts toward bonds. Why? We need bonds. Bonds are expected to grow less than stocks, so should result in less growth/tax on Roth conversions, withdrawals, RMDs. Use discrete funds, or all-in-one fund? Your choice.

--Tax-free accounts. Since no RMDs, and withdrawals are tax-free, it is suggested we skew these accounts toward stocks. Why? We need stocks. Stocks are expected to grow more than bonds, so should result in more tax-free growth/withdrawals. Use discrete funds or all-in-one fund? Your choice.

Your use of a Roth IRA gives you the opportunity to consider its principal (not growth/dividends) as another tier of your EF. Your retired-self would not like it if you steal eggs from the golden goose sitting on your tax-free retirement nest egg, but you have the option.

--Taxable accounts. Since no RMDs, and only dividends/withdrawals are taxed, it is suggested we skew these accounts to tax-efficient discrete stocks/bond funds*. In this case TSM (>90% QDI), TISM (~70% QDI, ~10% FTC), and TBM in lowest tax bracket and munis (TE dividends) in higher tax brackets. (* All-in-one funds are too limiting---can't TLH just US/foreign stocks/bonds---and they use taxable bonds.)



Your accounts.

Solo 401k (tax-deferred, allowed annual contributions: >$50K#)
--A TDR fund, skewed toward bonds (choose an early date fund). Why? Simplicity.

Roth IRA (tax-free, allowed annual contributions: $6K)
--A TDR fund, skewed toward stocks (choose a later date fund). Why? Simplicity.
--Or LC index or S&P500 index fund*. Option. You'd chose this for 100% stocks in tax-free, and to avoid TLH problems with TSM in taxable. (* VLCAX, VFIAX)

Taxable. Tax brackets: 22% fed, 3% state. (I believe this is correct. Lather/rinse/repeat with better numbers if I'm wrong.)
--TSM. Why? Most tax-efficient stocks. Simplicity.
--Bonds? Optional. (Safer than stocks, more after-tax income than 1st-tier EFs, larger buffer before your TA accounts.)
----TBM, SEC yield = 1.29%
----VWITX (IT national muni), SEC yield = 0.63% = .63 / (1-.22) = 0.81% taxable-equivalent yield.
----VWLTX (LT national muni), SEC yield = 1.04% = 1.04 / (1-.22) =1.33% TEY
----VPAIX (PA LT muni), SEC yield = 1.06% = 1.06 / (1 -.22 -.3) = 1.41% TEY
--TISM? Optional.


Bond allocation. The advice is that we should have our age in bonds if we are conservative (more risk averse, ~34%* in your case). We can have age-10 in bonds (24%* your case) if we what to take more risk (with stocks). (* Close is good enough, it doesn't need to be exact, so 20-40% bonds. Your choice, based on your risk tolerance.)


Bond options. It's okay to put all of your bonds into your TA accounts and use only TSM in taxable. (Your tax-free account will benefit most from 100% stock growth from now until you retire, but 100% stocks makes your Roth IRA more volatile and less suitable as an ET tier.)

If you decide to put some bonds in taxable, then both the LT national and PA munis should provide slightly more after-tax income than TBM---without increasing your taxable income, which TBM would do. Munis have more risk than TBM (seen in their 52wk price spreads), but risk can be TLH'd. It is suggested that if we go the single-state muni route, we should pair it 50/50 with a national muni fund to reduce our single-state default risk. (Me? I can't see making any major investment in any bond fund that is expected to return *less* after-tax than TBM.)

The only good reason I can think of to put some bonds in your taxable account, is to build a safer (than TSM), larger buffer (than your 1st-tier EFs) between you and a financial emergency that might tempt you to raid your TA accounts. And if you have some bonds in taxable as an extended-tier EF, then it's okay to use 100% stocks in your Roth IRA and no longer consider it as part of your EFs. (Your retired self will thank you.)

So, (1) your asset allocation (AA), percent to bonds, (2) which bonds to use (all-in-one or/and discrete funds), and (2) where to put them (tax-deferred or/and taxable), depends upon what you want to do. Your choice. You are the one who must pass the SWAN test.



# Student reading.
--Qualified Dividend Income: https://www.bogleheads.org/wiki/Qualified_dividend
--Foreign Tax Credit: https://www.bogleheads.org/wiki/Foreign_tax_credit
--Roth IRA as EF: https://www.bogleheads.org/wiki/Roth_IR ... gency_fund
--Tax-loss harvesting: https://www.bogleheads.org/wiki/Tax_loss_harvesting
--Solo 401k contribution limits: https://www.kiplinger.com/article/retir ... -2020.html



Idea: ABP by CC technique. There is an idea that some of us use to increase the return on our ~0%-interest 1st-tier EFs. It helps us avoid complicating our lives by giving in to the urge to chase teaser rates and account opening bonuses. We use the "ABP by CC technique" to earn ~2%/yr tax-free on our 1st-tier EFs.

ABP by CC technique.
--Do this only with your trusted creditors. (Those who don't make billing mistakes.)
--Set up all bills to be paid by your creditors' Automatic Bill Payment (ABP) plans, and allow them to withdraw their payment directly from your account.
--Link the ABP plans to your cashback CC (Citi 2% cashback CC is popular) where you can, and to bank checking where you must.
--Link CC ABP to your checking.

Keep 2mos of living expenses in checking to cover lumpy spending.

ABP plans give ~2wks notice before a payment is withdrawn---enough time to cancel ABP, or fill checking for larger purchases.

Now your creditors do all of the work to get their money, and you get CC cashback which boosts the return on your money sitting fallow in bank/CU checking/savings.

You'll notice that some creditors withdraw their money 1-3 days later than the bill due date. Why? Their offices are closed on weekends/holidays, so the withdrawals are not processed until the next business day. But some creditors are changing their ABP policy and now withdraw their payment before a weekend/holiday. Boo hiss! :annoyed
d.r.a., not dr.a. | I'm a novice investor; you are forewarned.
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dratkinson
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Joined: Thu Jul 26, 2007 6:23 pm
Location: Centennial CO

Re: Should I add vbtlx and vtiax to my taxable brokerage?

Post by dratkinson »

Lilybluerose wrote: Wed Sep 22, 2021 3:18 pm If I wsnt to change from TDF to vtsax in my roth ira do I do it as exchange VS sell?
It's done as an exchange.

CYA. Write yourself a checklist of exactly what you want to do: account(s) involved, from fund, to fund, amount. Double check your transaction and check off each checklist step, before you hit the "Submit" button.

It's surprising how many folks mess this up. (Myself included, before I started making/using a checklist for *every* transaction.)


Minor CYA.

The short answer. Yes, you can use TSM today in your Roth IRA. And handle any problems that arise later.

The long answer. If you plan to use the option to TLH (only applies to taxable accounts), and you want to use TSM in your taxable account, then consider using LC (VLCAX, ~3000 companies, maybe less, I forget) or S&P500 (VFIAX, 500 companies) in your Roth IRA. Why? To avoid any chance of creating a TLH problem.

