This is something that I read about in the wiki but didn’t fully consider.Triple digit golfer wrote: ↑Sun Jan 19, 2020 6:14 amWould you rebalance into/out of your emergency fund? If yes, it is part of your asset allocation. If no, then it is not.ultraviolet wrote: ↑Sat Jan 18, 2020 10:59 pmI've been given reasons why bonds that are considered part of your AA/risk profile shouldn't be held in a taxable account but I'm just trying to figure out what to do with my EF. I don't want to leave it in a fully taxed savings/MM account. So is keeping it in a municipal bond fund ok and should that be considered part of your total asset allocation?aristotelian wrote: ↑Sat Jan 18, 2020 9:59 pmThis has already been answered. It seems like you really, really, really want to hold bonds in taxable. You have been given reasons why that is not recommended. If you still want to do it, go ahead and go for it. You do not have to justify yourself to the Boglehead Police.ultraviolet wrote: ↑Sat Jan 18, 2020 8:55 pm Ok, how about this question. If I'm ok with the added risk (and I am), what's wrong with putting my emergency fund into a NY municipal bond fund? Since 2001 the max drawdown was a little over 7%. So let's say I added 10% more to the EF, would this be an acceptable way to hold the EF in a way that earns a little more than a standard savings account or MM fund but doesn't cost me anything in taxes? In this case would I just ignore the skewed asset allocation created by having 40k in a muni bond fund? I would imagine I would rebalance annually to maintain the desired EF value using VTSAX and any new money would just go straight into VTSAX.
I had my emergency fund in a taxable high yield savings account until my taxable account (the savings plus my taxable account equities) was double my desired emergency fund size. Then I stopped holding the savings emergency fund altogether and invested it all in equities and exchanged an equal amount from equities to bonds in a tax deferred account.
If I have an emergency, I will simply sell taxable equities and exchange an even amount in tax deferred from equities to bonds, effectively selling bonds for the emergency. If I need the money, I'm covered. If I don't, then I'm invested tax efficiently and can leave it as is indefinitely.
If your taxable account is not double your desired emergency fund amount, I would hold the bonds (or savings or whatever you desire) in taxable and not fret over it.
Cliff notes: I practice the method in the wiki on placing cash needs in a tax deferred account. If taxable account is not twice the desired emergency fund size, don't do it and instead use taxable account (bonds, savings, or whatever) for your emergency fund until it is.
So let’s say there’s 100k total split between taxable and tax advantaged. The AA is 90/10. 60k stocks in taxable, 30k stocks in 401k and 10k bonds in 401k. Now let’s say I need 5k. I sell 5k in taxable then rebalance in the 401k, right? As a result of the sale you would be left with 85k stocks and 10k bonds and the account would be worth 95k. So wouldn’t I just exchange 500 in bonds for 500 in equities in order to keep my AA the same? Then you’d have 85.5k stocks and 9.5k bonds. You said “exchange and equal amount equities to bonds in tax deferred”. Did you mean the other way around?