Bonds in taxable account

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getaclue21
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Bonds in taxable account

Post by getaclue21 »

Hi

Sorry, I'm feeling a bit overwhelmed. I'm 35 years old. I'm currently maxing out my 401K contributions and have everything in a VTRLX 2050 account. I have a ROTH IRA (backdoor) in FIPFX. I want to start investing in a non-Tax advantaged account. I was going to invest in Fidelity Freedom® Index 2050 Fund - Investor Class, but reading the bogleheads wiki realize that holding bonds in a taxable account isn't optimal. I'm just clearly a novice and not sure what the alternative would be. To keep a similar balance, would the strategy be to manually create a 3 fund portfolio in my tax-advantaged accounts and increase the bond% there, and then in my tax advantaged accounts just invest in index funds without any bonds? Sorry for the novice question.
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climber2020
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Re: Bonds in taxable account

Post by climber2020 »

One option is to put only stock index funds in your taxable account.

In your 401k, put whatever bonds you need and fill the remaining space with stocks. When you need to rebalance, you can do so without any tax consequences.
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David Jay
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Re: Bonds in taxable account

Post by David Jay »

Welcome to the forum!
climber2020 wrote: Wed Jan 19, 2022 3:13 pm One option is to put only stock index funds in your taxable account.

In your 401k, put whatever bonds you need and fill the remaining space with stocks. When you need to rebalance, you can do so without any tax consequences.
^^^ This. Select funds that typically only generate qualified dividends, so you pay lower LTCG tax rates rather than standard income tax rates.
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
mbltna
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Re: Bonds in taxable account

Post by mbltna »

David Jay wrote: Wed Jan 19, 2022 3:16 pm Welcome to the forum!
climber2020 wrote: Wed Jan 19, 2022 3:13 pm One option is to put only stock index funds in your taxable account.

In your 401k, put whatever bonds you need and fill the remaining space with stocks. When you need to rebalance, you can do so without any tax consequences.
^^^ This. Use funds that typically only generate qualified dividends, so you pay LTCG tax rates rather than standard income tax rates.
This is basically what I did as well. I was very light on bonds so I exchanged existing investments in my 401k (a 2035 date fund, iirc) for bonds (FXNAX) and only invest in VTI in my taxable account. New 401k contributions are being invested per my AA (since I'm mostly balanced now), and I'll exchange stocks for bonds next time I rebalance (or the other direction if the tide turns). I had to learn to look at all my investments as a whole to get to my AA vs trying to have each pool (401k, taxable, IRA) have the same AA.
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KlingKlang
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Re: Bonds in taxable account

Post by KlingKlang »

The advice that you have received to hold only stocks in your taxable account and all of your bonds in your 401(k) is reasonable. If you would still like some bonds in your taxable account two options to look at are Series I US Savings Bonds which are state tax exempt and defer federal taxes for up to 30 years, and tax-exempt bond funds which (usually) pay less interest but are exempt from federal and in some cases state taxes.
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retiredjg
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Re: Bonds in taxable account

Post by retiredjg »

getaclue21 wrote: Wed Jan 19, 2022 2:45 pm Hi

Sorry, I'm feeling a bit overwhelmed. I'm 35 years old. I'm currently maxing out my 401K contributions and have everything in a VTRLX 2050 account. I have a ROTH IRA (backdoor) in FIPFX. I want to start investing in a non-Tax advantaged account. I was going to invest in Fidelity Freedom® Index 2050 Fund - Investor Class, but reading the bogleheads wiki realize that holding bonds in a taxable account isn't optimal. I'm just clearly a novice and not sure what the alternative would be. To keep a similar balance, would the strategy be to manually create a 3 fund portfolio in my tax-advantaged accounts and increase the bond% there, and then in my tax advantaged accounts just invest in index funds without any bonds? Sorry for the novice question.
Welcome to the forum. :happy

I can think of several things to consider.
  • 1. If your taxable account is small, just holding stock funds (such as total stock and total international Index) in taxable will now throw your stock to bond ratio off a lot.

    2. If your taxable account is going to be largish, you could hold just stocks in taxable and hold target funds with more bonds in your other accounts.

    3. Or you can hold total stock, total international and a bond fund (or cash or I Bonds or CDs or a tax-exempt bond fund) in taxable.

    4. Or you can break it down and hold individual funds (rather than target funds) in all the accounts.
There are probably more options, but these are the easiest.

Consider posting your information in the format we use to help people with their portfolio questions if you want more help with this. See the link at the bottom of this message.
Topic Author
getaclue21
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Re: Bonds in taxable account

Post by getaclue21 »

climber2020 wrote: Wed Jan 19, 2022 3:13 pm One option is to put only stock index funds in your taxable account.

In your 401k, put whatever bonds you need and fill the remaining space with stocks. When you need to rebalance, you can do so without any tax consequences.
Does that mean I should get rid of my target funds entirely and exchange for manually adjusting via index funds, or would it be possible to achieve the same effect by doing something like 90% of my future investments in target fund, 10% in bonds (I'd have to do the actual math, but just for example)
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climber2020
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Re: Bonds in taxable account

Post by climber2020 »

getaclue21 wrote: Wed Jan 19, 2022 4:22 pm
climber2020 wrote: Wed Jan 19, 2022 3:13 pm One option is to put only stock index funds in your taxable account.

In your 401k, put whatever bonds you need and fill the remaining space with stocks. When you need to rebalance, you can do so without any tax consequences.
Does that mean I should get rid of my target funds entirely and exchange for manually adjusting via index funds, or would it be possible to achieve the same effect by doing something like 90% of my future investments in target fund, 10% in bonds (I'd have to do the actual math, but just for example)
Either method will work fine. I hold separate stock & bond index funds instead of target date because my taxable account is quite a bit larger than my tax advantaged accounts and it makes the math really easy, but in your case I don’t think it makes much difference.
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getaclue21
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Re: Bonds in taxable account

Post by getaclue21 »

Thank you
dbr
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Re: Bonds in taxable account

Post by dbr »

Don't put balanced funds of any kind in a taxable account. Sooner or later you will likely find this is not tax efficient but a more serious problem when that happens is that if the funds have increased in value it can cost a lot of money in capital gains taxes to sell and change to something different. There was a recent fiasco with one of the Vanguard TD funds where they distributed large and costly capital gains distributions.

A taxable account can hold things like total stock fund that is likely to be there forever. If bonds have to go into a taxable account at least keep them separate.

Sooner or later target date and other balanced funds can become complicated to manage rather than simple. It all depends on details.
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Eagle33
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Re: Bonds in taxable account

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