Worst case, if you mess up a TLH, where a Roth IRA is involved, you lose the TLH---you don't get a do-over.
--Do your TLH reading.
--See real-time TLH example posted by BH member, livesoft: viewtopic.php?t=179414

But if you don't plan to do TLHing, then you don't care. So, never mind.

Bottom line. You've got plenty of time to use TSM today in your Roth IRA, and head off any TLH problem later. Just remember to come back then and ask us for your options to skirt TLH problems... if you are planning to TLH.
d.r.a., not dr.a. | I'm a novice investor; you are forewarned.
Topic Author
Lilybluerose
Posts: 23
Joined: Tue Sep 21, 2021 1:30 pm

Re: Should I add vbtlx and vtiax to my taxable brokerage?

Post by Lilybluerose »

dratkinson wrote: Wed Sep 22, 2021 6:12 pm The SWAN test.

You will be provided with many investing options. All are valid and used by different ones among us. Some are safer (to match our personality), some are more risky (to match our personality). But the only correct options for you are the ones that best fit your personality---your true risk tolerance. Which options are those? The ones that let you pass the Sleep-Well-At-Night test.

Will you immediately know which options match your personality? You may, or may not.

Disclosure. Me? I'd lost lots of money investing before finding the BHs. So when they advised that I should take less risk (age 60) and use safe bonds, I did. It took me ~5yr to learn that too-safe bonds (treasuries) bored me to tears. So, after lots of reading, thinking, and testing after-tax income scenarios by produced sample tax returns, I switched to bonds that provide more reward/risk. I'm happier now and do pass the SWAN test.

Bottom line. You must decide which options are appropriate for you. Since it may take some time for you to understand which are best for you, it's okay to start safe/simple, and work your way into options that are more reward/risk/complex.



Account types.

Definition. Tax-advantaged accounts = tax-deferred accounts (traditional: IRA, 401k, solo 401k,...) + tax-free accounts (Roth: IRA, 401k,...)


Characteristics.

--Tax-deferred accounts. Contributions may be tax deductible. Growth is tax-deferred. Withdrawals taxed as ordinary income---lose tax benefits for QDI# (qualified dividend income), LTCG (long-term capital gains), FTC# (foreign tax credit). RMDs apply.

--Taxable accounts. Contributions are not tax deductible. Dividends/withdrawals receive tax benefits for QDI*/LTCG/FTC/TE/TLH. No RMDs. (* QDI: Income previously taxed at corporate level, and taxed same as LTCG at individual level. FTC: foreign tax credit. TE: tax-exempt dividends. TLH: tax-loss harvest.#)

--Tax-free accounts. Contributions are not tax deductible. Growth/withdrawals are tax-free---QDI/LTCG benefits are improved. Lose benefit for FTC. No RMDs. Tax-free withdrawal of principal (not dividends/growth) is allowed from Roth IRA, so can use it as another EF tier (if needed).


Hierarchy of goodness. The above understandings result in this hierarchy of goodness among the account types.

(less good) tax-deferred accounts -- taxable accounts -- tax-free accounts (more good)


Suggestions. Which results in these suggestions as to how we may optimally place our investments.

--Tax-deferred accounts. Since withdrawals are taxed as ordinary income and RMDs apply, it is suggested we skew these accounts toward bonds. Why? We need bonds. Bonds are expected to grow less than stocks, so should result in less growth/tax on Roth conversions, withdrawals, RMDs. Use discrete funds, or all-in-one fund? Your choice.

--Tax-free accounts. Since no RMDs, and withdrawals are tax-free, it is suggested we skew these accounts toward stocks. Why? We need stocks. Stocks are expected to grow more than bonds, so should result in more tax-free growth/withdrawals. Use discrete funds or all-in-one fund? Your choice.

Your use of a Roth IRA gives you the opportunity to consider its principal (not growth/dividends) as another tier of your EF. Your retired-self would not like it if you steal eggs from the golden goose sitting on your tax-free retirement nest egg, but you have the option.

--Taxable accounts. Since no RMDs, and only dividends/withdrawals are taxed, it is suggested we skew these accounts to tax-efficient discrete stocks/bond funds*. In this case TSM (>90% QDI), TISM (~70% QDI, ~10% FTC), and TBM in lowest tax bracket and munis (TE dividends) in higher tax brackets. (* All-in-one funds are too limiting---can't TLH just US/foreign stocks/bonds---and they use taxable bonds.)



Your accounts.

Solo 401k (tax-deferred, allowed annual contributions: >$50K#)
--A TDR fund, skewed toward bonds (choose an early date fund). Why? Simplicity.

Roth IRA (tax-free, allowed annual contributions: $6K)
--A TDR fund, skewed toward stocks (choose a later date fund). Why? Simplicity.
--Or LC index or S&P500 index fund*. Option. You'd chose this for 100% stocks in tax-free, and to avoid TLH problems with TSM in taxable. (* VLCAX, VFIAX)

Taxable. Tax brackets: 22% fed, 3% state. (I believe this is correct. Lather/rinse/repeat with better numbers if I'm wrong.)
--TSM. Why? Most tax-efficient stocks. Simplicity.
--Bonds? Optional. (Safer than stocks, more after-tax income than 1st-tier EFs, larger buffer before your TA accounts.)
----TBM, SEC yield = 1.29%
----VWITX (IT national muni), SEC yield = 0.63% = .63 / (1-.22) = 0.81% taxable-equivalent yield.
----VWLTX (LT national muni), SEC yield = 1.04% = 1.04 / (1-.22) =1.33% TEY
----VPAIX (PA LT muni), SEC yield = 1.06% = 1.06 / (1 -.22 -.3) = 1.41% TEY
--TISM? Optional.


Bond allocation. The advice is that we should have our age in bonds if we are conservative (more risk averse, ~34%* in your case). We can have age-10 in bonds (24%* your case) if we what to take more risk (with stocks). (* Close is good enough, it doesn't need to be exact, so 20-40% bonds. Your choice, based on your risk tolerance.)


Bond options. It's okay to put all of your bonds into your TA accounts and use only TSM in taxable. (Your tax-free account will benefit most from 100% stock growth from now until you retire, but 100% stocks makes your Roth IRA more volatile and less suitable as an ET tier.)

If you decide to put some bonds in taxable, then both the LT national and PA munis should provide slightly more after-tax income than TBM---without increasing your taxable income, which TBM would do. Munis have more risk than TBM (seen in their 52wk price spreads), but risk can be TLH'd. It is suggested that if we go the single-state muni route, we should pair it 50/50 with a national muni fund to reduce our single-state default risk. (Me? I can't see making any major investment in any bond fund that is expected to return *less* after-tax than TBM.)

The only good reason I can think of to put some bonds in your taxable account, is to build a safer (than TSM), larger buffer (than your 1st-tier EFs) between you and a financial emergency that might tempt you to raid your TA accounts. And if you have some bonds in taxable as an extended-tier EF, then it's okay to use 100% stocks in your Roth IRA and no longer consider it as part of your EFs. (Your retired self will thank you.)

