Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Bond fund in taxable account?
Old 10-20-2011, 05:30 PM   #1
Thinks s/he gets paid by the post
 
Join Date: Nov 2006
Posts: 2,268
Bond fund in taxable account?

I have only one bond fund available in my 401k. Its Pimco Total Return. Its been a very good fund long term but the past year its been pretty awful. I'm considering switching to Vanguard Intermediate-Term Bond fund (VBIIX), but I would have to move the bond portion of my AA to a taxable account and pay tax each year on the dividends. The 5 and 10 year returns of the funds are nearly identical but Pimco has stuck recently. Would you make this switch or not?
__________________

__________________
utrecht is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 10-20-2011, 05:42 PM   #2
Thinks s/he gets paid by the post
 
Join Date: Jul 2003
Location: Pasadena CA
Posts: 2,695
Pico is the fund I would have liked to own. Like you, not sure going forward. IMHO the VG is ok going forward. I would own it in a taxable account if retired but not sure if I were working.
__________________

__________________
T.S. Eliot:
Old men ought to be explorers
yakers is offline   Reply With Quote
Old 10-21-2011, 08:29 AM   #3
Thinks s/he gets paid by the post
 
Join Date: Nov 2006
Posts: 2,268
I guess the real question is not regarding any specific funds, but if you knew in advance what a given funds returns would be, how much of a higher return would you require to hold a bond fund in a taxable account instead of a 401k.

IOW..how much affect does it have on your bottom line to have to pay taxes yearly as oppossed to paying them only when you withdraw? Is there some formula that can be used assuming a given tax rate?
__________________
utrecht is offline   Reply With Quote
Old 10-21-2011, 08:45 AM   #4
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: May 2005
Posts: 13,288
To me it would matter how much income we are talking about.... without that info I could not comment...

IOW, I have bond funds in my taxable account but the income is not so much that it worries me paying taxes... and I can still adjust how much I put into the 401 if it did.....
__________________
Texas Proud is offline   Reply With Quote
Old 10-21-2011, 09:04 AM   #5
Thinks s/he gets paid by the post
ronin's Avatar
 
Join Date: Oct 2003
Posts: 1,191
Have you looked at the taxable equivalent rates on municipal bond funds?
__________________
We are, as I have said, one equation short. Keynes
ronin is offline   Reply With Quote
Old 10-21-2011, 09:14 AM   #6
Thinks s/he gets paid by the post
 
Join Date: Nov 2006
Posts: 2,268
Quote:
Originally Posted by Texas Proud View Post
To me it would matter how much income we are talking about.... without that info I could not comment...

IOW, I have bond funds in my taxable account but the income is not so much that it worries me paying taxes... and I can still adjust how much I put into the 401 if it did.....
Based on the 3.61% yield, it would be a little over $8000 per year.
__________________
utrecht is offline   Reply With Quote
Old 10-21-2011, 09:44 AM   #7
Recycles dryer sheets
justplainbll's Avatar
 
Join Date: Sep 2011
Location: Easten Long Island
Posts: 414
On an investment of $10,000 for 20 years:
Tax deferred, earning 4% would be worth $10,000 x (1.04) ** 20 = $21,911 or $11,911 in interest
To accumulate $11,911 of interest on which a 28% tax has been paid would require earning $16,543 of before tax interest or about 5% per year.
__________________
justplainbll is offline   Reply With Quote
Old 10-21-2011, 10:07 AM   #8
Thinks s/he gets paid by the post
 
Join Date: Nov 2006
Posts: 2,268
Quote:
Originally Posted by justplainbll View Post
On an investment of $10,000 for 20 years:
Tax deferred, earning 4% would be worth $10,000 x (1.04) ** 20 = $21,911 or $11,911 in interest
To accumulate $11,911 of interest on which a 28% tax has been paid would require earning $16,543 of before tax interest or about 5% per year.
That doesnt account for taxes having to be paid on the tax deferred money as it is withdrawn, does it?
__________________
utrecht is offline   Reply With Quote
Old 10-21-2011, 11:21 AM   #9
Full time employment: Posting here.
 
Join Date: Jul 2011
Posts: 721
They are both well run intermediate-term bond funds. I can't think of a good reason to pay income taxes on the distribution if you're just going to reinvest the proceeds in essentially the same investment.
__________________
panacea is offline   Reply With Quote
Old 10-21-2011, 11:27 AM   #10
Recycles dryer sheets
timeasterday's Avatar
 
Join Date: Aug 2011
Location: GA
Posts: 211
I too only have PIMCO as a choice in my 401k. I am staying put. Compare PTTRX to VBIIX on the Morningstar 10-year chart. The latest hiccup by PIMCO is just a slight bump in the road, IMO.
__________________
timeasterday is offline   Reply With Quote
Old 10-21-2011, 11:56 AM   #11
Recycles dryer sheets
justplainbll's Avatar
 
