When can you put bonds in a taxable account?

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idoc2020
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When can you put bonds in a taxable account?

Post by idoc2020 »

I am investing for my elderly mother and need to keep the investments at a "safe level". She has no retirement accounts, only taxable. I have her in BND (total bond fund) and Wellesley. I fully realize that these funds are best kept in retirement accounts that are tax-deferred. Last year her taxable income on her 1040 was 90K, approximately half of which came from ordinary dividends from the BND and Wellesley funds. Her income put her approximately in the 20% federal tax bracket (she lives in N.Y. state). So she paid about $9000 taxes on about a million invested. This seems pretty reasonable and I would be hesitant to change from these funds which I am confortable with even though I know they are in the "wrong" place. Just wondering if I am way off base here?
UpperNwGuy
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Re: When can you put bonds in a taxable account?

Post by UpperNwGuy »

Like your mother, I have only taxable accounts, no retirement accounts, and I hold bonds in those accounts. It's not the end of the world.

As long as she is in the 20% tax bracket, she's fine with her present holdings. If she somehow ends up in the 24% tax bracket, she may want to consider municipal bonds instead of her Total Bond holding.
Northern Flicker
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Re: When can you put bonds in a taxable account?

Post by Northern Flicker »

Holding a treasury fund instead of packaging treasuries in BND makes their interest state-tax-free.
dbr
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Re: When can you put bonds in a taxable account?

Post by dbr »

You are not off base because the advice is for situations that are different from yours.

But all tax management is detailed and specific. For you it starts with a matter of fact that there are bonds in a taxable account and that the amount of income is at a middling level so far as tax costs.

Things that can be investigated are the above mentioned fact that Treasuries are state tax exempt, if that is relevant, and whether or not it is helpful to invest part the portfolio in tax free munis. One way to do that along with stocks is to use the Vanguard tax managed fund. State specific munis can be investigated for a part of the holding, but you have to run the numbers.

How much any suggestion helps needs to be run in a dummy tax return with estimated income situation to see the new tax cost.

There might be more exotic and complex ways to defer or exempt income, but one should not be tempted to get too fancy.
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Re: When can you put bonds in a taxable account?

Post by goodenyou »

dbr wrote: Wed Apr 14, 2021 8:00 am You are not off base because the advice is for situations that are different from yours.

But all tax management is detailed and specific. For you it starts with a matter of fact that there are bonds in a taxable account and that the amount of income is at a middling level so far as tax costs.

Things that can be investigated are the above mentioned fact that Treasuries are state tax exempt, if that is relevant, and whether or not it is helpful to invest part the portfolio in tax free munis. One way to do that along with stocks is to use the Vanguard tax managed fund. State specific munis can be investigated for a part of the holding, but you have to run the numbers.

How much any suggestion helps needs to be run in a dummy tax return with estimated income situation to see the new tax cost.

There might be more exotic and complex ways to defer or exempt income, but one should not be tempted to get too fancy.
This is great and concise advice. It is the avoidance of fetishizing the perfection of the (often) inconsequential.
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secondopinion
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Re: When can you put bonds in a taxable account?

Post by secondopinion »

Northern Flicker wrote: Tue Apr 13, 2021 6:08 pm Holding a treasury fund instead of packaging treasuries in BND makes their interest state-tax-free.
Is this even accurate? Look at https://investor.vanguard.com/taxes/fun ... nformation and see U.S. government obligations information. It is for mutual funds, but I imagine that many states still honor state tax exemption for some of the income. Also, the tax form you receive from your broker should have some info (I think it is in the 1099-DIV).
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secondopinion
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Re: When can you put bonds in a taxable account?

Post by secondopinion »

UpperNwGuy wrote: Tue Apr 13, 2021 5:53 pm Like your mother, I have only taxable accounts, no retirement accounts, and I hold bonds in those accounts. It's not the end of the world.

As long as she is in the 20% tax bracket, she's fine with her present holdings. If she somehow ends up in the 24% tax bracket, she may want to consider municipal bonds instead of her Total Bond holding.
If she is in a state where most municipal bonds are usually still taxed and there is income tax, the 24% tax bracket might not be enough either to justify holding municipals either (unless you are doing this manually and not through a fund/ETF). From my experience at the tax bracket, municipals are okay but still do not outdo other bonds after-tax (but it is usually fine risk-adjusted).
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Re: When can you put bonds in a taxable account?

Post by UpperNwGuy »

secondopinion wrote: Thu Apr 15, 2021 10:05 am
UpperNwGuy wrote: Tue Apr 13, 2021 5:53 pm Like your mother, I have only taxable accounts, no retirement accounts, and I hold bonds in those accounts. It's not the end of the world.

As long as she is in the 20% tax bracket, she's fine with her present holdings. If she somehow ends up in the 24% tax bracket, she may want to consider municipal bonds instead of her Total Bond holding.
If she is in a state where most municipal bonds are usually still taxed and there is income tax, the 24% tax bracket might not be enough either to justify holding municipals either (unless you are doing this manually and not through a fund/ETF). From my experience at the tax bracket, municipals are okay but still do not outdo other bonds after-tax (but it is usually fine risk-adjusted).
I agree. However, one of the municipal bond experts here on the board, grabiner, describes the 24% bracket as neutral for using or not using municipal bonds. Above 24%, definitely use them. Below 24%, don't use them. This is why I wrote "she may want to consider" instead of "she should."
secondopinion
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Re: When can you put bonds in a taxable account?