So, (1) your asset allocation (AA), percent to bonds, (2) which bonds to use (all-in-one or/and discrete funds), and (2) where to put them (tax-deferred or/and taxable), depends upon what you want to do. Your choice. You are the one who must pass the SWAN test.



# Student reading.
--Qualified Dividend Income: https://www.bogleheads.org/wiki/Qualified_dividend
--Foreign Tax Credit: https://www.bogleheads.org/wiki/Foreign_tax_credit
--Roth IRA as EF: https://www.bogleheads.org/wiki/Roth_IR ... gency_fund
--Tax-loss harvesting: https://www.bogleheads.org/wiki/Tax_loss_harvesting
--Solo 401k contribution limits: https://www.kiplinger.com/article/retir ... -2020.html



Idea: ABP by CC technique. There is an idea that some of us use to increase the return on our ~0%-interest 1st-tier EFs. It helps us avoid complicating our lives by giving in to the urge to chase teaser rates and account opening bonuses. We use the "ABP by CC technique" to earn ~2%/yr tax-free on our 1st-tier EFs.

ABP by CC technique.
--Do this only with your trusted creditors. (Those who don't make billing mistakes.)
--Set up all bills to be paid by your creditors' Automatic Bill Payment (ABP) plans, and allow them to withdraw their payment directly from your account.
--Link the ABP plans to your cashback CC (Citi 2% cashback CC is popular) where you can, and to bank checking where you must.
--Link CC ABP to your checking.

Keep 2mos of living expenses in checking to cover lumpy spending.

ABP plans give ~2wks notice before a payment is withdrawn---enough time to cancel ABP, or fill checking for larger purchases.

Now your creditors do all of the work to get their money, and you get CC cashback which boosts the return on your money sitting fallow in bank/CU checking/savings.

You'll notice that some creditors withdraw their money 1-3 days later than the bill due date. Why? Their offices are closed on weekends/holidays, so the withdrawals are not processed until the next business day. But some creditors are changing their ABP policy and now withdraw their payment before a weekend/holiday. Boo hiss! :annoyed
Ty so much for your time and input I really appreciate it! I read through this several times trying to understand all of it. I will have to read it a few more times lol. But from what I gather from it, how does this sound? Does it sound like what you are suggesting? I definitely need simple and don't want super risky. I'm late to investing and saving retirement. I never learned about it until I started reading about it myself two or so years ago so I have alot of catching hp to do!

I am thinking of doing something like this. After researching and making sure I understand more.

Solo 401k. Choosing a TDF at an earlier date for more bonds. So possibly a 2040 VS my 2050.

Roth Ira. Choosing a TDF at a later date for more stocks. So maybe 2060 VS 2050.

Taxable brokerage = all vtsax.

And if I need to adjust to have more bonds I'm thinking I'd do that in the 401k yes? So maybe add in a bond fund or would I have to change the TDF?

Ty everyone so much. This is so appreciated
Topic Author
Lilybluerose
Posts: 23
Joined: Tue Sep 21, 2021 1:30 pm

Re: Should I add vbtlx and vtiax to my taxable brokerage?

Post by Lilybluerose »

dratkinson wrote: Wed Sep 22, 2021 6:45 pm
Lilybluerose wrote: Wed Sep 22, 2021 3:18 pm If I wsnt to change from TDF to vtsax in my roth ira do I do it as exchange VS sell?
It's done as an exchange.

CYA. Write yourself a checklist of exactly what you want to do: account(s) involved, from fund, to fund, amount. Double check your transaction and check off each checklist step, before you hit the "Submit" button.

It's surprising how many folks mess this up. (Myself included, before I started making/using a checklist for *every* transaction.)


Minor CYA.

The short answer. Yes, you can use TSM today in your Roth IRA. And handle any problems that arise later.

The long answer. If you plan to use the option to TLH (only applies to taxable accounts), and you want to use TSM in your taxable account, then consider using LC (VLCAX, ~3000 companies, maybe less, I forget) or S&P500 (VFIAX, 500 companies) in your Roth IRA. Why? To avoid any chance of creating a TLH problem.

Worst case, if you mess up a TLH, where a Roth IRA is involved, you lose the TLH---you don't get a do-over.
--Do your TLH reading.
--See real-time TLH example posted by BH member, livesoft: viewtopic.php?t=179414

But if you don't plan to do TLHing, then you don't care. So, never mind.

Bottom line. You've got plenty of time to use TSM today in your Roth IRA, and head off any TLH problem later. Just remember to come back then and ask us for your options to skirt TLH problems... if you are planning to TLH.
Ty! I have some reading to do! I have no idea what TLH is besides briefly hearing about it. I don't plan on doing anything. I wsnt to set and forget things and just throw as much money in as I can. So if I don't sell anything in the taxable I should be OK right? I belive the issue would be selling vtsax in taxable and then buying vtsax again right away? I have alot to learn lol! Ty
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dratkinson
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Location: Centennial CO

Re: Should I add vbtlx and vtiax to my taxable brokerage?

Post by dratkinson »

Lilybluerose wrote: Wed Sep 22, 2021 9:38 pm ... I have no idea what TLH is besides briefly hearing about it. I don't plan on doing anything. I wsnt to set and forget things and just throw as much money in as I can. So if I don't sell anything in the taxable I should be OK right? I belive the issue would be selling vtsax in taxable and then buying vtsax again right away? I have alot to learn lol! Ty
Not quite. You can't buy replacement shares of TSM within ±30 days of the TLH. This is where owning TSM in your rIRA could potentially cause a problem. How? If your rIRA TSM uses a distribution to automatically buy shares, and you TLH your taxable TSM within ±30 days for the rIRA reinvestment date, then your rIRA automatically bought replacement shares of TSM, which results in a *small* (not total) "wash sale", which causes a *small* (not total) portion of the TLH to be disallowed---a paperwork exercise is required to adjust the cost basis of the replacement shares.

Since it's easier to avoid paperwork problems, than to fix them, this is why TDR funds are popular in TA accounts; no chance to cause TLH problems with discrete funds in taxable. But don't worry; as long as all of your investments are with Vanguard, and Vanguard knows about your husband's accounts, then Vanguard will automatically adjust the cost basis of any replacement shares.

N.B. If the replacement shares are in your husband's taxable account and get a stepped up cost basis, then you get a second chance to TLH when he sells his TSM shares. But! if the replacement shares are in a rIRA (yours/his), then you'll never get a second chance to TLH those shares... because rIRA withdrawals are tax-free... so you can never have a tax loss on a rIRA withdrawal.


But you could do this: TLH TSM --> to LC/S&P500 index. Wait 31 days, then sell LC/S&P500 index --> to buy TSM. During the round trip, you might get another chance to TLH LC/S&P500 index, or you might have a gain. If you want to avoid the offsetting STCG, then you'd keep LC/S&P500 until another opportunity to TLH comes along.

