What Bond Index funds in Taxable - FL/24%

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LazyNihilist
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What Bond Index funds in Taxable - FL/24%

Post by LazyNihilist »

Hello Bogleheads,

I am a pretty strong believer in the 3 fund portfolio and have all my current investments in the 3 funds (or equivalent in my 401k).
I might soon run out of Tax advantage space to invest Bonds in and want to know what bond funds I can invest in Taxable.
At one point of time I had I-Bonds, but to keep things simple enough I just sold them.
I live in Florida and my tax bracket is Single Filer 24% and use Vanguard funds.

Should I stick with VBTLX? Should I use VTEAX? What other Vanguard Bond Index funds are available? Any other options I should consider?

Thank you.
The strong do what they can and the weak suffer what they must -Thucydides
UpperNwGuy
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Re: What Bond Index funds in Taxable - FL/24%

Post by UpperNwGuy »

VTEAX is your best option if you are in a high tax bracket.
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grabiner
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Re: What Bond Index funds in Taxable - FL/24%

Post by grabiner »

In the 24% tax bracket, it's pretty close between munis and taxable bonds. My rule of thumb is that 25% is the break-even tax rate between munis and taxable bonds of comparable risk. As a single in the 24% bracket, you are probably not subject to Net Investment Income Tax (AGI over $200K, which makes your marginal tax rate 27.8%) unless you have a lot of qualified dividends or long-term gains which do not increase your tax bracket, or large itemized deductions so that your AGI is much higher than your taxable income.
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retired@50
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Re: What Bond Index funds in Taxable - FL/24%

Post by retired@50 »

Given current yields for VBTLX and VTEAX and a 24% tax bracket, VBTLX is the better choice.

VBTLX SEC 30-day yield = 1.29%
VTEAX SEC 30-day yield = 0.81%

a little math
( 1 - 0.24 ) X 1.29 = 0.9804

So, if you buy VBTLX you'll get to keep 0.98%, but if you buy VTEAX you'll get to keep 0.81%.

Obviously, these calculations change over time as the yield(s) move around with changes in the interest rate environment.

Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
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grabiner
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Re: What Bond Index funds in Taxable - FL/24%

Post by grabiner »

retired@50 wrote: Sun Sep 26, 2021 10:14 am Given current yields for VBTLX and VTEAX and a 24% tax bracket, VBTLX is the better choice.

VBTLX SEC 30-day yield = 1.29%
VTEAX SEC 30-day yield = 0.81%

a little math
( 1 - 0.24 ) X 1.29 = 0.9804

So, if you buy VBTLX you'll get to keep 0.98%, but if you buy VTEAX you'll get to keep 0.81%.
This is not the whole story, because bond yields depend on risk as well. VBTLX has a duration of 6.8 years, while VTEAX has a duration of 4.6 years. You are thus taking more interest-rate risk in order to get the higher yield.

And even that isn't the whole story; most munis are callable, and this causes muni funds to have more interest-rate risk than indicated by the duration. Thus, even though Vanguard Long-Term Tax-Exempt Admiral has a yield of 1.13% with a duration of 5.2 years, for a higher after-tax yield than Total Bond Market, it probably has more risk.
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retired@50
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Re: What Bond Index funds in Taxable - FL/24%

Post by retired@50 »

grabiner wrote: Sun Sep 26, 2021 12:30 pm
retired@50 wrote: Sun Sep 26, 2021 10:14 am Given current yields for VBTLX and VTEAX and a 24% tax bracket, VBTLX is the better choice.

VBTLX SEC 30-day yield = 1.29%
VTEAX SEC 30-day yield = 0.81%

a little math
( 1 - 0.24 ) X 1.29 = 0.9804

So, if you buy VBTLX you'll get to keep 0.98%, but if you buy VTEAX you'll get to keep 0.81%.
This is not the whole story, because bond yields depend on risk as well. VBTLX has a duration of 6.8 years, while VTEAX has a duration of 4.6 years. You are thus taking more interest-rate risk in order to get the higher yield.

And even that isn't the whole story; most munis are callable, and this causes muni funds to have more interest-rate risk than indicated by the duration. Thus, even though Vanguard Long-Term Tax-Exempt Admiral has a yield of 1.13% with a duration of 5.2 years, for a higher after-tax yield than Total Bond Market, it probably has more risk.
I agree with you. There is always some sort of difference when comparing a taxable bond fund to a municipal bond fund.
For brevity, I limited my response to the two funds the OP had mentioned.

Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
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LazyNihilist
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Re: What Bond Index funds in Taxable - FL/24%

Post by LazyNihilist »

Thank you everyone for the replies. This is some good info. It looks like in the 24% tax bracket, both the funds are 'decent' options. For now I will stick with VBTLX.
The strong do what they can and the weak suffer what they must -Thucydides
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