Post by secondopinion »

UpperNwGuy wrote: Thu Apr 15, 2021 12:42 pm
secondopinion wrote: Thu Apr 15, 2021 10:05 am
UpperNwGuy wrote: Tue Apr 13, 2021 5:53 pm Like your mother, I have only taxable accounts, no retirement accounts, and I hold bonds in those accounts. It's not the end of the world.

As long as she is in the 20% tax bracket, she's fine with her present holdings. If she somehow ends up in the 24% tax bracket, she may want to consider municipal bonds instead of her Total Bond holding.
If she is in a state where most municipal bonds are usually still taxed and there is income tax, the 24% tax bracket might not be enough either to justify holding municipals either (unless you are doing this manually and not through a fund/ETF). From my experience at the tax bracket, municipals are okay but still do not outdo other bonds after-tax (but it is usually fine risk-adjusted).
I agree. However, one of the municipal bond experts here on the board, grabiner, describes the 24% bracket as neutral for using or not using municipal bonds. Above 24%, definitely use them. Below 24%, don't use them. This is why I wrote "she may want to consider" instead of "she should."
Is 24% with or without state tax accounted for? Some states are not as favorable as others on this line.

And 24% as a hard line for 100% one or the other seems strange. Would 24% then justify diversifying amongst taxable and non-taxable (given tax laws can change).
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UpperNwGuy
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Re: When can you put bonds in a taxable account?

Post by UpperNwGuy »

secondopinion wrote: Thu Apr 15, 2021 1:22 pm
UpperNwGuy wrote: Thu Apr 15, 2021 12:42 pm
secondopinion wrote: Thu Apr 15, 2021 10:05 am
UpperNwGuy wrote: Tue Apr 13, 2021 5:53 pm Like your mother, I have only taxable accounts, no retirement accounts, and I hold bonds in those accounts. It's not the end of the world.

As long as she is in the 20% tax bracket, she's fine with her present holdings. If she somehow ends up in the 24% tax bracket, she may want to consider municipal bonds instead of her Total Bond holding.
If she is in a state where most municipal bonds are usually still taxed and there is income tax, the 24% tax bracket might not be enough either to justify holding municipals either (unless you are doing this manually and not through a fund/ETF). From my experience at the tax bracket, municipals are okay but still do not outdo other bonds after-tax (but it is usually fine risk-adjusted).
I agree. However, one of the municipal bond experts here on the board, grabiner, describes the 24% bracket as neutral for using or not using municipal bonds. Above 24%, definitely use them. Below 24%, don't use them. This is why I wrote "she may want to consider" instead of "she should."
Is 24% with or without state tax accounted for? Some states are not as favorable as others on this line.

And 24% as a hard line for 100% one or the other seems strange. Would 24% then justify diversifying amongst taxable and non-taxable (given tax laws can change).
Look, I'm only sharing what grabiner has written in many posts, and I think he is referring to national muni funds. I'm not sure what point you're trying to make, as I've already agreed with you that an investor should consider the tax laws of their state when deciding between taxable bonds and munis. Grabiner has often recommended that folk split their muni investments between state-unique funds and national funds when they live in a high tax state.
secondopinion
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Re: When can you put bonds in a taxable account?

Post by secondopinion »

UpperNwGuy wrote: Thu Apr 15, 2021 2:20 pm
secondopinion wrote: Thu Apr 15, 2021 1:22 pm
UpperNwGuy wrote: Thu Apr 15, 2021 12:42 pm
secondopinion wrote: Thu Apr 15, 2021 10:05 am
UpperNwGuy wrote: Tue Apr 13, 2021 5:53 pm Like your mother, I have only taxable accounts, no retirement accounts, and I hold bonds in those accounts. It's not the end of the world.

As long as she is in the 20% tax bracket, she's fine with her present holdings. If she somehow ends up in the 24% tax bracket, she may want to consider municipal bonds instead of her Total Bond holding.
If she is in a state where most municipal bonds are usually still taxed and there is income tax, the 24% tax bracket might not be enough either to justify holding municipals either (unless you are doing this manually and not through a fund/ETF). From my experience at the tax bracket, municipals are okay but still do not outdo other bonds after-tax (but it is usually fine risk-adjusted).
I agree. However, one of the municipal bond experts here on the board, grabiner, describes the 24% bracket as neutral for using or not using municipal bonds. Above 24%, definitely use them. Below 24%, don't use them. This is why I wrote "she may want to consider" instead of "she should."
Is 24% with or without state tax accounted for? Some states are not as favorable as others on this line.