Since you don't want to be out of the market for 31 days (if you TLH'd to a mmkt fund, and missed a market recovery), only TLH to a similar fund that you would be happy to own for the LT. This makes TSM/LC/S&P500 good TLH partners---all are good to own LT.


Concepts. ("IRS weasel wording".)
--"Family investing accounts". Any account controlled by you or your husband. The IRS assumes spouses have control over each others accounts. So you can't TLH TSM, and your husband buy TSM within ±30 days of your TLH. Even automatically reinvested distributions in his account, count as "replacement shares" for your TLH.
--"Replacement shares". Any shares purchased within ±30 days, in any family account, are considered to replace those TLHed.
--Similar, but not "substantially identical" funds. Similar is okay. "Substantially identical" is not okay.
----(1) S&P500 index and LC index funds are similar to TSM, but are not "substantially identical" funds, so can not buy "replacement shares" of TSM, so can not cause a "wash sale", so can not cause a TLH to be disallowed. (2) Vanguard TSM and Schwab SCHB (TSM) are not "substantially identical" because it's reported that they track different indexes (I haven't verified this); so it's possible to split the hairs very close. :happy
----Recall reading that Vanguard TSM and Fidelity TSM are "substantially identical", because they track the same index (I have not verified this). Vanguard VTSAX and VTI are "substantially identical" because VTI is the ETF share class of VTSAX.


A TLH is a way to turn a paper loss, into a tax deduction, while still owning basically the same investment. It's a tax-return paperwork exercise that puts money back into our pocket. (Some say it turns a lemon (a market paper loss) into lemonade (a tax deduction)).


TLHing opportunities don't come around that often, and then only when the market is down. During those times there are lots of posts asking how to handle individual situations, so you'll see them and can make your decision/ask your questions then.

Sometimes the market drop is small, and a small TLH may not be worth our paperwork effort. Sometimes the market drop is larger, so being able to write off a few thousand on our tax return is nice, so is worth our paperwork effort.

So to TLH, you need two things: (1) a market drop, and (2) a loss large enough to be worth our paperwork effort.

I use to say that I'd not TLH for less than $3K. Others TLH for a $500 loss. This means they pick up more losses than I, which can result in quite a nice tax deduction in some years.


The TLH deductions booked in one year offset capital gains (internal STCG or LTCG from TSM or from your sales of TSM; but not QDI nor TE dividends) dollar-for-dollar + any excess loss can offset up to $3K of ordinary income. Unused losses ("carryover loss") can be used to offset up to $3K of ordinary income/yr until used up. (N.B. In year earned, losses offset CGs dollar-or-dollar, the $3K limit does not apply.)

The goal of the TLHing game is to book enough total losses, that we can write off $3K of "carryover losses", against ordinary income, every year. (It's a nice warm fuzzy to see 1040 line 7: -$3000. :happy )



Disclosure. This is how I try to minimize TLH problems.

rIRA.
--LC index (similar, but not "substantially identical" equities to TSM to maximize growth). Distributions automatically reinvested. Average cost basis.

Taxable.
--TSM. Distributions redirected to mmkt (meaning I control when replacement shares are purchased). Specific share cost basis (meaning I can sell shares with largest TLH).



Bottom line. You can worry about this later.
Last edited by dratkinson on Thu Sep 23, 2021 8:02 am, edited 1 time in total.
d.r.a., not dr.a. | I'm a novice investor; you are forewarned.
hoofaman
Posts: 958
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Re: Should I add vbtlx and vtiax to my taxable brokerage?

Post by hoofaman »

Why own bonds when you still have a mortgage?
Topic Author
Lilybluerose
Posts: 23
Joined: Tue Sep 21, 2021 1:30 pm

Re: Should I add vbtlx and vtiax to my taxable brokerage?

Post by Lilybluerose »

OK so this is where I am at and thinking of doing. Does. This sound OK? It seems like the simplest way for me.


Solo 401k. Choosing a TDF at an earlier date for more bonds. So possibly a 2040 VS my 2050.

Roth Ira. Choosing a TDF at a later date for more stocks. So maybe 2060 VS 2050.

Taxable brokerage = all vtsax.

And if I need to adjust to have more bonds I'm thinking I'd do that in the 401k yes? So maybe add in a bond fund or would I have to change the TDF?

Ty everyone so much. This is so appreciated
User avatar
dratkinson
Posts: 6108
Joined: Thu Jul 26, 2007 6:23 pm
Location: Centennial CO

Re: Should I add vbtlx and vtiax to my taxable brokerage?

Post by dratkinson »

Lilybluerose wrote: Wed Sep 22, 2021 9:34 pm...
I am thinking of doing something like this. After researching and making sure I understand more.

Solo 401k. Choosing a TDF at an earlier date for more bonds. So possibly a 2040 VS my 2050.

Roth Ira. Choosing a TDF at a later date for more stocks. So maybe 2060 VS 2050.

Taxable brokerage = all vtsax.

And if I need to adjust to have more bonds I'm thinking I'd do that in the 401k yes? So maybe add in a bond fund or would I have to change the TDF?
That sounds okay.


Student exercise.
--Determine what percentage of bonds you want to use? (It doesn't have to be exact. Close is good enough.)
--Read the prospectus of each TDF to see what percentage each contains in bonds.
--Then compute the weighted average percentage of bonds in your combined TDF funds---so you know it.

By adjusting the amount you have in different-date TDF funds, you adjust the weighted average of bonds, to match your desired bond percentage. And since "close is good enough", you might not need to add a bond fund. Or you could. Whatever makes things easiest for you and allows you to SWAN. Your choice.



Idea. Instead of tweaking between two TDF funds between your 401k and your rIRA, and adding a bond fund to your 401k to tweak your AA, as you add more TSM to taxable... you could use some of your taxable to buy bonds (munis).
--Those muni bonds rebalance your AA, too, and begin creating your extended-tier EF.
--And since your rIRA will be small, compared to taxable account, it could be ~100% equities, which you'd offset with munis in taxable.
--And your 401k (assumed to be a traditional account) could be a single, appropriate TDF fund.


This idea would give you this investing structure.

Solo 401k, assumed to be larger than rIRA: use appropriate TDF. (It’s self-managing.)

Roth IRa, assumed to be smaller than 401k/taxable: skew heavily toward equities (TDF/TSM/LC/S&P500), don't worry about bond%.

Taxable, assumed to be larger than rIRA: split to TSM/munis to tweak your AA into (close is good enough) balance. (You manage to maintain your AA across your rIRA and taxable).

Meaning your 401k (TDF) takes care of itself, you manage your taxable to rebalance your total AA, and your rIRA goes for "shoot for the moon" growth potential.


Disclosure. I came to the BHs late in life. I have a small orphaned rIRA* and a very large taxable account. (* I didn't know any better.
I converted all my tax-deferred accounts to rIRA long before finding the BHs.)

This is my investing structure: 50/50 AA, 20% additional allocation to TISM.

Roth IRA (100% equities for fun and "shoot for the moon" growth potential: LC, SCV, HC, REIT. Trying to make up for lost time.)