Join Date: Sep 2011
Location: Easten Long Island
Posts: 414
Quote:
Originally Posted by utrecht View Post
That doesnt account for taxes having to be paid on the tax deferred money as it is withdrawn, does it?
Deferring taxes on the earned income contributed to an IRA makes the deferred tax investment more attractive than my example indicates.
If the IRA contributions were made with after-tax earnings, only the portion of the distribution attributable to interest income would be taxable.
__________________
justplainbll is offline   Reply With Quote
Old 10-21-2011, 12:32 PM   #12
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
RunningBum's Avatar
 
Join Date: Jun 2007
Posts: 5,195
Quote:
Originally Posted by panacea View Post
They are both well run intermediate-term bond funds. I can't think of a good reason to pay income taxes on the distribution if you're just going to reinvest the proceeds in essentially the same investment.
I don't understand the logic here. What you do with the proceeds is irrelevant. Reinvesting in the same fund is no different tax-wise than taking the distribution in cash, seeing that your AA is out of balance, and buying the fund. Or buying any other taxable investment. Or spending the money, and using other money to invest in the same or some other fund.
__________________
RunningBum is offline   Reply With Quote
Old 10-21-2011, 01:24 PM   #13
Full time employment: Posting here.
 
Join Date: Jul 2011
Posts: 721
Quote:
Originally Posted by RunningBum View Post
I don't understand the logic here. What you do with the proceeds is irrelevant. Reinvesting in the same fund is no different tax-wise than taking the distribution in cash, seeing that your AA is out of balance, and buying the fund. Or buying any other taxable investment. Or spending the money, and using other money to invest in the same or some other fund.
Aren't we talking about taking money out of something tax-sheltered at potentially a high marginal tax bracket and then putting it in the same thing that will be taxable going forward? Bond income is taxed at ordinary income tax rates, unlike qualified dividend income so if a person is in a lower tax bracket, then maybe it's not a bad idea otherwise I don't see it. My point about the proceeds- if it's needed for expenses and it makes sense from an income tax planning standpoint to take it from a source that is growing tax-deferred then that makes sense but if the purpose is to move an investment from tax-deferred to taxable, not so much IMO. If rebalancing is in order, wouldn't it be done within the same account to avoid taxes?
__________________
panacea is offline   Reply With Quote
Old 10-21-2011, 01:45 PM   #14
Thinks s/he gets paid by the post
 
Join Date: Nov 2006
Posts: 2,268
No money would actually be coming out of the tax sheltered account. I was only talking about redistributing my AA and ending up with my bond allocation outside of the 401k. So I would be selling the bond fund inside the 401k to buy a stock fund and selling a stock fund in the taxable account to buy a bond fund.

The only difference would be that the bond dividends would be taxable as they are earned instead of whenever I take a 401k withdrawal sometime down the road.
__________________
utrecht is offline   Reply With Quote
Old 10-21-2011, 01:58 PM   #15
Full time employment: Posting here.
 
Join Date: Jul 2011
Posts: 721
Quote:
Originally Posted by utrecht View Post
No money would actually be coming out of the tax sheltered account. I was only talking about redistributing my AA and ending up with my bond allocation outside of the 401k. So I would be selling the bond fund inside the 401k to buy a stock fund and selling a stock fund in the taxable account to buy a bond fund.

The only difference would be that the bond dividends would be taxable as they are earned instead of whenever I take a 401k withdrawal sometime down the road.
Aaaahhhh. I misunderstood. Sorry about the confusion.
Over and out.
__________________
panacea is offline   Reply With Quote
Old 10-21-2011, 10:09 PM   #16
Thinks s/he gets paid by the post
Helen's Avatar
 
Join Date: Oct 2004
Location: Portland
Posts: 1,354
Quote:
Originally Posted by utrecht View Post
So I would be selling the bond fund inside the 401k to buy a stock fund and selling a stock fund in the taxable account to buy a bond fund.
Have you taken into account the capital gain (or capital loss) if you sold the stock fund?
__________________
Helen is offline   Reply With Quote
Old 10-21-2011, 10:30 PM   #17
Moderator Emeritus
 
Join Date: May 2007
Posts: 11,044
Pimco total return is the only bond option in DW's 401K. Right now, 100% of her 401K money is invested in that fund. I don't plan on making any changes.

The only bonds we have in taxable are munis because we are in a high tax bracket.
__________________
FIREd is offline   Reply With Quote
Old 10-22-2011, 08:21 AM   #18
Thinks s/he gets paid by the post
 
Join Date: Nov 2006
Posts: 2,268
Quote:
Originally Posted by Helen View Post
Have you taken into account the capital gain (or capital loss) if you sold the stock fund?
I have a fund that I bought several months ago that has a loss.
__________________

__________________
utrecht is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
need help with my fund selection and expense ratios..thanks dooo42 FIRE and Money 2 10-09-2011 09:28 AM
Tax defered vs taxable account make up of your buckets nun FIRE and Money 17 09-04-2011 12:40 PM
Bond Fund Mgrs increasing cash DFW_M5 FIRE and Money 4 07-23-2011 05:40 PM
Bond fund in taxable account? joecaf53 FIRE and Money 1 07-09-2011 03:48 PM
Neuberger Berman High Income Bond Fund glinka FIRE and Money 2 07-02-2011 05:09 PM

 

 
All times are GMT -6. The time now is 07:47 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.