And 24% as a hard line for 100% one or the other seems strange. Would 24% then justify diversifying amongst taxable and non-taxable (given tax laws can change).
Look, I'm only sharing what grabiner has written in many posts, and I think he is referring to national muni funds. I'm not sure what point you're trying to make, as I've already agreed with you that an investor should consider the tax laws of their state when deciding between taxable bond and munis. Grabiner has often recommended that folk split their muni investments between state-unique funds and national funds when they live in a high tax state.
I know you agree; "considering" municipal bonds is the best course of action around that tax bracket (I know because it applies to me). I am not saying anything you wrote was wrong; it seems fine to me what was posted (I missed what state the person was in, so it threw off my posts by a little bit). I just want readers to also pay careful attention to state taxes, which has significant impact on decisions, in their own situation. The last post is more I am trying to understand with what assumptions that grabiner wrote the suggestions.
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idoc2020
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Re: When can you put bonds in a taxable account?

Post by idoc2020 »

Her taxable income was around 90K and her tax was $14K, so she paid 15% in taxes. However, when I looked at what the "tax rates" are for her level of income I see that it is 24% (a bit confusing). I considered switching her to Vang NY munis but for some reason they only have long term munis (perhaps a little higher level of risk than BND). Anyway, I suspect that her tax rate is so low that there is no great advantage in munis.
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Re: When can you put bonds in a taxable account?

Post by grabiner »

UpperNwGuy wrote: Thu Apr 15, 2021 12:42 pm
secondopinion wrote: Thu Apr 15, 2021 10:05 am
UpperNwGuy wrote: Tue Apr 13, 2021 5:53 pm Like your mother, I have only taxable accounts, no retirement accounts, and I hold bonds in those accounts. It's not the end of the world.

As long as she is in the 20% tax bracket, she's fine with her present holdings. If she somehow ends up in the 24% tax bracket, she may want to consider municipal bonds instead of her Total Bond holding.
If she is in a state where most municipal bonds are usually still taxed and there is income tax, the 24% tax bracket might not be enough either to justify holding municipals either (unless you are doing this manually and not through a fund/ETF). From my experience at the tax bracket, municipals are okay but still do not outdo other bonds after-tax (but it is usually fine risk-adjusted).
I agree. However, one of the municipal bond experts here on the board, grabiner, describes the 24% bracket as neutral for using or not using municipal bonds. Above 24%, definitely use them. Below 24%, don't use them. This is why I wrote "she may want to consider" instead of "she should."
I am not an expert here. My rule of thumb is that 25% is the break-even point; that is, munis tend to yield about the same as taxable bonds of comparable risk at a 25% tax rate. Investors in the 24% bracket may have a 24% or 27.8% marginal tax rate, depending on whether they are over the NIIT threshold. Either way, it's pretty close.

If that 20% tax is 12% federal plus 8% state, munis don't make sense, but Treasuries might in order to avoid the high state tax. (In NY, a fund must hold at least half its assets in Treasuries to get a partial state tax exemption; thus there is a slight advantage for using Intermediate-Term Bond Index rather than Total Bond Market Index.0
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Re: When can you put bonds in a taxable account?

Post by grabiner »

If you have the choice, it is normally better to hold stocks in a taxable account and bonds in a tax-deferred account in the 12% federal bracket. The reason is that the tax cost on stocks is zero in that bracket, with no tax on qualified dividends, nor on long-term gains when you sell them. However, you may not have that choice, and taxable bonds in a taxable account are also fine in that low a bracket.

The OP's situation adds an additional complication; stock dividends are not subject to federal tax, but they are subject to state tax at her full tax rate. It is probably still better to hold stocks in a taxable account if possible.
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Re: When can you put bonds in a taxable account?

Post by 22twain »

ilan1h wrote: Fri Apr 16, 2021 12:19 am Her taxable income was around 90K and her tax was $14K, so she paid 15% in taxes. However, when I looked at what the "tax rates" are for her level of income I see that it is 24% (a bit confusing).
Are you familiar with how tax brackets work? It appears that she is in the 24% bracket, which means that only the part of her taxable income that exceeds $85,526 is taxable at 24%. The rest of her income is taxed partially at 22%, partially at 15%, and partially at 12%, according to the boundaries of those brackets. So the average (or "effective") rate is less than 24%.
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Re: When can you put bonds in a taxable account?

Post by grabiner »

22twain wrote: Sun Apr 18, 2021 3:32 pm
ilan1h wrote: Fri Apr 16, 2021 12:19 am Her taxable income was around 90K and her tax was $14K, so she paid 15% in taxes. However, when I looked at what the "tax rates" are for her level of income I see that it is 24% (a bit confusing).
Are you familiar with how tax brackets work? It appears that she is in the 24% bracket, which means that only the part of her taxable income that exceeds $85,526 is taxable at 24%. The rest of her income is taxed partially at 22%, partially at 15%, and partially at 12%, according to the boundaries of those brackets. So the average (or "effective") rate is less than 24%.
And she probably isn't actually paying 15% on any of that income, because much of it is qualified dividends and long-term gains. Her marginal tax rate may be 22%.

If it is 22%, plus NY state tax, then NY munis may make sense for some of the bond holdings. In my previous post, I assumed that the 20% rate was 12% federal plus 8% state.
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