Taxable
--TSM
--TISM
--IT national muni (3yrs of living expenses, last tier of my formal EFs)
--LT national muni (~50% of retirement bonds, higher reward/risk bonds)
--IT single-state muni (~50% of retirement bonds, higher reward/risk bonds)

Notice all of my bonds are in taxable. So all of my rebalancing is done in taxable. It's not hard to do. I just rebalance with new money (retirement pay, SS, redirected distributions, tax refund,...). Since "close is good enough", I don't worry about keeping my AA "exact".

Remember. According to the "hierarchy of goodness", a taxable account is preferable to a tax-deferred account... because of the many tax benefits (QDI/LTCG/FTC/TE dividends/TLH/no RMDs). So it's okay to put my bonds there.


Bottom line. Do whatever allows you to SWAN, now.

Just start somewhere, and tweak things later as you learn more and become more experienced managing your investments. (That’s what we all did.)



Idea. Just remembered something. :oops:

Your husband is eligible for a "spousal IRA" based on your income. So you need to work it into your family retirement planning. This would be another opportunity for a rIRA and more equity growth. (Your retired selves will thank you.)

See: https://www.irs.gov/retirement-plans/pl ... ion-limits
d.r.a., not dr.a. | I'm a novice investor; you are forewarned.
Topic Author
Lilybluerose
Posts: 23
Joined: Tue Sep 21, 2021 1:30 pm

Re: Should I add vbtlx and vtiax to my taxable brokerage?

Post by Lilybluerose »

dratkinson wrote: Thu Sep 23, 2021 9:44 am
Lilybluerose wrote: Wed Sep 22, 2021 9:34 pm...
I am thinking of doing something like this. After researching and making sure I understand more.

Solo 401k. Choosing a TDF at an earlier date for more bonds. So possibly a 2040 VS my 2050.

Roth Ira. Choosing a TDF at a later date for more stocks. So maybe 2060 VS 2050.

Taxable brokerage = all vtsax.

And if I need to adjust to have more bonds I'm thinking I'd do that in the 401k yes? So maybe add in a bond fund or would I have to change the TDF?
That sounds okay.


Student exercise.
--Determine what percentage of bonds you want to use? (It doesn't have to be exact. Close is good enough.)
--Read the prospectus of each TDF to see what percentage each contains in bonds.
--Then compute the weighted average percentage of bonds in your combined TDF funds---so you know it.

By adjusting the amount you have in different-date TDF funds, you adjust the weighted average of bonds, to match your desired bond percentage. And since "close is good enough", you might not need to add a bond fund. Or you could. Whatever makes things easiest for you and allows you to SWAN. Your choice.



Idea. Instead of tweaking between two TDF funds between your 401k and your rIRA, and adding a bond fund to your 401k to tweak your AA, as you add more TSM to taxable... you could use some of your taxable to buy bonds (munis).
--Those muni bonds rebalance your AA, too, and begin creating your extended-tier EF.
--And since your rIRA will be small, compared to taxable account, it could be ~100% equities, which you'd offset with munis in taxable.
--And your 401k (assumed to be a traditional account) could be a single, appropriate TDF fund.


This idea would give you this investing structure.

Solo 401k, assumed to be larger than rIRA: use appropriate TDF. (It’s self-managing.)

Roth IRa, assumed to be smaller than 401k/taxable: skew heavily toward equities (TDF/TSM/LC/S&P500), don't worry about bond%.

Taxable, assumed to be larger than rIRA: split to TSM/munis to tweak your AA into (close is good enough) balance. (You manage to maintain your AA across your rIRA and taxable).

Meaning your 401k (TDF) takes care of itself, you manage your taxable to rebalance your total AA, and your rIRA goes for "shoot for the moon" growth potential.


Disclosure. I came to the BHs late in life. I have a small orphaned rIRA* and a very large taxable account. (* I didn't know any better.
I converted all my tax-deferred accounts to rIRA long before finding the BHs.)

This is my investing structure: 50/50 AA, 20% additional allocation to TISM.

Roth IRA (100% equities for fun and "shoot for the moon" growth potential: LC, SCV, HC, REIT. Trying to make up for lost time.)

Taxable
--TSM
--TISM
--IT national muni (3yrs of living expenses, last tier of my formal EFs)
--LT national muni (~50% of retirement bonds, higher reward/risk bonds)
--IT single-state muni (~50% of retirement bonds, higher reward/risk bonds)

Notice all of my bonds are in taxable. So all of my rebalancing is done in taxable. It's not hard to do. I just rebalance with new money (retirement pay, SS, redirected distributions, tax refund,...). Since "close is good enough", I don't worry about keeping my AA "exact".

Remember. According to the "hierarchy of goodness", a taxable account is preferable to a tax-deferred account... because of the many tax benefits (QDI/LTCG/FTC/TE dividends/TLH/no RMDs). So it's okay to put my bonds there.


Bottom line. Do whatever allows you to SWAN, now.

Just start somewhere, and tweak things later as you learn more and become more experienced managing your investments. (That’s what we all did.)



Idea. Just remembered something. :oops:

Your husband is eligible for a "spousal IRA" based on your income. So you need to work it into your family retirement planning. This would be another opportunity for a rIRA and more equity growth. (Your retired selves will thank you.)

See: https://www.irs.gov/retirement-plans/pl ... ion-limits
Ty!!

Question - Taxable, assumed to be larger than rIRA: split to TSM/munis to tweak your AA into (close is good enough) balance. (You manage to maintain your AA across your rIRA and taxable).

So I have vtsax now in that taxable. Would vbtlx be an okay fund then to tweak it if I need more bonds?

I just looked at the 2040 TDF and it's around 19% bonds. So that seems pretty good to me. Then I could add vbtlx to my taxable as I add more and more to vtsax in there?

My husband does have a roth ira in a TDF :D

Sorry for so many questions! Ty again
Topic Author
Lilybluerose
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Re: Should I add vbtlx and vtiax to my taxable brokerage?

Post by Lilybluerose »

Oops I just reread and saw this and think this answered that question? I am around 22% I believe so I'm guessing not to go with these and vbtlx would be OK?

! you're in the 25%+ fed tax bracket, and want to add bonds to taxable, then most recommend an IT (intermediate-term) national muni fund (VWITX) or ETF (MUB). It's safer and should match/exceed TBM's after-tax income in a higher tax bracket. (Me? I'd still prefer the LT national muni, for the extra dividends. But I do have 3yrs of living expenses in safer VWITX/VWIUX as an extended-tier EF.)
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dratkinson
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Location: Centennial CO

Re: Should I add vbtlx and vtiax to my taxable brokerage?

Post by dratkinson »

The short answer. Yes, VBTLX would be an acceptable fund to use in taxable, and to tweak to adjust your AA.



The long answer.

Remember this table from above.
dratkinson wrote: Wed Sep 22, 2021 6:12 pm...
--Bonds? Optional. (Safer than stocks, more after-tax income than 1st-tier EFs, larger buffer before your TA accounts.)
----TBM, SEC yield = 1.29%
----VWITX (IT national muni), SEC yield = 0.63% = .63 / (1-.22) = 0.81% taxable-equivalent yield.
----VWLTX (LT national muni), SEC yield = 1.04% = 1.04 / (1-.22) =1.33% TEY
----VPAIX (PA LT muni), SEC yield = 1.06% = 1.06 / (1 -.22 -.3) = 1.41% TEY
In your assumed fed/state tax brackets, TBM (VBTLX) has a current 1.29% SEC yield... then taxes (fed/state) are removed from it.

Notice that VWLTX/VPAIX, when factoring in the fed+state tax benefits, have a TEY (taxable-equivalent yield) of 1.33% and 1.41%. The expectation is that both should return more after-tax than TBM.


TEY. What is TEY? It is the SEC yield a taxable bond would need, to produce the same after-tax income as the muni fund. The muni has a "taxable-equivalent yield".

Example: LT national muni. Assume a taxable bond SEC yield of 1.33%, subtract 22% fed tax, and you get the muni's 1.04% (=1.33% x (1-.22%)), after tax. So a taxable bond paying 1.33% will give you the same after-tax income as a national muni paying 1.04%---you don't care---you are indifferent to---which you own.

Example: LT PA muni. Assume a taxable bond SEC yield of 1.41%, subtract 22% fed and 3% state, and you get the muni's 1.06% (=1.41 x (1-.22-.3)), after tax. So a taxable bond paying 1.41% will give you the same after-tax income as a single-state muni paying 1.06%---you don't care---you are indifferent to---which you own.

But! you don't have taxable bonds paying that much. But you do that munis with TEYs of that much. Advantage: munis... if you can tolerate the additional risk of munis (greater 52wk price spread).


So the TEY (taxable-equivalent yield) is a quick first-look to compare the SEC yield of a muni bond fund to a taxable bond fund.


But to better understand the muni benefit to a particular situation, you'd need to take a second-look. A second-look is produced by creating sample tax returns and assuming the use of muni bond funds, instead of a taxable bond fund.

Example. Assume you are in the 12% fed tax bracket, and using the LT national muni fund. It's dividends don't add to taxable income, so no matter how much you earn in muni dividends, you remain in the 12% bracket. Meaning TSM's dividends (>90% QDI) benefit from 0% taxation. The same would be true after tax-code sunset and the 12% bracket returns to 15%.

But in your 22% tax bracket, your TSM QDI is already taxed at 15%, so you must satisfy yourself with knowing that both risky munis are expected to return more after-tax than TBM. And their TE dividends will not push you toward the 24% tax bracket. (Life's tough... then you die.)


SEC yield. It is the calculation, required by the SEC (Securities and Exchange Commission), that says this is the best guess of the return we can expect from a bond fund going forward. It's a forward-looking, best guess.

The TEY calculation relates a muni bond's SEC yield to a taxable bond's. In your case, the forward-looking, best guess is that the risky munis (LT national and single-state) will give you slightly more after-tax income than TBM.



Your risk exposure. If your 2040 TDF fund is 19% bond, then your 2060 TDF fund is much less. Meaning your weighted-average of both is <19% bonds. Meaning your weighted-average to stocks is >81%. Having more than 80% stocks is a little outside of the 20-40% range of bonds expected for someone of age 34.

You could use TBM; it's safer. And would be recommended by many on the forum. But if you can withstand more stock risk, and bonds are less risky stocks, then using bonds that are slightly more risky should also be doable.


Disclosure. I must take more risk with my bonds to avoid doing something less wise with equities. In this case, I do not follow the central road to Dublin (doublin'). Most BH's would advise you use TBM (IT duration). But it is expected to produce less after-tax income in your tax brackets.


Tax code sunset. Remember the current tax code was to have a 10yr sunset, so your fed tax bracket may return to 25% (2026?). At which point the muni TEYs will improve.

--TBM, SEC yield = 1.29%
--VWITX (IT national muni), SEC yield = 0.63% = .63 / (1-.25) = 0.84% taxable-equivalent yield.
--VWLTX (LT national muni), SEC yield = 1.04% = 1.04 / (1-.25) =1.39% TEY
--VPAIX (PA LT muni), SEC yield = 1.06% = 1.06 / (1 -.25 -.3) = 1.47% TEY

VPAIX is assumed to more risky because of its exposure to single-state default risk. But I don't believe PA was on any short-list of "death spiral states".

Search death spiral states: https://www.google.com/search?q=death+spiral+states


My experience with higher reward/risk bonds.
--Higher reward... is typically stable. (I like recording them each month.)
--Higher risk... is typically infrequent, and can be reduces by overfilling (I do) and TLHing (I have. It wasn't terrible.).

TLH partners. In your case, VWLTX/VPAIX would be acceptable TLH partners. You just need to avoid buying replacement shares within ±30 day of a TLH. (This is why we are advised to redirect all distributions in taxable (to a mmkt fund), to avoid an inadvertent automatic purchase of "replacement shares", around our TLH date.)



Bottom line. Yes, VBTLX would be an acceptable fund to use in taxable, and to tweak to adjust your AA.
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Re: Should I add vbtlx and vtiax to my taxable brokerage?

Post by Lilybluerose »

Thank you so very much! I'm going to start by switching my 401k to the 2040 TDF and then slowly go from there lol!

How did you learn about this? Are there any books you recommend?im a quarter through the bogglehead guide to investing
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Re: Should I add vbtlx and vtiax to my taxable brokerage?

Post by dratkinson »

Lilybluerose wrote: Thu Sep 23, 2021 7:44 pm Thank you so very much! I'm going to start by switching my 401k to the 2040 TDF and then slowly go from there lol!

How did you learn about this? Are there any books you recommend?im a quarter through the bogglehead guide to investing
I read several books on the wiki's list of recommended authors. Search "books" in wiki to find list.

After my forum review, when I became disenchanted with safe/boring treasury bonds, I read two recommended bond books, in the hope I'd find something better. Why? To get different ideas.

Why two bond books? Where recommended authors agree, that is the central road to Dublin and is safe for novice investors. Where they disagree, those are alternate routes, are less safe and should only be traveled by investors able to withstand more risk.

I paid special attention to the book sections on muni bonds. Why? If I couldn't find higher yield taxable bond funds, then I looked to see if I could find bond funds that got a yield boost from favorable tax treatment.
--Taxable bonds: fed + state taxed. (My opinion: TBM is the 3-fund standard. If I can't do better than TBM, then own TBM.)
--Treasury bonds: fed taxed, but state-tax exempt. (My opinion: very safe, very low yield, less after-tax income than TBM, boring.)
--National muni bonds: fed-tax exempt, but state taxed. (My opinion: might be okay since fed tax bite is larger than state tax bite.)
--Single-state muni bonds: fed + state tax exempt. (My opinion: might be better, if I could find an acceptable candidate.)

One of the bond book authors (Swedroe) use to post here, and worked in research for an investment management company. I read his posts describing how his firm chose individual muni bonds for its clients. I used his list of criteria to search for a single-state muni fund with the same characteristics. (Found lots of bad single-state muni funds. Vanguard's PA muni is not on the bad list.)

I produced ~20 sample tax returns (a second look) to compare the expected after-tax income produced by different bond fund candidates: ST/IT/LH/HY, treasury/muni/TBM/corporate, before/after SS.

I decided to use LT national and single-state muni funds. Posted my results here: viewtopic.php?t=197966


Timeline. After my forum review (2008), which recommended the use of safe treasuries:
--It required ~5yrs before I could no longer tolerate boring treasuries, so switched to LT national muni fund.
--It required ~2yrs more before the urge to reach for more yield caused me to start searching for an acceptable single-state muni.

Due diligence. I spent a lot of time reading, studying, and thinking about different bond options. So by 2015 (~7yrs after my forum review) I'd found the bond allocation that I'm using today. All of that work was my due diligence in selecting investments that were appropriate for me: to scratch my urge for more yield, and were within my true risk tolerance (neither too safe/risky).


To the above, I've added the ideas of overfilling and TLH bonds to reduce their risk. (I learned those ideas here.)

And I added the "ABP by CC technique" to boost the return on my 1st-tier EFs sitting in ~0% bank accounts. (Thought I discovered it, but "No", other BHs knew it before me... so I only rediscovered it for myself.)



Bottom line. Your start is decent. You and hubby should read the forum and several wiki-recommended books. It will broaden your understanding of your options and give you more ideas.

Think about your reading (books, forum, wiki), the problems discussed by others, their solutions, and how they might apply to your situation. You never know what you might find a good idea.

And if in a few years, you want to tweak your investments, and you've done your due diligence to understand and accept the reward/risk of a new investment, then that's okay.



Investment Policy Statement (IPS). After you've done all of the work required to understand and come up with your investing game plan, then you don't want to forget what you are doing, or why. So you should write it down in an IPS.

See IPS: https://www.bogleheads.org/wiki/Investm ... _statement

You should review your IPS at least annually*. And whenever the market upsets your emotions... to remember what you decided to do, and why, when your mind was calm. (* I review my IPS in January as part of my tax-withholding planning for the new year.)



Second thoughts: investment planning for family retirement. You forgot to include your husband's rIRA in your (family) forum review request. Remember: omitted information = omitted ideas. Did you forget anything else? Does he have employers' retirement plans lying around? If so, those should be included in your family investment planning.

To save time, the logic discussed above, for your accounts, is the same used for all your (plural) family accounts. So lather, rinse, repeat above when you include his accounts in your family retirement planning.
d.r.a., not dr.a. | I'm a novice investor; you are forewarned.
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Re: Should I add vbtlx and vtiax to my taxable brokerage?

Post by grabiner »

Lilybluerose wrote: Tue Sep 21, 2021 1:33 pm Debt: Around $113k left on my mortgage. 4.2% interest
This suggests not having a taxable brokerage account at all; keep money in taxable only as needed for liquidity and short-term needs (such as your future house purchase). You get a risk-free 4.2% return by making extra mortgage payments, which is much better than you get on your bond holdings. Thus, as long as you hold any bonds, you come out ahead without taking more risk by paying down the mortgage in preference to buying bonds.

I do recommend maxing out the 401(k) and IRA, because that gives you a permanent benefit. Eventually, you will pay off your current mortgage (or be forced to pay it off because the house is sold), and then you will stop earning the risk-free 4.2% return on your mortgage prepayments, while you keep the benefit of tax-deferred earnings in your retirement accounts.
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Re: Should I add vbtlx and vtiax to my taxable brokerage?

Post by Lilybluerose »

I ended up changing my solo 401 k to the 2040 TDF VS the 2050 it was in. This took my bond percentage from 8.6% to 11.9%

If I wanted to get this up to 20% would it be okay to soon take some out of that 2040 and put it into vbtlx in my 401k?

Or better to just add vbtlx to my taxable?

Ty so much for any input!!
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Re: Should I add vbtlx and vtiax to my taxable brokerage?

Post by Yarlonkol12 »

grabiner wrote: Fri Sep 24, 2021 11:13 pm
Lilybluerose wrote: Tue Sep 21, 2021 1:33 pm Debt: Around $113k left on my mortgage. 4.2% interest
This suggests not having a taxable brokerage account at all; keep money in taxable only as needed for liquidity and short-term needs (such as your future house purchase). You get a risk-free 4.2% return by making extra mortgage payments, which is much better than you get on your bond holdings. Thus, as long as you hold any bonds, you come out ahead without taking more risk by paying down the mortgage in preference to buying bonds.

I do recommend maxing out the 401(k) and IRA, because that gives you a permanent benefit. Eventually, you will pay off your current mortgage (or be forced to pay it off because the house is sold), and then you will stop earning the risk-free 4.2% return on your mortgage prepayments, while you keep the benefit of tax-deferred earnings in your retirement accounts.
+1

Not sure why you hold bonds while you also have a 4.2% mortgage
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Re: Should I add vbtlx and vtiax to my taxable brokerage?

Post by Lilybluerose »

Yarlonkol12 wrote: Sat Sep 25, 2021 10:39 am
grabiner wrote: Fri Sep 24, 2021 11:13 pm
Lilybluerose wrote: Tue Sep 21, 2021 1:33 pm Debt: Around $113k left on my mortgage. 4.2% interest
This suggests not having a taxable brokerage account at all; keep money in taxable only as needed for liquidity and short-term needs (such as your future house purchase). You get a risk-free 4.2% return by making extra mortgage payments, which is much better than you get on your bond holdings. Thus, as long as you hold any bonds, you come out ahead without taking more risk by paying down the mortgage in preference to buying bonds.

I do recommend maxing out the 401(k) and IRA, because that gives you a permanent benefit. Eventually, you will pay off your current mortgage (or be forced to pay it off because the house is sold), and then you will stop earning the risk-free 4.2% return on your mortgage prepayments, while you keep the benefit of tax-deferred earnings in your retirement accounts.
+1

Not sure why you hold bonds while you also have a 4.2% mortgage
So does this mean I should refinance and/orpay it off before adding more bonds?
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Re: Should I add vbtlx and vtiax to my taxable brokerage?

Post by grabiner »

Lilybluerose wrote: Sat Sep 25, 2021 12:01 pm
Yarlonkol12 wrote: Sat Sep 25, 2021 10:39 am
grabiner wrote: Fri Sep 24, 2021 11:13 pm
Lilybluerose wrote: Tue Sep 21, 2021 1:33 pm Debt: Around $113k left on my mortgage. 4.2% interest
This suggests not having a taxable brokerage account at all; keep money in taxable only as needed for liquidity and short-term needs (such as your future house purchase). You get a risk-free 4.2% return by making extra mortgage payments, which is much better than you get on your bond holdings. Thus, as long as you hold any bonds, you come out ahead without taking more risk by paying down the mortgage in preference to buying bonds.

I do recommend maxing out the 401(k) and IRA, because that gives you a permanent benefit. Eventually, you will pay off your current mortgage (or be forced to pay it off because the house is sold), and then you will stop earning the risk-free 4.2% return on your mortgage prepayments, while you keep the benefit of tax-deferred earnings in your retirement accounts.
+1

Not sure why you hold bonds while you also have a 4.2% mortgage
So does this mean I should refinance and/orpay it off before adding more bonds?
As long as you hold any bonds, you should pay off the mortgage in preference to taxable investing (unless you need the liquidity). Paying down the mortgage rather than buying bonds gives you a better low-risk return. Paying down the mortgage rather than buying stocks in your taxable account allows you to sell bonds in your 401(k) to buy more stock. Either way increases your expected return with the same stock-market risk, but paying down the mortgage gives a better return since you get rid of lower-yielding bonds.

It is reasonable to keep the mortgage and have some bonds in your 401(k), because of the benefit of making 401(k) contributions. If you max out the 401(k) rather than diverting the bond amount to paying down the mortgage, you will lose the difference between bond and mortgage rates until the mortgage is paid off, but you will then gain the difference between 401(k) and taxable investment returns because you have more money in your 401(k).
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Re: Should I add vbtlx and vtiax to my taxable brokerage?

Post by Lilybluerose »

Gosh, reading and re reading that just keeps going over my head :( I have alot to learn.

So in simple terms, keep my 401k at the now 2040 TDF I switched to from 2050.

Keeo my roth Ira as is with the 2050 tdf

Don't touch my taxable account nor add more bonds to it until I pay off my mortgage yes?

I'm going to look into refinancing and also how to pay it off the fastest way.

Now I do plan on looking to move in a year or two. Would it still be advisable to pay off this mortgage first? If I buckle down I could do this. Ty so much
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Re: Should I add vbtlx and vtiax to my taxable brokerage?

Post by grabiner »

Lilybluerose wrote: Sat Sep 25, 2021 5:45 pm Gosh, reading and re reading that just keeps going over my head :( I have alot to learn.

So in simple terms, keep my 401k at the now 2040 TDF I switched to from 2050.

Keeo my roth Ira as is with the 2050 tdf

Don't touch my taxable account nor add more bonds to it until I pay off my mortgage yes?
It's probably not worth selling stocks for a capital gain to pay down the mortgage, because that is an extra tax cost.
I'm going to look into refinancing and also how to pay it off the fastest way.
If you can refinance to an adjustable-rate mortgage (since you are planning to move soon), that might be a good way to reduce the interest cost. However, your mortgage may be too small to be worth refinancing, as there are fixed costs involved in a refinance (appraisal, underwriting, recording fees) which may cancel out the interest savings.
Now I do plan on looking to move in a year or two. Would it still be advisable to pay off this mortgage first? If I buckle down I could do this. Ty so much
You probably want to have enough in cash (or low-risk investments such as CDs) to make a down payment on your new home, so that you don't have to take out a bridge loan or make buying the new home contingent on selling the old home.

But this makes paying down the mortgage even more attractive, because it is a short-term return. When you do sell your current home, you will get all your prepayments back, with interest. You can then invest that amount, or use it to reduce the mortgage you take out on your new home; which one makes sense will depend on your tax situation and interest rates at that time.
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Re: Should I add vbtlx and vtiax to my taxable brokerage?

Post by dratkinson »

Lilybluerose wrote: Sat Sep 25, 2021 5:45 pm Gosh, reading and re reading that just keeps going over my head :( I have alot to learn.
I'll try. Bonds are sometimes said to be a "negative bond".
--So getting rid of a mortgage is better than buying a bond. Why? Mortgage interest is guaranteed. Bond interest is not guaranteed. So using our money to pay down/off a higher-interest mortgage is a guaranteed way to increase our wealth (reduced bank interest expense) and reduce our risk, over what we would expect from buying a lower-interest bond.
--Paying down a mortgage can also be better then using *new* money to buy stocks. (Can increase stock AA in TA accounts.)
--You want to maximize your annual TA contribution: (1) you only get one chance, (2) more compounding periods are better than fewer.

grabiner wrote: Sat Sep 25, 2021 2:13 pm...
As long as you hold any bonds, you should pay off the mortgage (reduces guaranteed ~4% mortgage interest cost) in preference to taxable investing (don't buy bonds in taxable expected to earn only ~1%... the savings to you is ~3%) (unless you need the liquidity (you want a larger EF cushion, or to save 20% down payment for next home purchase to avoid PMI... then do that in taxable)). Paying down the mortgage rather than buying bonds gives you a better low-risk return (bonds have some return risk, mortgage prepayment is guaranteed interest reduction).

(Switch from thinking about buying bonds in taxable, to thinking about buying stocks in taxable.) Paying down the mortgage rather than buying stocks in your taxable account allows you to sell bonds in your 401(k) to buy more stock (move additional stock purchases, from taxable to 401(k), by using an earlier later TDF to reduce bonds in 401(k) to increase stocks... your desired higher stock AA is achieved).

(Summary) Either way (paying down mortgage, instead of buying bonds or stocks in taxable) increases your expected return with the same stock-market risk, but paying down the mortgage gives a better return since you get rid of lower-yielding bonds.

It is reasonable to keep the mortgage and have some bonds in your 401(k), because of the benefit of making 401(k) contributions. If you max out the 401(k) rather than diverting the bond amount to paying down the mortgage, you will lose the difference between bond and mortgage rates until the mortgage is paid off, but you will then gain the difference between 401(k) and taxable investment returns because you have more money in your 401(k).
I think that's right. Mea culpa if I've misunderstood.


Edit. Oops.
Last edited by dratkinson on Sun Sep 26, 2021 1:42 pm, edited 1 time in total.
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Re: Should I add vbtlx and vtiax to my taxable brokerage?

Post by grabiner »

dratkinson wrote: Sat Sep 25, 2021 8:42 pm
Lilybluerose wrote: Sat Sep 25, 2021 5:45 pm Gosh, reading and re reading that just keeps going over my head :( I have alot to learn.
I'll try. Bonds are sometimes said to be a "negative bond".
--So getting rid of a mortgage is better than buying a bond. Why? Mortgage interest is guaranteed. Bond interest is not guaranteed. So using our money to pay down/off a higher-interest mortgage is a guaranteed way to increase our wealth (reduced bank interest expense) and reduce our risk, over what we would expect from buying a lower-interest bond.
This isn't quite right. Bond interest can be guaranteed if you buy Treasury bonds, and is close to guaranteed for state general-obligation municipal bonds. The reason it is often better to pay down a mortgage than to buy a bond is that the mortgage rate is higher. (Thus I didn't pay down my own mortgage when the after-tax mortgage rate was lower than muni yields, but I later paid it off when bond yields had fallen.)
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Re: Should I add vbtlx and vtiax to my taxable brokerage?

Post by Lilybluerose »

Ty everyone! I'm going to leave my ira/401/taxable where they are at for the year. And look into paying off this mortgage and then will go from there. Ty for all the help!!
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